Chip shaker: TSMC, Samsung to flex foundry muscle

By Jonathan Standing

TAIPEI (Reuters) - Morris Chang, the father of Taiwan's chip sector, once shrugged off Samsung Electronics' entry into the foundry business - making private-label semiconductors under contract for others. Now, he calls the South Korean group the industry's "700-pound gorilla" with formidable financial firepower.

Samsung's rise highlights the rapid changes in one of Asia's top industries - where speed, creativity and deep pockets count in a race to make chips smaller, but smarter, to keep up with a consumer shift from computers to mobile gadgets such as Apple Inc's iPhone and iPad.

While U.S. firm Intel remains the dominant player, with as much as a two-year lead in process technology, the chip industry is going through its biggest shakeout in a decade, and the less well-known contract makers, or foundries, are set to emerge strongest.

Once-dominant Japanese firms have been battered by rising costs and the investment clout of Samsung and Chang's Taiwan Semiconductor Manufacturing Co (TSMC).

The Japanese have the technology, but the likes of Elpida Memory, a maker of DRAM memory chips for computers, and Renesas Electronics Corp, the world's leading maker of microcontroller chips for automobiles, just don't have the money to plough into the constant plant and technology upgrades.

"As technology moves forward, companies simply can't afford to individually build advanced fabs. The foundry model of aggregation is very good for addressing the cost issue," said Len Jelinek, director and chief analyst of semiconductor manufacturing at research company IHS iSuppli.

While the word conjures up images of red-hot steel and pounding metal, a chip industry "foundry" is a company that makes chips for others in large, modern and ultra-clean plants, or fabs, that cost billions of dollars to build.

IHS predicts revenue from the foundry business will jump to $42 billion by 2015 from around $30 billion this year, pushing up its share of the total chip industry to 10.8 percent from 9.1 percent. Foundries will account for almost a quarter of total chip capacity by 2015, up from a fifth currently.