Thailand’s big backend houses wait for bottom

By Drew Wilson

WaferNews correspondent

With no clear sign of recovery, Thailand’s assembly and test companies are attempting to navigate through waters infested with deterioration of output, production slowdowns, low utilization rates, cuts in orders, and subsequent cuts in planned capex.

Microchip Technology utilizes a plant in Bangkok for half its output and 100% of its testing. The plant had been pushing out 3.4 million units/day in September 2000. Output was down to 2.4 million units/day in 3Q01, according to John Oatley, managing director of the Thai operation.

In addition to the slowing of output, Microchip has had production shutdowns. However, thus far, the company has avoided shedding employees. Oatley said the only bright spot is that serial EPROMs are in demand ?but price erosion is terrible,? he added.

Philips Semiconductor?s backend operation in Bangkok turned out more than 3 billion units ? about 50% of the company?s total chip output — and earned $750 million in export revenues in 2000 servicing customers such as IBM, Motorola, and Intel. This year, however, the company has cut 340 jobs, stopped hiring, and started once-a-week shutdowns. T.S. Suh, managing director of Philips Semiconductor, expects revenues to be down this year, though he would not give specific figures.

Suh said logic products, which make up 65% of output, are seeing strong demand but the outlook is still hazy. Company management expects the division to show its first annual loss in nine years in 2001.

Thailand-based chip packager Hana Group has a 40 to 60% utilization rate, varying due to spot orders. ?We?ve had more spot orders in the third quarter than in the second,? said Richard Han, CEO. ?But there?s no big turnaround to get excited about. Certain companies are hitting bottom with inventory.?

As if Thailand?s low output levels are not bad enough, backend capex has been slashed dramatically. Microchip expects to spend $2 million in 2001, down from $20 million in 2000. Hana?s budget is less than $5 million compared to $30 million in 2000. Philips isn?t spending a dime.

So when does Thailand reach bottom? Eric Gomberg, analyst at Thomas Weisel Partners LLC, doesn?t see any backend equipment purchases until the industry is well into an upturn. ?Packaging houses have way too much capacity,? he said. ?They could probably double revenues before they make any meaningful capacity purchases.?

Microchip?s Oatley believes the chip cycles have about eight steps and the industry is at step four. ?We?re starting to ease up excess capacity and subcontractors are starting to come back,? he said. ?We?re starting to produce at real demand level.?

But if the bad times last another three to six months, the results may be a consolidation in the backend, sources said. There are far too many players, said Hana?s Han. ?But a lot of these companies have relatively strong balance sheets fresh from the heyday, so it?s doubtful if anyone is under huge pressure to sell their company right now,? he added.

Mergers and acquisitions in the backend has been an ongoing discussion for months, said Weisel?s Gomberg. The problem is, few companies want to deal when their stock price is on the floor. Moreover, companies continually revise their financial forecasts, bringing too much uncertainty into valuation of a company.

?Once we?re sure we?ve hit bottom, there should be more of an appetite for M&A,? Gomberg predicted.


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