European Chipmakers Strive to Stay in Race

French semiconductor company hopes its new state-of-the art facility represents the future

IN a $90-million clean room nestled at the foot of the French Alps, engineers and technicians in blue and white full-body suits keep a careful eye on etching machinery which is creating some of the world's most advanced semiconductors.

The pride of the Franco-Italian semiconductor group SGS-Thomson, this clean room in a high-tech manufacturing facility is the kind that Europeans would like to see more of on their continent. Yet the fanfare that accompanied last week's ribbon-cutting at the chip development and manufacturing plant underscores how unusual new European-owned facilities of this nature remain.

Even as several American computer-chip manufacturers break ground on billion-dollar plants in the United States to meet booming global demand, Thomson's new $200-million facility, while impressive, suggests the struggle ahead for European manufacturers battling to remain in the computer-chip field.

French Industry Minister Gerard Longuet put Europe's difficulty succinctly: While Europe makes up 25 percent of the global semiconductor market, European manufacturers supply just 10 percent of world demand.

The Crolles plant - designed to produce 5,000 8-inch ``logic'' wafers a week for use in everything from telecommunication systems to automobiles - is SGS Thomson's flagship for staying in the race. But foreign competitors are not far off.

``This is the most advanced European [semiconductor] plant in Europe,'' says SGS-Thomson engineer Ed Dobson during a tour of the new facility outside Grenoble. Why the careful definition? Because the American giant Intel, which last year came close to toppling the Dutch group Phillips as Europe's No. 1 semiconductor supplier, is bringing on line a similarly advanced clean room and manufacturing plant in Dublin.

A year ago Texas Instruments opened a $1.2 billion chip manufacturing plant in Italy, and other American and Japanese manufacturers have recently advanced into Europe.

The problems facing SGS-Thomson, and fellow major European manufacturers Phillips and Siemens, are daunting: Despite double-digit growth in European chip sales, they have stagnated in their own market; a relatively small global presence makes the heavy investment necessary to keep up in the semiconductor field more difficult; and the expanding dominance of US and Japanese manufacturers makes links with those giants increasingly tempting.

Just last year Siemens, Europe's second-largest chipmaker, agreed to join with IBM and Toshiba to create the next decade's semiconductor. While that may be good strategy for keeping one European manufacturer alive, such alliances are not always seen as helping to maintain a European presence in semiconductors and electronics in general.

``We would like to see more partnership among Europeans, but the feeling is that Phillips and Siemens are less ready for the heavy investment it takes,'' says Piero Martinotti, SGS-Thomson vice president for strategic planning. Still, as small as SGS-Thomson is - with just over 2.5 percent of the world market - a pickup in sales and an anticipated increase this year in world market share have lifted company spirits. ``Do we look like a dying company?,'' asks SGS-Thomson's personable chief executive officer, Pasquale Pistorio. ``Our goal is still to reach 5 percent of [global] market share, and the progress we're going to make this year will take us in that direction. We have good presence in the US, 10 percent of the Japanese market in certain sectors, and a facility like [Crolles] is going to keep us moving up.''

Some industry analysts share Pistorio's optimism for the short term, even while cautioning that limited manufacturing capacity will remain a stumbling block. ``Technically what they are doing [at the Crolles plant] is on a par with anyone in the world,'' says Bipin Parmar, European market analyst at Dataquest.

``But 3 to 4 percent [world] market share remains the critical mass you need to keep from slipping to a small niche player,'' Mr. Parmar says. ``The challenge they face is developing capacity [and] this one facility isn't enough.''

The $200 million investment in the Crolles site is to triple over the next few years, and SGS-Thomson plans to add two or three facilities in Europe or elsewhere by the end of the decade. The company already has manufacturing facilities in the US.

But funding for research and development remains forbidding, especially for smaller players. Already laboring under a heavy debt, SGS Thomson has had to look to its French- and Italian-government affiliations, as well as to the European Community, to make its R&D program possible. But the public pot is shrinking.

Whether Europe sees more European-owned facilities like Crolles will depend on whether companies like SGS-Thomson can attract customers, build market share, and thus build up the revenue flowing into the till.