Cash-Strapped Malaysian Fabs Yet To Get Off Ground

December 9, 1998, Kuala Lumpur -- Two government-backed advanced wafer fabrication plants at the Kulim Hi-Tech Park in Malaysia have yet to get off the ground in over a year.

Sources close to the projects said they were affected by the global chip market downturn and the inability to raise local or foreign financing.

The delays underline the severity of Malaysia's battered economy and its souring investment climate.

The two fabs costing over US$2 billion were supported by government investment arm Khazanah Nasional Berhad with separate technology partners Atmel Corp and VLSI Technology Inc.

Khazanah Nasional is a wholly-owned company of the Minister of Finance Incorporated, entrusted to manage the assets held by the Government and to undertake strategic investments particularly in high technology projects.

Announced amid much fanfare in October 1997, the fabs were expected to make Malaysia a force in front-end manufacturing of the semiconductor business. The country's cheap labor already make it a popular manufacturing site for back-end assembly and test.

Construction was set to begin early 1998, and the fabs were set to be operational by the third quarter of 1999, each producing between 25,000 and 28,000 units of 200mm wafers monthly using 0.25 micron technology.

Checks at the park indicate that construction for both fabs had yet to begin.

Atmel Corp chief financial officer and vice president Donald Colvin told this reporter the company had not decided to pull out yet, but financing was "rather tight" due to the depressed semiconductor market and worldwide credit squeeze.

"The semiconductor sector is in the middle of its worst down period of the last 35 years. This has pushed out the market need for this new fab. Atmel does not need to build a fab that the market does not require," he said.

Colvin said its revised plan with joint-venture partner Khazanah Nasional was still on target to meet expected market requirements but subject to obtaining finance.

He did not state when the project was re-scheduled to begin but suggested the year 2000 was not a "drop dead deadline".

Atmel had a 60 percent stake in the venture and Khazanah Nasional the remaining 40 percent. The joint-venture had an initial capital layout of US$830 million of which US$275 million was to be funded by equity.

Ground work was set to have begun in February this year and the fab was to be completed in 18 months.

Atmel, a San Jose,California-based producer of nonvolatile memory chips, microcontrollers, and programmable logic devices, underwent mid-year restructuring, laying off 650 staff, and cut back production at its fabs in France and Colorado Springs, Colorado.

VLSI Technology Inc vice president and treasurer Sunil Mehta indicated lack of financing was also hampering the other US$1.2 billion fab project led by local start-up Wafer Technology Malaysia Sdn Bhd (WTM).

"One of the conditions of our involvement requires WTM to be able to obtain third-party financing for the project. Currently, we do not have any indications that bank financing has been arranged so no firm contracts have been drawn up," he said.

The San Jose, California-based company was to have taken a 20 percent equity in the fab and provide key management, technological expertise and training assistance.

Khazanah Nasional took up a 30 percent stake in the project, with another 25 percent to local partners, and the remaining 25 percent to be offered to foreign customer-partners.

Japan-based Sumitomo Group indicated an early interest to take up a 5 percent stake.

WTM CEO and president Cyril Hannon assured this reporter that the fab was still on course despite the delay.

"Malaysian interests in the fab has not deteriorated. We've taken the time to re-rationalize the project as we move forward," he said.

Hannon said the company was now shooting for 0.18 micron technology, its second revisal from the original 0.35 micron linewidths.

He said the fab was now scheduled to come onstream by the latter half of 2000.

Hannon added the projected costs of US$1.2 billion for the fab may have "incremental rises for equipment and tools."

A source close to the WTM and Atmel projects says the fabs are unlikely to be operational until the year 2001 because of the time it takes to construct and equip a fab.

WTM had also yet to take ownership of VLSI's existing San Jose fab as originally announced which would have sped up its entry into the market.

WTM was expected to convert and upgrade the older fab to act as a pilot line for training, process development and customer qualification.

On the collapse of previous fab ventures in Malaysia, Hannon said: "The market made the decision. There were several irons in the fire and its prudent that the market forces determined who should survive," he said.

Another wafer fab by Taiwanese company Hualon Corp had yet to materialize at the Kulim park despite its announcement three years ago, while a start-up foundry to be built at the Sama Jaya industrial zone in Kuching, Sarawak led by the state government was derailed last year after key staff of the company InterConnect Technology Sdn Bhd clashed with investors over non-payment of salaries.

In June, a US$600 million project to build an integrated crystal growing and wafer polishing plant also at the Kulim park came to a sudden halt when principal investor MEMC Electronic Materials Inc pulled out.

Khazanah Nasional had a 25 percent stake in the joint-venture project.

US-based MEMC, cited current and anticipated excess capacity for 200mm wafers, significant price erosion and weak economic conditions in the Asia Pacific region, including Japan, for the withdrawal.

The company said it wrote-off architectural design, site preparation fees and costs incurred to develop a computer integrated manufacturing system for the plant.

The company is believed to have incurred US$25 million to set up, then wind down the plant, including dismantling a cleanroom, retrenching staff and cancelling orders for components from local subcontractors.

Malaysia's foray into the high-risk, capital-intensive fab business seems questionable amid the current global chip market slump, foundry overcapacity and financial crisis.

Malaysia's chip exports also shrank by 4 percent in the first seven months of the year. Its recessionary economy shrank 8.6 percent on the three months to September, the third quarterly decline in a row and the sharpest contraction among Asian economies with the exception of Indonesia.

Critics point out that new capital controls introduced in September have caused long-term investment uncertainties, and the country's persistent power failures and chronic shortage of design engineers and skilled labor all weigh against it.

Even when both the projects do come onstream they face a stiff pricing war with established Singaporean and Taiwanese foundries.

Hannon, a former executive of LSI Logic Corp, said he does not believe Malaysia's lack of credibility and experience in wafer technology is an issue. "There is no magic in the technology anymore, almost anyone can build a fab these days. You just need access to good technology, strong investor support, and a solid executive team."

Hannon hinted the stalled fab may garner new support from Taiwanese investors.

He was also hopeful that current surpluses in global inventory will work its way out by the year 2001 as more integrated-device manufacturers (IDMs) outsourced their wafer needs.

Link:
Kulim HiTech Park website

Copyright 1998 Julian Matthews.   Disclaimer