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June 16, 2000 VOL. 29 NO. 23 | SEARCH ASIAWEEK
Taiwan's VIA is licking Intel in a small market, and eyeing larger ones By ASSIF SHAMEEN It's a David and Goliath story, and like any good one, David looks like he might win, at least in his niche. Taiwan-based VIA Technologies is going up against giant Intel Corp., the world's dominant maker of microprocessors, the "brains" of computers. This week, VIA introduced a new version of its Cyrix III processor, designed to eat away at the position of Intel's Pentium and Celeron chips in budget PCs and notebook computers. But that's only a skirmish, given that VIA has a tiny 4% share of the microprocessor market against Intel's 83%. The real battle is going on in an obscure field called core logic chipsets, where the mouse ap-pears set to surpass the mammoth. Once that's done, the upstart will be well placed to give Intel serious trouble, especially in developing Asian markets. VIA who? Few outside the tech world may have heard of it, but the company is creating enough noise that investors are now sitting up and listening. Taipei-listed VIA is probably one of the fastest-growing technology companies in Asia, expanding at more than 80% annually over the past five years. Analysts expect it to post profits of $172 million on sales of $1.1 billion this year, and $290 million on sales of over $1.5 billion next. Its stock has nearly quadrupled in the past 12 months to around NT$580 ($18.80). Many analysts now have aggressive price targets as high as NT$850 -- up nearly 50% from current levels. Seven years ago, VIA was a failing California-based chipset maker when it lured Chen Wen-chi to become its president. Chen had previously worked as an engineer at Intel, and later founded and sold his own chipset design firm. After joining VIA, he moved the company's headquarters to his native Taiwan, which he correctly read would become a global center for the manufacture of computer components and peripherals. He built back VIA's business, battling through a war of attrition that cut the number of competing chipset companies from around 30 to four. Now VIA is poised to usurp the position of market leader Intel. So what are core logic chipsets? They are circuits that route data between the central processing unit (CPU) and the memory, graphics, sound and other chips on a computer's motherboard. Their speed and capabilities are thus critical to the overall performance of the computer. The chipset market is growing 15% to 20% annually, and until two years ago, Intel held a nearly 70% share. Then, the U.S. giant decided to shift to an architecture based on new memory technology called Rambus, which promised much faster performance. Unfortunately, Rambus memory chips were in short supply and Rambus-based chipsets were expensive, making PC makers reluctant to embrace the technology. Around the same time, VIA came out with its fast PC133 chipset that works with standard memory and costs a third of Intel's Rambus-based products. Sales boomed. "VIA read the market right on chipsets," says Calvin Chang, electronics analyst at Jardine Fleming Securities in Taipei. Worse for Intel, a chipset it designed that let its Rambus-friendly CPUs talk to ordinary memory was de-layed coming out. Soon, top rank PC makers like IBM and Hewlett-Packard signed up with VIA, whose customer base had traditionally been second- and third-tier players. Now Intel's market share is down to 50% and falling. VIA, meanwhile, has boosted its portion to 40%, and CEO Chen reckons he will control 50% of the market by early next year and over 60% by 2002. The rest of the market is held mostly by two other Taiwan companies: Silicon Integrated Systems (SiS) and Acer Laboratories Inc. (ALI). VIA also enjoys a competitive advantage over competitors in the way it makes chips. Basically, it doesn't. The company calls itself the world's leading "fabless" supplier of chipsets and other mo-therboard components. That means VIA has no fabrication plants of its own to make chips. Instead it subcontracts production to companies like Taiwan Semiconductor Manu-facturing Corp. Since it costs around $1.5 billion to build a decent-sized fab and more money to run it, maintain and upgrade it, VIA avoids huge capital and operating costs by sticking with design and sales. Of course the company competes not just on price but also on performance. Kristopher Thornton of ING Barings in Taipei says: "VIA is being recognized as the top line supplier, and is no longer seen as a supplier of cheap chipsets." But cheap is important, especially in Asia's growing markets. "The world is hungry now for sub-$800 PCs that Chinese, Indian and Indonesian families can afford," says Jardine's Chang. "When you are trying to ship out value PCs, you need to keep your costs low. Every little component counts." VIA chipsets cost $10 to $20 each. An average Intel chipset costs $25 or more, while a top-of-the-line Rambus-based product may command as much as $45 a piece. That can hurt, especially if the added capabilities are not really needed. "High-end servers and desktops used for scientific purposes or by graphic designers will probably have Intel's Rambus-based chipsets," says Chang, "but my bet is that the rest will be more than adequately served by lower-end chipsets made by VIA, ALI or SiS." Intel isn't taking the competition lying down. For starters, it has filed suit in the U.S., Britain and Singapore against VIA. Intel accuses VIA of violating the terms of a licensing agreement allowing the latter to build chipsets for Celeron and Pentium CPUs, and is trying to stop the flow of the Taiwan company's products into the U.S. VIA denies the charge, and claims that Intel simply wants to curb the popularity of its chipsets. Whatever the merits of the case, analysts feel it is just one of the risks companies take when working in the CPU market. "You don't want to jump into this business if you can't withstand Intel lawsuits," says ING's Thornton. "The lawsuits will not have a material impact on VIA going forward." More practically, Intel will soon release its own chipset for standard memory that matches the speed of VIA's products. It is also pushing forward its Rambus-based products. The two companies will go head to head again with the expected release later this year of Double Data Rate (DDR) memory, a version of current memory that is twice as fast. "VIA has done very well because Intel made such a huge blunder on Rambus chipsets," says Thornton. "I wouldn't bet on Intel making such a blunder again." But VIA is not betting its future on the $2 billion-a-year chipset market. By buying struggling U.S.-microprocessor maker Cyrix last year, it entered the $23 billion CPU market. Of course Cyrix has battled for years in that arena without much success, but VIA can leverage its relationships with chipset customers. And it is again targeting the lower end of the market, which Intel has traditionally underserved because it is constantly pressuring its customers to upgrade to the newest, fastest, most-expensive CPUs. "Intel regularly under-produces their lower-end processors because it wants PC makers to migrate to higher-end products," says Thornton. "When the market is looking for cheaper CPUs, there is a window of opportunity open for the likes of VIA." If VIA can get a large share of new sales in developing Asian markets where low-cost PCs are expected to predominate, it does not need to compete directly with Intel to do well. VIA also linked up with California chipmaker S3, from whom it bought market-leading graphics technology. It plans to integrate that into its chipsets and CPUs, which will further enhance its strength in low-cost computing. All these moves are getting VIA ready for the ultimate battlefield. "They are integrating graphics chips with their S3 alliance and moving into CPUs," says Thornton. "That positions [them] well for the post-PC era. Information appliances need a cheap system-on-a-chip CPU, not a Celeron." As microprocessors and computing capability are em-bedded in more and more everyday items like mobile phones, personal digital assistants and even home appliances, multiple capabilities at low cost will be the key competitive advantage. Of course Intel is eyeing this trend as well and rushing to finish its delayed integrated processor Timna. But Intel has always been a high-tech, high-price chipmaker. VIA could have an advantage in that it has always been meeting the needs of low-cost PC makers, and may have an easier time supplying to low-cost information appliance producers. Chief executive Chen, a born-again Christian, pursues business with religious zeal. At this rate, he may lead his company to the promised land. Write to Asiaweek at mail@web.asiaweek.com
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