It is a multi-million ringgit club. Minimum entry fee: RM500 million. The place: Kulim Hi-Tech Park in Kedah. Member of the month: Silterra Malaysia Sdn Bhd. Silterra is a RM1.3-billion wafer fabrication facility, or commonly referred to in the global industry as "fab", not plant, or heaven forbid, factory! Analysts commonly call them "foundries" and among the biggest are TSMC and UMC of Taiwan and Chartered of Singapore. The so-called Big Three produce up to 70 per cent of the world's wafers. Joining the rest of the pack is Silterra.

On Nov 24 this year, president and CEO, Cy Hannon, flipped the switch of the fab. "And it will be on, 24 hours a day, every day, until the fab closes," says Hannon, a Canadian with over 30 years' experience in the business.

The fab's current installed capacity is 6,000 wafers a month. This will be ramped up to 30,000 wafers a month in increments of 6,000 every quarter till full capacity in the second half of 2002.

"Thirty thousand wafers a month is reasonable for an economically-sized facility like ours," says Hannon. Silterra, which unites silicon (sil) with terra (earth in Latin), gets the wafers from producers like Wacker, National Semicon and MEMB. It then prints the circuits on these bases which look like shiny black frisbees. This is called the process.

After the circuits are printed on, they go to the assemblers, like MPI and Unisem, to be cut and packaged before being shipped out.

In the chip food chain, Silterra is second, after product development and chip design. After fabrication comes assembly and testing, marketing and distribution.

The first fab was set up by Motorola in 1988, followed by the Malaysian Institute of Microelectronics Systems (Mimos). Mimos' fab is a small one, producing wafers mainly for research.

According to the Malaysian Industrial Development Authority (Mida), approvals for fabs were given to six companies in the 1990s. To date, only Silterra and 1st Silicon (Malaysia) Sdn Bhd in Sarawak have gotten going. 1st Silicon is also reported to be starting production round about now. The main reason is cash. Fabs are a big-money game. At full capacity, the fab would cost $1.4 billion, most of this coming from equity.

Hannon says Silterra's share capital stands at US$1 billion at the moment and he expects to source an additional US$300 million more from equity.

The main shareholders on full capitalisation of this first fab are national investment agency Khazanah Nasional Bhd, with 49 per cent, followed by Bank Industri (32 per cent), international venture capital company BI Walden (9.7 per cent), technology partner and first customer LSI Logic (7.5 per cent) and miscellaneous (1.8 per cent).

Hannon expects revenue by late March next year. When full production, the fab would be ringing in revenue of more than US$500 million per annum. Besides LSI Logic, he says the company has lined up "five to six customers" and is talking to more, though he refuses to name them. "We're fully booked for next year at 12,000 wafers a month."

The trick, naturally, is to match customers with capacity and Hannon says, "25 to 50 customers" is ideal. Since its not exactly a retail industry, customers tend to stick to a fab once chosen. "There's a lot of prequalification to be done," Hannon says.

That would go down well with BI Walden Management Bhd executive director, Chok Kwee Bee. She says the international venture capital company, which was involved in the project from its inception in 1995/96, has invested more than US$10 million so far from all three Walden Funds.

Walden's policy, she adds, is to be hands-off in day-to-day operations and hands-on in the bigger picture, like evaluating the choice of tech partner, recruitment and financial advice.

Since it has been a long gestation period, isn't Walden keen to realise its investment? The obvious choice is a public offering, currently slated for 2002. Two boards are earmarked for the IPO -- the US' Nasdaq and Malaysia's Mesdaq.

A dual listing?

"We'd go where it's more liquid and more appropriate," Chok answers. Hannon explains during a tour of the spanking-new fab that in order to finance a project the size of a fab, you'd have to go to the market. The game plan is to have multi-fabs. More is better in this industry and there are three more on the drawing board at Silterra's 72-acre site in Kulim.

It sits on a hillock, looking out to the gold and country resort across the way. KL-ites would find the Hi-Tech Park a "jumping" place. Indeed, the whole northeastern seaboard around Seberang Prai, including Kulim, is pretty jumping. Big apartment blocks seem to stick out of paddy fields. There's brand new hospitals and hotels. Never mind Lunas and farcical by-election. This is the real happening -- the legacy of Silicon Valley, first started by former Penang chief minister Tan Sri Lim Chong Eu more than 20 years ago.

In the middle of this year, it was reported that 19 hi-tech companies, including multinationals Intel, Celestica, Entegris as well as Malaysia's own AIC Corp Bhd, had set up shop in the first phase of the park. Development of the park would take place over 10 years and over 3,100 acres. Hannon agrees that Silterra's location has made his job a big easier. Penang's history in silicon has attracted a pool of trained people for his human resource team to tap for the 1,000 staff that would be at Silterra at any one time!

But could all this turn out to be another folly? After all, the global chip cycle, so go-go six months ago, is now uh-oh!

And a lot of analysts, caught on the hop, are hedging their bets. "They're waiting for the promise of the products to pan out," says an international investment adviser, half-mockingly. His personal take is that the chip cycle is going down, and worse, silicon is dead and everyone is racing back to the Old Economy. Chok takes the opposite view. "Chips are in a lot of areas now. They were previously tied to PCs but there are a lot more applications now, like communications, which in turn is moderating the cycle." But let's listen to the old hand.

Hannon's finger on the pulse of the industry tells him there should be growth for the foundry business of around 30 per cent. The reason: outsourcing. With the IDMs (integrated device manufacturers) like Intel, TI, NEC and Lucent closing down fabs and the advent of the so-called fabless semiconductor companies (among them Alterra, Xilinx and Broadcom), Hannon says outsourcing is growing at twice the industry rate.

At the same time, Silterra offers customers higher-end process technologies -- 0.25mm and 0.18mm CMOS (complementary metal oxide semiconductor) digital and mixed signal processors. The plan is to move into even higher tech -- 0.13mm or less. The higher the tech, the higher the value added, the demand, and hopefully, a less bumpy ride on the chip cycle (see charts).

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