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SEPTEMBER 4, 2003
By Olga Kharif The Big Pain of Smaller Chips The newest micro technology no longer means an automatic spike in sales. These days, as manufacturers are learning, it can be a risky gamble Sometimes, it really is better to be safe than sorry. Take computer chips. Last year, Nvidia (NVDA ) and ATI Technologies (ATYT ) -- Nos. 2 and 3, respectively, among graphic-chip suppliers worldwide -- took boldly different tacks with their new designs. ATI played it safe and released its new Radeon 9700 Pro chip -- an apple that didn't fall far from the tree. Its intricate components were located within 0.15 micron (one-thousandth the width of a human hair) from each other, no change from previous ATI chip specs. But Nvidia decided to get fancy. It designed its NV30 chip around 0.13-micron technology, which turned out to be far more difficult to make. Result: Nvidia is paying the price for its risk. In its second quarter, ended July 27, the outfit blamed 0.13 micron production on lower-than-expected gross margins of 28%. Turns out contract manufacturer Taiwan Semiconductor (TSM ) needs about 11 weeks to turn out a batch of NV30 chips, vs. six weeks for more traditional designs. That cost Nvidia plenty in late deliveries, with no commensurate improvement in sales or market penetration, says Michael McConnell, an analyst with Pacific Crest Securities. An Nvidia spokesperson says problems associated with the 0.13-micron process have been worked out. Yet, partly due to its production woes, Nvidia's stock has fallen 30% since June, to around $17.60 as of Sept. 3. Meanwhile, ATI's gross margins stand at 32.9% -- five points above Nvidia's. "We made the right process choices," says Matt Skynner, ATI's director of marketing for what are known in the industry as "desktop discrete graphics." The stock, which has almost doubled since June, was trading at around $15 as of Sept. 3. BEHIND THE CURVE. The same scenario has played itself out across the industry over the past year, with many players finding that it pays to stick with the tried and true. That's a 180-degree turn in thinking for high-end chipmakers. For years, outfits that didn't migrate -- and fast -- to the newest and greatest in chip-production technology were regarded as laggards. The accepted wisdom was that new manufacturing processes always offered higher yields and lower costs. That remains the prevailing view on Wall Street. "It's very clear that investors, at this point, prefer companies that are investing in new technologies," says Merrill Lynch analyst Brett Hodess. "Otherwise, they think they won't be able to produce the right products." But profitability, growth, and high returns no longer seem to go hand in hand with high-risk investments in new manufacturing processes, if the the past year is any indication. Inside the industry, fast technological migration is no longer regarded as closely tied to a success, says Ray Bingham, president and CEO of chip-design software powerhouse Cadence (CDN ). For a lot of chipmakers -- especially those whose chips go into products with a lifespan of less than two years -- waiting until new manufacturing technologies prove viable is starting to look like a smart strategic and financial move. New processes no longer guarantee good yields and often require costly chip redesigns.
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