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Chipmaker cuts capital spending amid slowdown

Chipmakers gird for an uncertain future, with Taiwan Semiconductor Manufacturing Company reducing its projected capital expenditures this year by nearly a third.

Chipmakers continue to gird for an uncertain future, with Taiwan Semiconductor Manufacturing Company (TSMC), the top contract manufacturer of chips, reducing its projected capital expenditures this year by nearly a third.

The Taiwan-based chip foundry announced Wednesday a projected capital budget of $2.7 billion for 2001, down $1.1 billion from 2000 and $1 billion lower than an earlier estimate by the company. TSMC told analysts last October that it expected to spend $3.7 billion on capital expenditures in 2001.

But some analysts weren't fooled by the generous projection then. They say the latest news from TSMC follows an old but familiar pattern that emerges whenever the semiconductor industry over-estimates its needs for production capacity.

"The industry has overbuilt, to some extent, manufacturing capacity, especially in Asia," said Risto Puhakka, a senior analyst with VLSI Research in San Jose, Calif.

TSMC's cutback "has been expected from our standpoint," he said. "This is just one sign of those things."

Chipmakers' spending on new chip manufacturing equipment is generally cyclical in nature, because manufacturing plants have to be planned well ahead. Construction on facilities must begin as long as two years before a factory is brought online, and it is difficult to estimate demand that far ahead.

A TSMC spokesman said the company would stop and take a breath during 2001, re-evaluating plans after a period of rapid expansion in 1999 and 2000.

"I think what you see is a ramp of capacity?and (a re-evaluation) of where that money needs to be spent," said Chuck Byers, a spokesman for TSMC in North America.

"Yes, that number (the capital budget) is down, however, the planned capacity is up 33 percent," he said.

TSMC plans to have the capacity to process the equivalent of some 4.5 million 8-inch silicon wafers in 2001. That figure is up 33 percent from 3.4 million in 2000. (The eight-inch equivalent is derived from an average of the number of current 8-inch wafers, older 6-inch wafers and new 12-inch wafers.)

TSMC must watch carefully so as to not lower capital expenditures too much, leaving itself with less manufacturing capacity than needed when demand picks up.

VLSI Research's conservative estimates show the industry growth rates for 2001 will be flat at less than 1 percent, with growth in 2002 at less than 10 percent, Puhakka said.

Approximately half of TSMC's capital budget will be spent on accelerating TSMC's transition to new 12-inch wafers manufacturing at two plants.

The move to 12-inch wafers will allow TSMC, and chipmakers in general, to manufacture about 60 percent more chips per wafer while reducing manufacturing costs by about 30 percent. Many other chipmakers, such as Intel, continue to build out their 12-inch wafer factories, despite a market slowdown, according to VLSI's observations.

Despite some estimates, TSMC feels that demand will begin to pick up again, beginning late spring or early summer.

"We're still looking at significant growth over the next 10 years," Byers said.