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Why one silicon wafer maker relented and is adding capacity

Now that it can raise prices, Japan's Sumco makes big capital splash

Sumco, the world's second largest silicon wafer maker, is set to make its first large capital investment in 10 years, now that it has some pricing power.

TOKYO -- Sumco, the world's second-largest silicon wafer maker, has been on pause for a decade now, at least as far as major capital outlays go.

That is changing. The Tokyo-based company this week said it will spend 43.6 billion yen ($397 million) to buy and install more equipment. It expects the capital investment to allow it to take advantage of the world's insatiable appetite for semiconductors, the chips that sit on top of wafers.

The additional wafer capacity is to come online in 2019, the company said.

Sumco had remained cautious about increasing capacity even as the supply of wafers tightened. But when wafer prices reached a level at which the company determined it could expect viable returns, Sumco decided to make its first major investment in 10 years.

At a news conference announcing its financial results for the January-June half, President and Chief Operating Officer Michiharu Takii said the company would likely experience difficulty in trying to meet customer demand were its capacity to remain unchanged.

"We've decided, Takii said, "to make the investment to fulfill our responsibility to supply state-of-the-art products" to clients.

The plan is to boost monthly production capacity by 110,000 units. To get there, Sumco will install a clean room as well as additional equipment to polish and clean wafers at a plant in Imari, Saga Prefecture, western Japan -- Sumco's main production center for 300mm wafers.

The spending is expected to boost Sumco's wafer production capacity by 5% to 10%.

Wafer demand continues to increase in tandem with a growing appetite for semiconductors. The chips are finding their way into smartphones, which themselves are finding their way into still more pockets. Internet of things devices are also gobbling up the chips. And companies working on self-driving technologies are also demanding more semiconductors.

According to SEMI, an industry association, global wafer shipment volume as measured by surface area hit record highs for three years in a row through 2016. The streak is expected to be kept alive this year.

Sumco sees monthly demand for 300mm wafers at 6.1 million units in 2019. That is up 11% from estimates for 2017. It is also 610,000 more than current capacity can handle.

The tight supply in the January-March quarter allowed Sumco to hike prices for the first time in 11 years. Customers appeared to have accepted the 5% price hike in the subsequent quarter.

Higher prices and sales have combined to boost Sumco's consolidated pretax profit about 220% from a year earlier to 13.7 billion yen in the January-June period.

Executive Vice President Harumitsu Endo said the capital investment decision came after the company saw that it will be able to hike prices by another 40% next year.

Previously, Sumco seemed more concerned with pricing power than with being able to meet demand.

"Supply may be tight," Chairman and CEO Mayuki Hashimoto once said, "but we cannot be convinced that [additional investments] will bring profit as long as prices remain low."

Although the company has yet to install that 40% price hike, it decided it has to make the capital investment now, partly because labor and repair costs are being pushed up by domestic and overseas plants that are operating nonstop.

Whether Sumco is the first domino remains to be seen, but industry analysts are wondering how the top wafer maker, Japan's Shin-Etsu Chemical, might respond.

Sumco, Shin-Etsu and Germany's Siltronic are the only companies in the world thought to be able to produce high-precision, impeccably flat, impurity-free wafers. Intel of the U.S., Samsung Electronics of South Korea and other big chip companies are said to be asking these wafer makers to increase production.

Shin-Etsu is expected to wait and watch how prices shift before making a decision.

The semiconductor industry is known to go through ups and downs -- the silicon cycle -- with each phase spanning three to five years. But many industry players now believe a new cycle has taken over, a tide, really, that will keep rising beyond expectations. They call it the "supercycle."

Sumco's change of mind may bear witness to this.

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