Chip Makers Plan Alliance for Next-Gen Product

In a move that could lead to stiffer competition for Intel (Nasdaq: INTC) -- and also accelerate the production of next-generation electronics -- three computer chip-making rivals are forming a partnership to work on cutting-edge system chips.

Hitachi (NYSE: HIT), Toshiba and Renesas Technology said they are still working out the details of a partnership, but published reports in Japan indicate the three will invest as much as US$850 million and hope to start production by 2007.

The partnership would likely involve the establishment of a new chip-fabrication facility that could help the smaller companies compete with the massive undertakings of Intel, Advanced Micro Devices (NYSE: AMD) and Samsung Electronics.

The new partnership plans to begin by creating a group to study costs and feasibility. By mid-2006, a decision is expected as to how aggressively -- if at all -- the firms will move forward to complete the plant.

Also up in the air is what size chips the venture will focus on making. They are expected to be 65 nanometers (nms) or smaller, a step ahead of today's 90 nm chips. Intel and others are already working on 45 nm chip production.

The move may have little impact on the overall market for chips and is unlikely to create any hardship for Intel and others. A more promising target, according to some analysts, would be Taiwan Semiconductor -- the world's largest supplier of made-to-order chips -- which provides chips for Microsoft's (Nasdaq: MSFT) Xbox 360 and several leading mobile phone handsets.

Falling Fortunes

That's because a major issue in the chip industry is the cost of production -- especially for setting up new facilities to build cutting-edge chips.

In fact, one of the reasons Intel has been able to maintain its edge in the chip market over a long period of time is that it has invested heavily in research and development, according to observers. The company has also demonstrated a willingness to build new facilities to make ever-smaller and more powerful chips.

Intel is now working on a 45 nm production facility in Israel, which is expected to cost at least $3.5 billion to build, and has announced plans for additional next-generation plants in the U.S. and elsewhere. It is expected to have 45 bm chips on the market before the end of 2007.

"Intel constantly plows money into R&D and new production capabilities," said Mercury Research president Dean McCarron. "The smaller firms just can't compete on their own, so alliances make sense."

That's becoming especially true as chips begin to shrink to the point where additional gains are harder to come by than in the past, McCarron noted. "It takes more work and the gains aren't as great."

One Chip Fits all

Japan once boasted several of the top chip makers, but their fortunes fell along with the Japanese electronics industry, where most of the chips traditionally were sent.

The new alliance could help electronics makers by providing a steady stream of chips that offer one-chip functionality -- combining the technologies of chipsets currently installed in everything from DVD players and mobile phones to gaming consoles and televisions.

However, such partnerships can be tricky, especially if there's disagreement among members about the direction a venture should take. For that reason, the latest team-up probably doesn't pose much of a threat to the chip industry hierarchy.

Consumers may benefit, however, as any pressure from new competitors could prompt companies that now dominate the industry to bring next-generation chips onto the market faster.

"It might add a little urgency to efforts that are already under way," McCarron said.