By Faith Hung EBN (09/06/2002 12:50 PM EST)

Oki Electric Industry Co. Ltd. will rely increasingly on Taiwan's United Microelectronics Corp. for capacity as the Japanese company embarks on a strategic shift to a fabless model for system LSI products.

Oki, an integrated device manufacturer (IDM) based in Tokyo, is planning to grant $25.4 million, or 70% of its outsourced production, to UMC in its fiscal year ending March 2003, according to Keiko Miyaji, an Oki spokesperson.

Oki will align itself with UMC's process design rules targeting 0.15-micron. The arrangement will also allow Oki to offer system LSI chips and use advanced technologies of 0.13-micron and below at the facilities of UMC and UMCJ, UMC's subsidiary in Japan, the companies said in a joint release.

The Japanese IDM's strategy is to focus on developing designs and new technology and leave manufacturing to foundry partners.

"Broadening our long-term foundry partnership is one of Oki's system LSI development strategies," said Katsuhiko Sano, president of Oki's Silicon Solutions Co., at a press conference in Tokyo. "With this agreement, Oki will be able to deliver system LSI products to customers on time with a total service solution."

Oki is trying to transform into a system LSI fabless house to reduce the high costs associated with R&D and manufacturing equipment purchases.

"This move is historic in that it marks the first example of an IDM in Japan moving toward the fabless business model that has proven so successful in the U.S. and other countries over the past decade," said John Hsuan, vice chairman and chief executive of UMC, Hsinchu.

IDMs that have increasingly outsourced production to UMC or rival Taiwan Semiconductor Manufacturing Co. Ltd. include Advanced Micro Devices Inc. and Motorola Inc.

For volume production of memory chips, Oki uses the facilities of UMC and Grace Semiconductor Manufacturing Co., Shanghai, and Singapore-based Chartered Semiconductor Manufacturing Ltd. for analog-based system LSI, Miyaji said. By fiscal 2006, UMC is expected to handle 75% of Oki's outsourced production, rising from 70% in its latest fiscal year, she said.

Oki uses its fabs for small-volume production and for differentiated products such as silicon-on-insulator and devices that consume little power, she added.

The latest deal is intended to ensure UMC will have enough capacity for Oki should demand suddenly pick up. Oki is among many global IDMs that are counting more on foundries as the semiconductor industry slowly recovers.

"It costs a huge amount of money to develop the latest technologies of 0.13-micron and smaller," said George Wu, an analyst at Primasia Securities Ltd., Taipei. "Japanese IDMs are short of cash. They [naturally] would have to turn to UMC and TSMC for production using those advanced processes."

Under the agreement, UMC will share a mutual IP portfolio with Oki and evaluate Oki's ARM-based integration platform and design environment-PLAT-for use at the foundry. Oki will also offer its design support and IP licensing service to UMC's foundry customers.

Currently, UMCJ is producing 0.35- and 0.22-micron products for Oki.