Singapore semiconductor firms in deep trouble

Jennifer Tan

SINGAPORE: The gloom over Singapore's semiconductor firms showed few signs of

lifting after they posted wider second quarter losses and warned of further red

ink in the third quarter, citing severely depressed industry conditions.

Chartered Semiconductor Manufacturing Ltd., the world's third largest

contract manufacturer of microchips, suggested last week the industry could

bottom out in the third quarter and was cautiously hopeful of a subsequent

rebound.

But it countered the optimism with a somber reminder that "the company

has not yet seen signs of stabilization in the marketplace and customer

visibility remains poor."

Singapore-based Chartered reported last Friday it lost US $107.6 million in

the second quarter, compared with a US $30.9 million loss in the January-March

quarter. Its sister company ST Assembly Test Services, which provides

semiconductor testing and packaging services, on Wednesday posted a second

quarter loss of US$31.7 million, against a US$22.9 million loss in the previous

quarter.

While it forecast a 15-30 per cent fall in revenues and another loss in the

third quarter, it remained short on specifics on the fourth quarter outlook,

citing "very limited" visibility. At midday on Wednesday, Chartered

was down four cents to S$4.28, while ST Assembly was steady at S$1.50.

Chartered has performed almost in line with the broader Straits Times Index,

while ST Assembly has underperformed the index by about 30 per cent in the last

six months.

Too early to call bottom



Analysts said the timeframe for the recovery of the battered sector was a moving
target, as negative signs like low plant utilization rates and product pricing

pressures still abound.

Daniel Heyler, semiconductor analyst at Merrill Lynch in Hong Kong, noted

that it was too early to assume a bottom in the semiconductor industry, due to

weak demand and record-high inventory levels in the communications space.

"But while we believe that the rate of (decline) is slowing, it does not

mean we are at the bottom yet," he added. Chartered and ST Assembly's high

exposure to the previously fast-growing communications segment, comprising

wireless and wireline, is more of a bane than a boon now.

While a mild rebound is likely in the wireless market by year-end, the

networking segment is not expected to turn around until mid or end-2002,

analysts said. Communications accounts for about 61 per cent of ST Assembly's

revenues and 45 per cent of Chartered's sales.

Chartered's top customers include network testing equipment maker Agilent

Technologies, broadband components provider Broadcom Corp and communications

chip maker Conexant Systems Inc, while ST Assembly ranks signal processing chip

maker Analog Devices Inc and German chip maker Infineon Technologies AG among

its key clientele.

Chartered's chief executive Barry Waite said "raw numbers" obtained

from customers pointed to a trough in the third quarter and an improved fourth

quarter. But he emphasized he remained "very cautious" about giving

forward guidance as customers could pull back orders midway through the quarter,

as they did in the second quarter.

While ST Assembly expects a dismal 30-35 per cent utilization rate in the

third quarter to keep the company deeply in the red, chief executive officer Tan

Bock Seng held out some hope, noting that "the pace of demand deceleration

appears to have slowed down" despite high excess inventory in the sector.

Cost cuts



In a bid to cut costs, both Chartered and ST Assembly have slashed capital
expenditure for 2001. Chartered has delayed the start-up of its latest 300mm

technology fab, Fab 7, by one year to 2003, and subsequently cut its 2001

capital expenditure to US$700 million from US$1 billion.

While it had no plans to temporarily shut down any plant, it would continue

"selective idling" of its fabs. In the second quarter, the company

idled its fabs for periods of up to 12 days.

ST Assembly said it would trim its 2001 capital expenditure to US$50 million

from US$60 million, and implement various cost cuts including mandatory leave of

four days a month for staff. It will also idle its plant in Singapore for a week

in August.

ST Assembly spokeswoman Lim Beng See told Reuters these measures would lead

to savings of over US$2 million per quarter.

(C) Reuters Limited 2001.