Earlier this month, the Semiconductor Industry Association (SIA) reported May 2004 global semiconductor sales of $17.32 billion, the highest level seen since December 2000. A combination of record chip sales and a surge in new semiconductor fab construction worldwide in Q2 this year have raised some concerns on Wall Street, particularly from research analysts Glen Yeung at Citigroup Smith Barney and Shawn Webster at J.P. Morgan Chase & Co., who believe that the semiconductor cycle may have already peaked. 

According to Semiconductor International, at the peak of the last semiconductor boom cycle in 2000, the total value of new 300mm fab start-ups hit a record high of $25 billion, with 18 new chip fabs breaking ground worldwide. One should keep in mind that the peak of the last semiconductor boom cycle coincided with that of the U.S. macroeconomic boom cycle with the Fed Funds rate at an eight-year high of 6.5 percent in the year 2000. This year, however, the Fed Funds rate was recently raised from 1.0 to 1.25 percent and the current estimated GDP is only at 4 percent.

Under the assumptions that corporate IT spending continues to improve in the second half of 2004 and beyond, along with the strong demand for consumer electronics driven by low-priced flat panel televisions and portable electronic devices, growth should be sustainable in the semiconductor industry sector. 

Unlike other basic industrial materials such as steel and aluminum, investment in the semiconductor materials sector may require a broader understanding in capital spending and R&D investments involved in the manufacturing process as well as the rapid change in the IC chip manufacturing requirements imposed on the materials.

Silicon Business Fundamentals:  During the past eight years, the price of silicon, the starting raw material for the manufacturing of IC chips, has steadily declined from ~ $2 per square inch in 1996 to ~ $1 last year. This trend is expected to continue as Chinese silicon suppliers, such as Beijing, China-based Grinm Semiconductor Materials Co. Ltd, begin to increase production capacity to meet demand from high-growth domestic IC foundry businesses and eventually, export its products to the U.S. and abroad. Grinm, which went through an initial public offering (IPO) in 1999, is traded on the China Stock Exchange A Share market.

St. Peters, Mo-based MEMC Electronic Materials Inc. (NYSE:WFR) is the only major silicon supplier in the U.S. with a worldwide market share of approximately 7.4 percent. MEMC is ranked fourth worldwide, behind Germany-based Siltronic, a spin-off from Wacker Chemie GmbH; Japan-based SUMCO, a Sumitomo Mitsubishi Silicon Group; and Shin-Etsu Handotai (SEH), the world's largest silicon supplier with a market share of approximately 34 percent. SEH is a wholly-owned subsidiary of Shin-Etsu Chemical Co. Ltd., a Nikkei 225 company on the Tokyo stock exchange.

Increasing Production and Development Costs: One of the long-standing issues receiving a great deal of attention as silicon wafer cost  increasingly becomes a significant part of the total wafer fab operating costs, are the defects in silicon wafers. 

Silicon, manufactured using the present technology, contains several types of grown-in defects that affect the chip performance and yield, the number of good chips per finished wafer. According to Dr. Robert Falster, research scientist at MEMC, accurate control of these defects is immensely important to both silicon suppliers and device makers.

Defect reduction techniques, including silicon epitaxial layer encapsulation, high-temperature annealing and nitrogen doping, add costs to silicon wafers and may also induce new types of defects into silicon. 

With the increasing demand for low-cost and high-quality wafers, silicon suppliers may be required to heavily invest in new or innovative technologies to maintain their leadership and gain market share. Billion of dollars may be needed just to develop and transfer larger-diameter wafers, such as 450mm wafers, into production.

Another issue that faces silicon suppliers is the rapid change in device geometry. Last month, Xilinx (NASDAQ:XLNX) announced that their chip yield from its state-of-the-art 90nm process fabricated on 300mm wafers is almost five times more than that using the previous 130nm process with a 200mm diameter wafer. Based on the recent SIA revised 2005 forecast for global semiconductor sales growth from 10 percent to 4 percent, even less silicon may be needed next year if chip makers can increase their production yield.

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