Motorola, TI bet on 'fabs'

Doug Young

HONG KONG: Chip makers ranging from giants Motorola Inc and Texas Instruments Inc to younger mid-tier companies are finding that letting others manufacture their technology-intensive products makes good business sense.

The move toward a "fabless" business model, where firms focus on chip design and marketing but leave capital-intensive production to others, is helping drive down costs for makers of chips that power gadgets from PCs to cellphones and DVD players.

U.S. semiconductor and communications gear giant Motorola recently agreed to transfer ownership of a $1 billion chip-making plant, or "fab", in China to Shanghai-based Semiconductor Manufacturing International Corp (SMIC), a so-called foundry that makes chips based on the designs of its customers.

The fabless trend has opened up the industry to a crop of upstart chip designers that in the past would have been locked out by the prohibitive cost of production facilities that can run into billions of dollars.

"Fabless has become a real business model because you can have three or four people who have ideas and they don't have to invest in the manufacturing site," said HSBC Securities analyst Abraham Leu. "It's much easier for people who have ideas and don't have money."

Last month's agreement to transfer its only China chip plant to SMIC was part of Motorola's ongoing "asset light" approach, said spokeswoman Mary Lamb.

"Motorola has an outsourcing strategy to leverage resources during the industry's cyclical ups and downs and to continue to hold down capital expenditures," she said.

FABLESS FUTURE

Fabless production accounted for $16-$17 billion -- or about 11 percent -- of the semiconductor industry's estimated $150 billion in output last year, according to the U.S.-based Fabless Semiconductor Association (FSA).

Output by fabless producers is expected to grow to 14 percent of the industry's forecast $205 billion of annual output by 2005, according to the Semiconductor Industry Association and research firm Dataquest.

The fabless trend dates to the mid-1980s, when a field of idea-rich but capital poor upstarts entered the industry.

A corresponding group of contract manufacturers -- most notably Taiwanese giants Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and United Microelectronics Corp -- sprang up to fill the need for production capacity.

This year alone, the pair are expected to post combined revenue of $8.4 billion, compared with an expected $6.7 billion for the world's biggest semiconductor maker, Intel Corp, which still makes its own chips.

The move to fabless output should accelerate in the years ahead as chips become more sophisticated and the equipment to make them grows more expensive, analysts said.

A factory to produce high-end semiconductor wafers with 300 millimetre diameters -- a cutting-edge product -- costs between $2 billion and $3 billion on average, said Chris Chang, a senior marketing official at SMIC.

Most major fabless chip designers are in the United States and Taiwan, whose government has aggressively promoted development of the technology industry.

The U.S. companies include Qualcomm Inc, Conexant Systems Inc and Xilinx Inc, while big Taiwanese competitors include VIA Technologies Inc and MediaTek Inc.

Some industry heavyweights such as Motorola and Texas Instruments use a hybrid model, making some chips in-house and contracting others out to foundries.

In a nod to Taiwan's growing prowess, the FSA last month set up its first non-U.S. office in Taipei. It estimates the island now accounts for about 25-30 percent of fabless output, with the United States accounting for most of the rest.

Reuters