Top Japanese Chip Makers Reportedly Ally to Build Plant

Updated: The semiconductor manufacturers are rumored to have made a $1.67 billion deal to build a jointly operated chip plant.

Five of Japans largest semiconductor manufacturers apparently have reached an agreement to establish a huge joint-operation fab to build next-generation processors, the Japanese daily newspaper Yomiuri reported Friday.

A fab (short for fabrication) is a factory for producing integrated circuits. This would become the first such joint venture for Japans biggest chip manufacturers and one of the most expensive ventures of its kind ever.

The plant, to be built in Japan and owned and operated by Toshiba Corp., Hitachi Ltd. Co., Matsushita Electric Industrial Co. Ltd., NEC Electronics Corp. and Renesas Technology Corp., will cost more than 200 billion yen ($1.67 billion) and take two years to build, the report said.

Work on the facility is to begin late next year, with completion and the start of manufacturing to come as soon as 2007, Yomiuri said.

All five companies have denied officially that an agreement has been reached and were not offering comment Friday morning.

Because the Japanese semiconductor industry has been declining in sales and production during the last few years, analysts had warned that severe changes were needed to ignite a turnaround.

One example discussed in the press was for several industry leaders to co-op a fabrication plant. In another example, Toshiba and NEC Electronics—who in the past have been extremely competitive rivals in several markets—recently joined hands in an alliance that could eventually merge their chip making operations.

Yomiuri said the deal was aimed at recapturing market share from U.S. and South Korean competition.

/zimages/2/28571.gifJapanese IT companies are finding the global market elusive. Click here to read more.

"In general, the super plant project, if its actually in the works, reflects growing commoditization pressures on semiconductors, where new investment requirements and development costs increasingly pressure revenues/profits," Charles King, research director at Pund-IT in Hayward, Calif. told Ziff Davis Internet.

"Sharing some investment pain should help the partners bolster their bottom lines. The project would probably affect [companies like] Applied Materials, but Im not sure about any discernable impact on [industry leaders] Intel or AMD."

Hurwitz & Associates industry analyst Robin Bloor said that the entire chip industry is constrained by the price of fabs.

"As integrated circuits got smaller, the cost of building fabs rose toward the $1 billion per plant area (now it seems to be in the $2 billion area)," Bloor told Ziff Davis Internet in an e-mail.

"This is primarily because of the fragility of the manufacturing process, which needs specially constructed environments. Anyway, the high cost was a happy development for the incumbent chip vendors because it created a substantial barrier to entry into their markets. However, it also has a dislocating effect, because it isnt easy to ramp up production of the chips when there are only a small number of plants in the world producing them."

Bloor added, "What is clearly happening here is that a consortium of Japanese electronics companies is contemplating a joint investment to build a fab. Such investments are risky because they are big and a shortfall in chip demand could make the ROI non-existent. This is the reason why there is a consortium here—they share the investment and share the output. They would naturally take supplies of chips from their jointly owned fab first."

/zimages/2/28571.gifTo read about automation at IBMs latest chip plant, click here.

Unfortunately the chip market behaves like a commodity market, Bloor said, in which price is volatile and determined almost entirely by supply and demand.

"If demand outstrips supply, you cannot suddenly ramp up supply, so the price goes up and the fab owners make healthy profits. If the opposite occurs, it is entirely possible for all fab owners to lose money until demand recovers. However the demand for chips, in the long term, just seems to rise. So the number of fabs needs to rise, too, over time," Bloor said.

So how would the operation of such a new fab affect U.S. manufacturers, such as Intel Corp., Advanced Micro Devices Inc. and Applied Materials Inc.?

"It will affect their forward plans in terms of any of them investing in new fabs," Bloor said. "Theyll all have their projections of chip market volumes, and theyll factor in the capacity of this new plant if and when it comes online. Then theyll adjust their own forward plans.

"Its an over-simplification, but thats roughly how the industry works."

Editors Note: This story was updated to correct the estimated dollar amount of the deal.

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Chris Preimesberger

Chris J. Preimesberger

Chris J. Preimesberger is Editor-in-Chief of eWEEK and responsible for all the publication's coverage. In his 13 years and more than 4,000 articles at eWEEK, he has distinguished himself in reporting...