Attempting to ramp up its leverage in a Taiwanese market that's both hot and hotly contested, Orient Semiconductor Electronics (OSE at www.ose.com.tw) has announced a US$200 million expansion. The major investment will create two IC-assembly and packaging plants near OSE's headquarters in Kaohsiung, Taiwan, which is Taiwan's Silicon Valley.

The expansion is part of the company's plans to double its capacity through investing a total of $300 million during the course of the year 2000. In 1999 OSE spent a total of $200 million in expanding its operations. Nonetheless, Taiwanese industry analysts have criticized OSE for being too conservative in its approach.

Founded in 1971, OSE is Taiwan's third-largest IC-assembly and packaging company. Along with No. 1 Taiwanese player Advanced Semiconductor Engineering (ASE) and No. 2 Siliconware Precision, OSE is one of Taiwan's "Big Three" in IC assembly. The packaging sector accounts for some 55 percent of OSE's current revenues. The remaining 45 percent of revenues come from contract services such as manufacturing motherboards and PC add-on cards.

Expansion Imperative in Over-Saturated Market

Analysts consider OSE's expansion crucial. The Taiwanese market for IC-packaging, testing and assembly has rapidly grown from $1.9 billion in 1994 to $3.6 billion in 1999, according to data from the Industrial Technology Research Institute.

Industry analysts, however, say the market is over-saturated. More than 30 Taiwan-headquartered players are vying to capitalize on the industry's rapid growth. Ultimately, analysts predict that the IC-packaging, testing and assembly industry will undergo a pronounced shakeout. Weaker players will either go under or be assimilated by larger fish as part of a series of consolidations, they say.

Given that environment, OSE's substantial increase in capacity is imperative for the company to sustain its recent market gains, say industry observers. OSE recorded 1999 sales of $315 million, a healthy increase from 1998's $272 million. ASE, however, had 1999 sales of $1.1 billion, an even larger upsurge from the company's 1998 sales of $660 million.

Expansion Stimulates Competitors' Sniping

The intense competition in the Taiwanese market was evident in the sniping between players that followed OSE's announcement. An ASE spokesman, for example, said his company "isn't threatened by OSE," which he characterized as "having a lot of catching up to do." OSE Vice President Chen Ah-mei fired back that "OSE uses our standards to judge our growth."

Looking toward the U.S. Market

Many of Taiwan's major high-tech players are highly dependent on supplying locally based operations.

Siliconware Precision, for example, draws 80 percent of its IC assembly revenues from two chipmakers: Taiwan Semiconductor Manufacturing and United Microelectronics. Fearing becoming overly dependent, Siliconware is looking to expand its operations and product base, company officials say.

OSE is moving in the same direction. After earlier establishing a major packaging and assembly plant in the Philippines, OSE made two major moves into the U.S. market last year.

First, it established a contract manufacturing subsidiary, Sparqtron (www.sparqtron.com), in Fremont, Calif. Part of the rationale for setting up the California operation "was to be able to provide customers with capability include expansion into Mexico, Europe and Asia," says a company spokesman.

Later in 1999, OSE forked over $6.8 million for a 75 percent stake in San Jose, Calif.-based Integrated Packaging Assembly Corp. (IPAC at www.ipac.com).

OSE's investment may have saved IPAC, which was hemorrhaging red ink. The 1993-founded company that went public in 1996 had been financially floundering before OSE moved to take a controlling interest. NASDAQ, in fact, de-listed IPAC in 1998 after the company failed to meet minimum NASDAQ listing criteria.

IPAC's clientele includes semiconductor manufacturers including Advanced Micro Devices, IBM and Intel.