Saturday, March 28, 1998

Intel plant delay linked to chip slump

By Andrew Backover / Knight Ridder Newspapers

FORT WORTH, Texas -- One day after Intel acknowledged that it will not open its highly touted Fort Worth plant until 2002, a company official linked the delay to red flags being raised by semiconductor- and computer makers, including price cuts and warnings of lower-than-projected earnings.

"We are adjusting certain programs as a prudent precaution to current business conditions," said Bill Calder, a spokesman at Intel's headquarters in Santa Clara, Calif. "It's not the sole factor, but you could say it's part of a precaution that we are taking.

"It allows us to develop a building schedule that completes the facility when we need it."

Calder declined to give more specific reasons, citing a "quiet" period before the company's April 14 quarterly-earnings release.

But Intel's decision to stop construction of Fab 16 in far north Fort Worth comes as a growing number of microprocessor and computer makers take defensive moves against price wars and the Asian financial crisis.

"People have been arguing about whether there has been reduced demand. Demand remains strong," said Nathan Brookwood, a microprocessor analyst with Dataquest in San Jose, Calif. "The issue is primarily one of prices."

Early this month, Intel announced that its first-quarter revenue is expected to be about 10 percent less than its fourth-quarter 1997 revenue of $6.5 billion. Last week, Intel slashed the price of its 333-megahertz Pentium II microprocessor by 19 percent.

The demand for low-cost personal computers has created tougher competition among computer makers, and that has forced chip manufacturers such as Intel to lower the cost of the computers' components. Lower revenues and reduced profits have followed suit.

The Asian economic crisis, meanwhile, has led to the devaluation of several Asian currencies, which has made U.S. products more expensive there.

"That curtails purchases of U.S. products in those countries," said Jeff Weir, director of communications for the Semiconductor Industry Association in San Jose. "Demand is still there in terms of people's need for technology."

Four months ago, the industry association predicted nearly a 17 percent growth rate for the semiconductor industry in 1998. Now, the industry has backed off that prediction, and although it has not issued new numbers, some companies are predicting single-digit growth rates. In rapid succession, computer-industry giants have been bellowing bad news for nearly a month.

The biggest personal-computer manufacturer, Houston-based Compaq Computer Corp., said heavy competition and price-cutting wars will erase its first-quarter profits. A week ago, Compaq cut prices by up to 11 percent and said it will give away monitors.

Motorola, which makes computer chips, cellular phones and pagers, said Asia's difficulties will mean lower-than-expected first-quarter earnings. The company plans to revise its 1998 forecast for chip-industry growth down from 13 percent to 15 percent range to "middle-single digits."

On Tuesday, Las Colinas, Calif.,-based Hitachi Semiconductor America cut 30 percent of its Irving manufacturing force, citing plunging prices for the computer memory chips that the plant makes. In 1995, a 16-megabyte dynamic random-access-memory computer chip, known as DRAM, cost about $60. Today, the price is close to $2.

Dallas-based Texas Instruments is also reducing its memory-chip production to about 20 percent of overall capacity.

Dallas Semiconductor Corp., which makes complementary metal oxide semiconductor integrated circuits, announced last week that its first-quarter earnings will be equal to or below earnings for the same time last year, and that they will be far below the 62 cents a share predicted by analysts.

CompUSA of Dallas said its same-store sales will rise less than expected this quarter because the average price of personal-computer systems continues to fall.

Intel's delay of its Fab 16 plant, officials say, will allow it to assess predicted evolutions in technology that would have a massive affect on the industry over the next several years. Intel plans to eventually use the plant for a manufacturing process on a 300mm silicon wafer that will improve production and efficiency.

Intel's existing plants are meeting market demand for computer chips, which are for the most part made with 200mm silicon wafers -- further reducing the need for Fab 16 at this point, Calder said.

"It doesn't make sense to open as a 200mm wafer fab if we know we're going to need it as a 300mm wafer fab in 2002," Calder said. "That allows us to retarget Fab 16 to a future manufacturing process and bring that factory up and make it the state-of-the-art facility and the first of its kind for Intel, in terms of production."

Weir, of the Semiconductor Industry Association, downplayed Intel's decision to delay Fab 16.

"A decision of building at another time instead of tomorrow, that does not necessarily mean it's a negative sign of the industry and its overall economy," Weir said.

"The chip industry still has positive news. It's just that the price for chips are less than they used to be. The profit margins and the earnings for the computer companies and the chip manufacturers are lower than they have been. The demand for chips continues."

Technology companies will make the necessary changes to continue growing, others noted.

"As long as demand remains strong, then everybody survives and eventually adjusts their business models and overhead structures to do OK," Dataquest's Brookwood said.

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(c) 1998, Fort Worth Star-Telegram

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