Usually, market upturns are felt by integrated-circuit (IC) assemblers around two to three months later than silicon foundries, the upstream suppliers of the chip manufacturing chain. So, when Jason Chang, chairman of the world-leading IC assembler ASE Group, recently said his group would step up expansion investments in the third quarter this year, such announcement seems to make the recovery of the semiconductor market with definite certainty.

Chang said that the global semiconductor market is apparently warming up and his company has landed sizeable orders, which are even pushing the company`s Kaohsiung factory in southern Taiwan close to full capacity, as well as bringing the company`s mainland China factory back to more prosperous times. In a recent management conference, company executives suggested that new equipment be bought in the third quarter to cope with impending capacity shortage strained by flooding orders.

Subsidy-driven Demand
Industry watchers ascribe the present market upturn mostly to rising demand for household appliances, personal computers, mobile phones and automobiles in mainland China stimulated by official subsidies; inventory restocking by European and American chip suppliers; and process technology upgrading at integrated device manufacturers (IDMs) and fabless houses.

The influx of orders was thought to be short-term, rushed in nature in the beginning but now arrive steadily, according to industry executives.

The steady flow of orders are keeping chip supply chains busy, compelling IDMs including Intel Corp., Toshiba Corp., Renesas Tech Corp., NXP Semiconductor to increase outsourcing, after shutting down ineffective production lines on cost concerns, to pure silicon foundry as Taiwan Semiconductor Manufacturing Co. (TSMC) and packaging and test house ASE.

For example, Intel announced early this year that it would shut down four packaging and test facilities. It has contracted ASE and Siliconware Precision Industry Co., Ltd. to package and test its south-bridge chips, Ethernet chips, wireless chips, NAND flash chips. The two IC assemblers are expected to land 15% more of Intel`s orders in the third quarter over the second quarter.

Promising Second-half
As the foundries say they have secured contracts through September, industry watchers believe that the resulting packaging and test orders will help accelerate revenue growth at IC assemblers throughout the second half this year.

Orders from silicon foundries are estimated to boost revenues at IC assemblers by 10% in the third quarter based on the projection that the foundries would see revenues rise 10%, on average, in the same quarter thanks to increased orders from IDMs and fabless houses, including Qualcomm and Nvidia.

In light of steadily growing orders, the top two foundries TSMC and United Microelectronics Corp. (UMC) have begun ordering chip-making equipment in the second quarter. TSMC chairman Morris Chang recently announced his company would raise 2009 capital expenditure to 2008 level or US$1.8 billion, from the originally planned US$1.5 billion. So far this year, TSMC has spent over NT$10 billion (US$303 million at US$1:NT$33) on leading-edge process tools, much more than capital spending budgeted by industry peers.

After generating over 50% more revenue in April over March, TSMC saw its revenue for June rise 12.5% from a month earlier. Both TSMC and UMC are expected to see revenue for the second quarter surge over 80% from a quarter earlier. Consequently, ASE and Siliconware are forecast to enjoy a 50% revenue rise in the second quarter over the first quarter and a 20% jump in the third quarter. ASE originally projected its revenue to grow 40% this quarter. IC test houses Ardentec Corp., Kyec Yuan Electronics Co., Ltd. and STATS ChipPAC Test Services Co., Ltd. are even forecasting revenues to grow at the same rate as foundries` this quarter.

Revenue Growing
Industry officials point out that, unlike most electronics manufacturers who saw their May revenue rebound after declining in April, IC assemblers` revenue would likely further grow in June after rising in April and May. ASE had revenue of NT$7 billion (US$213 million at US$1:NT$33) in May alone, a gain of 15.1% from April`s NT$6.1 billion (US$185 million). Meanwhile, No.2 assembler Siliconware raked in around 15% more revenue over April`s NT$4.2 billion (US$127 million), to NT$4.8 billion (US$146 million) in May.

ASE`s Chang note that the world semiconductor supply chains abruptly stopped building up inventories last year because of the economic recession, freezing the flow of orders until January or February this year. His company, he says, began making money in March thanks to its cost advantage.

Chang says that the recent rush orders from China prove that the financial meltdown has hit the United States, Europe and Japan relatively harder, with China`s economy still packing more potential to grow fast.

Drive-IC Testers Big Winners
Among the prime beneficiaries of China`s rush orders are firms specializing in test and packaging of drive ICs for liquid crystal displays (LCDs), since the mainland`s official subsidies have significantly fueled consumption of household appliances, notably fridges and LCD TVs. The assemblers include Chipbond Technology Corp. and International Semiconductor Technology Ltd. Tester Kyec has even sold all its capacity for LCD drive ICs and is seeing its memory chip testing capacity steadily being stretched.

The market for flip chip-chip scale package (FC-CSP) service is also robust based on the report that ASE and Siliconware have sold all their FC-CSP capacity till the third quarter, and the orders are expected to help boost the total capacity utilization rates at ASE and Siliconware past 85% in the third quarter. IDMs and fabless houses are searching everywhere for FC-CSP capacity as ball grid array (BGA) packaging technology is obsolete for chips designed on 65-nanometer design rule, which can help IDMs and fabless houses further pare down costs when the global economy remains anemic.

So far, capacity utilization rates at ASE and Siliconware have soared past 70% while Kyec has sold test capacities for some products. Powertech Technology Inc., which mostly packages and tests memory chips, is expected to see revenue for the next quarter leapfrog for most of Taiwan`s DRAM (dynamic random access memory) chipmakers are pushing up production to cope with surging demand.

Q3 Outlook for ASE and Siliconware

Company	Q2 Revenue (forecast)	Q3 Revenue (forecast)	Quarterly Change	Q3 Yield Rate (forecast)	Customers
ASE	NT$20B	NT$24-25B	20-25%	80-85%	Qualcomm, Realtek, MediaTek, CSR
Siliconware	NT$14B	NT$17-17.5B	21-25%	85-90%	Broadcom, Marvell, Realtek, MediaTek

Sources: The companies and institutional investors