H.S. Tung, the chief financial officer of Taiwan's No. 1 chip assembler, Advanced Semiconductor Engineering Inc. (ASE), predicted early this month that the world chip-assembly market would improve greatly next year and that it would even experience stronger growth in the second half of 2003.

This rosy forecast has been borne out by the performance of ASE itself, and its domestic competitors.

ASE's operations climbed back into the black in the first half of this year, with revenue increasing at a better-than-expected 10% and after-tax profit reaching NT$360 million (US$10.6 million at NT$34:US$1). Tung went on to predict that revenue will continue to rise at a similar pace during the present quarter, and that gross profit will expand at a pace of 17% to 18%.

Another leader in the line, Powertech Technology Inc., feels so good about the future that it plans to boost its spending on new equipment this year from the originally projected NT$400 million (US$11.7 million) to NT$2 billion (US$59 million) to accommodate a flood of orders for its packaging and testing services.

The ChipMos Group's three affiliates--ChipMos Technologies Ltd., Thailin Semiconductor Corp., and Chantek Electronic Co.--have also experienced improved results this year. ChipMos broke even in March and posted first-half earnings of NT$20 million (US$590,000). Thailin started making money in July, with profits of NT$1.98 million (US$60,000) on revenues of NT$80 million (US$2.3 million). Chantek expects to break even in September, with revenues of NT$80 million (US$2.3 million).

Siliconware Precision Industries Co. turned profitable in July and its chairman, W.P. Lin, predicts that third- and fourth-quarter revenues will rise by 8% to 10%. Some institutional investors expect the company to earn at least NT$2 billion (US$59 million), or NT$1.1 per share, for the year as a whole.

All this is good news for an industry that has been in a slump for three years because of a recession in the global chip market. Many local companies in the line felt the stirrings of recovery beginning in the first quarter of this year, when the market contracted by only 10% in spite of the effects of the SARS epidemic and the war in Iraq (in normal times, the market drops 15% in the slack first quarter compared to the previous quarter).


Huge Global Growth


Heavyweight market research companies Dataquest and FSA predict that the global market for packaging services will soar 69% and the market for testing services will rise 44% this year, to a combined market value of US$29.6 billion.

A joint study conducted by the two firms attributes the growth primarily to a rapid transition of packaging technologies and a shortage of production capacity using the new technologies as a result of sluggish expansion over the past three years. An additional factor is that integrated-device manufacturers (IDMs) have accelerated their outsourcing of packaging and testing services to dedicated suppliers.

Ball-grid array is rising as a replacement for the lead frame as the main packaging method, since chips are becoming smaller even as they pack more functions. The study report indicates that around 20% of all single chips will have 400 input/output pins by the end of the year, up from the previous 100 pins. This means that the use of ball-grid array (BGA) packaging will increase sharply while use of the quad flat pack (QFP) will decline.

Packaging capacity for BGA, fine pitch, and system-on-a-chip (SOC)--all ball-array operations--has expanded by barely 55 percent over the past three years, leading to worries that shortages of high-end packaging capacity will become more apparent as demand grows. At the same time testing capacity has expanded by a mere 10%. This is obviously not enough, since Dataquest and FSA estimate that the outsourcing of testing services to surge 30% this year.

Top world IDMs such as Infineon Technologies, Hynix Semiconductor, Samsung Semiconductor, Advanced Micro Devices (AMD), and Toshiba have contacted Taiwanese assemblers about purchasing their services, mainly for flash-memory chips, storage-media chips, graphics chips, chipsets, and wireless chips.

Kyec Yuan Electronics Co. figures that excessive demand will allow it to hike the charges for its testing services this month. Sizable contracts from makers of NOR flash-memory chips in Europe, America, and Japan have strained the company's capacity, raising hopes that August revenues will top NT$600 million (US$17.6 million), up from NT$580 million (US$17 million) in July.

Mainland China has emerged as a large market for IC chips, but it depends on foreign chipmakers for most of its supply because of insufficient manufacturing capacity and backward processes. Only one mainland chipmaker has 0.18-micron processing capability so far--the Semiconductor Manufacturing International Co. (SMIC), which is led by Taiwanese investors. But its capacity is not great enough to support the formation of chip-assembly clusters; in addition, heavyweight IDMs such as Infineon, AMD, and Intel all have their own assembly plants in the mainland, and have no need for outsourcing services there.