Contract Chip Makers Face More Cutbacks

Flash memory giant Spansion on Wednesday announced it will reduce orders to contract chip makers by US$50 million per quarter in the first half of 2008 due to new production technology at its own factories. But the order changes couldn't come at a worse time for manufacturers because other companies are cutting back as well.

Contract chip makers (foundries) such as Taiwan Semiconductor Manufacturing (TSMC) and United Microelectronics (UMC) make money by producing chips on behalf of clients such as Spansion and Texas Instruments (TI). TSMC is Spansion's main foundry partner through a joint chip development agreement, and is also one of TI's foundry partners.

"We remain fully committed to our agreement with Spansion," said JH Tzeng, a spokesman for TSMC. He declined to comment on possible order cuts to his company.

The global technology industry faces the prospect of slower consumer demand this year due to U.S. economy woes. Many economists have already pronounced the U.S. in a recession as a result of problems in home loans and financial industries, and many fear those woes will spill over into consumer spending on gadgets.

The mobile phone industry has already taken a hit.

Last week, TI indicated it will cut orders to contract chip makers in response to declining orders for chips used in high-end mobile phones. TI lowered its sales and net profit forecasts for the first quarter due to the problems.

Sony Ericsson followed TI's handset warning by Wednesday saying it sees slowing market growth for mid-to-high end mobile phone sales in Europe, a sign there might be more pain for handsets and, ultimately, for chip makers. Sony Ericsson reduced its sales forecast for the first quarter, which ends March 31, to below that of the first quarter last year.

Spansion faces falling prices for its chips on global markets. The flash memory business has faltered this year amid a chip glut that has sent prices tumbling.

The price of mainstream 4G bit NAND flash chips has fallen 33 percent so far this year to US$4.06 Thursday, according to DRAMeXchange Technology, which runs an online memory chip market..

The company's increased manufacturing efficiency should help bolster its finances, but the memory chip business remains tough. Spansion's stock, which trades on the NASDAQ exchange, has fallen 37 percent so far this year to close at US$2.47 Wednesday.

One hope for foundry chip makers such as TSMC is that any reductions in chip orders by one company may be made up in increased orders by other chip companies. Qualcomm, for example, reiterated its first quarter guidance at a meeting last week. The company usurped TI's position as the world's largest mobile phone chip maker last year. Qualcomm also taps TSMC and other foundries for chip making services.