European chipmakers have bounced back after being declared nearly dead almost two decades ago—and despite one of the worst downturns in the global semiconductor industry.

Three of the world's top 10 chipmakers are now European, compared with just one a decade ago, according to IC Insights Inc., a market research group (Scottsdale, Ariz.). The French-Italian venture STMicro-electronics NV (Geneva) is ranked fourth. Germany's Infineon Technologies AG (Munich), despite its dependence on the ravaged DRAM and telecom markets, claims sixth place; Royal Philips Electronics NV (Amsterdam) is 10th.

Theirs is a remarkable achievement, given that just 15 years ago European semiconductor manufacturers—and there were plenty of them—were seen as oversubsidized, overstaffed, and bleeding money. In fact, many experts viewed the sector as in such dismal shape that they reckoned Europe would ultimately abandon the high-cost, high-risk semiconductor industry altogether.

It didn't. On the contrary, Europe has shown a remarkable determination to retain control of enabling technology in integrated circuits and become competitive in this market. Its technology leaders have pushed through major restructuring, from consolidation to cooperation. Equally important, they have found not only new ways to manufacture chips but also new uses beyond computers.

Keys to the kingdom "The mainstream chipmakers decided that the only way forward was to consolidate, share resources, and work on common problems, like process development," said Malcolm Penn, CEO of Future Horizons Ltd. (Sevenoaks, UK), a consultancy. "They more or less created the concept of the platform from which numerous products can be generated. They were pioneers in precompetitive cooperation."

Indeed, the broad experience of Europe's big three semiconductor suppliers in applications and manufacturing has been extremely useful in developing integrated system-on-chip products, according to Penn. "These high-end chips have become one of Europe's strengths as the market has moved to a more integrated platform approach," he says.

STMicroelectronics, perhaps more than any other European chipmaker, exemplifies this development. The company was formed from the merger of SGS Microelettronica of Italy and Thomson Semiconducteurs of France in 1987. Today it cooperates with rivals Philips Electronics and Motorola Inc. in several areas, including precompetitive research and chip production, and derives well over half its revenue from chips used in several key areas, such as telecom, automotive, digital consumer electronics, and smart cards.

The European chipmakers have reinvented not only themselves but also how chips are made. They're at the cutting edge of a new wafer technology that squeezes ever more horsepower out of silicon. Infineon was the first company worldwide to start volume production of so-called 300-mm wafer technology at its facility in Dresden, where East Germany's not altogether negligible semiconductor efforts had been concentrated. STMicroelectronics and Philips Electronics, together with Motorola Inc. (Schaumburg, Ill.) and Taiwan Semiconductor Manufacturing (Hsinchu), now operate a similar fab in Crolles, France.

Pros and cons of larger wafers The new wafers, which may not seem so much of a leap from today's 200-mm wafers, have a 50 percent bigger diameter and thus 2.25 times more surface area for chips, yet cost only about 20 percent more to process.

Although 300-mm fabs aren't without their critics, most industry experts believe the technology will prevail. "At some point, companies will need to get into 300-mm production to keep costs down and performance up," says Steve Cullen, an analyst with In-Stat/MDR, a market research unit of the Reed Elsevier Group PLC in London.

Much of the cost in processing a wafer, according to Cullen, is incurred on a per-wafer basis. "If you can get more die on a wafer, then you'll have lower costs in the long run," he says. Admittedly, during the first year of running a 300-mm fab, a company is faced with a huge amount of depreciation, according to Cullen: "You're on a learning curve, you're debugging processes, even equipment, and you're probably taking a hit, but over time, you're going to come out ahead."

That's exactly how Infineon sees it. The company, which already claims savings with its 300-mm fab, hopes to squeeze even more performance out of the new chip-manufacturing technology. Infineon has agreed to collaborate with Nanya Technology Corp. (Taoynen, Taiwan) to develop advanced 0.09-µm and 0.07-µm production technology for 300-mm wafers. The switch to smaller feature sizes in chip design, the company says, will enable a further boost in productivity.

Geographic diversification New 300-mm wafer fabs may clearly be the way forward, but from a business perspective, the technology still is expensive and risky: a new wafer fab can cost between US $2.5 billion and $3.5 billion to build, and annual sales must be at least $6 billion to justify the investment.

To remain competitive globally, however, European semiconductor suppliers will need more than one fab not only to expand capacity but also to have a local presence in key developing markets, such as China, concedes Cullen. Because of cost, they'll need to enter into joint ventures or rely on contract chipmakers, called foundries, he says.

Leading the way is Infineon, which has agreed to build a 300-mm wafer fab in Taiwan with Nanya, which will produce strictly for the two companies. The German company has entered into a 300-mm wafer venture with Advanced Micro Devices Inc. (AMD, Sunnyvale, Calif.) and Taiwan's UMC Group, to build a fab in Singapore, but that deal could be jeopardized by AMD's decision to ditch some joint R&D with UMC in order to go with IBM instead. (AMD operates a fab in Dresden as well.)

STMicroelectronics, which also teamed up with Taiwan's UMC last year, plans to build a fab in China "by 2005, either alone or in partnership," and is scouting the market for acquisitions in Japan, said the company's president and CEO, Pasquale Pistorio, at a meeting with analysts last year.

Having been forced to face up to reality years ago, Europe's chipmakers have come through the red ink of 2001-02 better than most and now appear well positioned to capture a good chunk of the global semiconductor market, which is expected to grow between 15 and 20 percent in 2003, according to Penn. It's "just" a matter of execution, he says.