ST in capacity push as demand surges

Diversified semiconductor maker STMicroelectronics is enjoying strong demand for the third quarter and a normal build-up of orders for the fourth quarter, its chief executive said on Thursday.

The world’s fifth-largest chipmaker also said during a company presentation to investors in London it was on track to meet its target of 6 to 12 per cent sales growth this quarter versus the first quarter of 2010.

“Demand is very, very strong for Q3. What’s also clear at this point is that the backlog in Q4 is building up as normal,” said Carlo Bozotti, CEO of ST. He added: “We do not have any evidence of inventory build-up at this point.”

Manufacturers and distributors tend to build up inventories of parts they need as demand returns to prevent being caught short and unable to supply their customers.

Shortages of basic components for the telecoms, automotive and consumer-electronics industries have been reported recently as suppliers cannot instantly hike production, but must buy expensive equipment and hire and train staff.

Alain Dutheil, ST’s chief operating officer, said the company planned to increase capacity by 20 per cent by the fourth quarter versus the fourth quarter of 2009.

“By the way, I think we are not going as fast as we need, because we need more capacity,” he said, adding that capital expenditure was coming down from 25 per cent of sales over a cycle towards 5-7 per cent and was currently about 15 per cent.

Dutheil said ST was having supply troubles, and added delays could be as long as three to four months for complex semiconductor products.

But he said the company was being more careful in ramping up capacity this time around than it had been a decade ago, when boom led to bust as chipmakers found themselves with surplus capacity, staff and equipment as demand waned.

Asked whether there was much double ordering occurring – in which customers order the same parts from different suppliers then cancel “backups” once a supplier fulfils the order – he said: “We don’t know yet. We think there might be.”

Analysts expect this to be a boom year for the semiconductor sector after sales unusually grew in the first quarter – to $70.6bn, according to technology research firm iSuppli – over the fourth quarter, which is typically far stronger.

ST’s results have been dragged down by losses at its wireless joint venture with Ericsson, ST-Ericsson.

Finance chief Carlo Ferro said ST aimed to mitigate wireless losses by the fourth quarter, and said the business should become profitable once it achieved a quarterly sales run rate of $750m and after restructuring was complete.
In the first quarter, Wireless reported revenue of about $600m.

ST’s chief technology officer Jean-Marc Chery said he expects the first chip aimed at the company’s own 20nm process to tape out in the fourth quarter of 2012. This will come at the end of a programme to have internal manufacturing at its fab in Crolles catch up with the major foundry suppliers.

Although the company expects to increase the amount of production that it outsources to foundry from its current level of 15 per cent to 20 per cent long-term, ST decided to put more investment into Crolles so that its own plant could act as a primary source of advanced processes.

Chery said the company is at the prototyping stage with its 32nm process and expects delivery of its first production immersion scanner next week so that production can ramp up in the third quarter of next year. This process ramp will follow just one quarter after the ramp for its low-power 40nm process. The 45nm process will ramp up in the fourth quarter of this year.

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