February 8, 2023 – THE semiconductor industry has been feeling the heat arising from tensions between the US and China, while grappling with worsening consumer demand amid a gloomy global economic outlook. Concerns over the mounting rivalry between the two economic giants prompted South Korea-based Simmtech Holdings Co Ltd to set up shop in Penang, according to Simmtech Southeast Asia managing director Jeffery Chun.

“It is a concern, but at the same time, [also] an opportunity. On the one hand, it might impact our China operations. On the other, there is a new opportunity to build a whole new supply chain,” Chun tells The Edge in an interview at the group’s manufacturing plant in Batu Kawan, Penang.

“It is a chance for a company like us that has a global manufacturing footprint. There are increasing requirements coming from the major customers’ side on making co-location investments. So, we are really responding to that requirement.

“Our first response is to set up a factory in Penang. We can foresee there will be many more projects coming in, not only to Malaysia but also to different locations around the world,” Chun adds.

Simmtech is a leading global manufacturer of semiconductor packaging substrate and high-density interconnect printed circuit boards (HDI PCBs). The group also has production facilities in China, South Korea and Japan.

“The US has definitely taken a stronger position in responding to the conflict with China. US sanctions are becoming more specific, and are directly related to the semiconductor operation. [The US] has been getting more stringent, and is definitely aiming to slow down Chinese companies looking to develop and catch up with the competition,” he says.

Despite concerns about growing US-China tensions, Chun says the group has to stay positive and flexible to ride out the storm.

“We know we will never go back to the pre-Covid situation, so we will need to adapt to new environments, new orders and new supply chain developments,” he notes.

Keep China’s operations running

Nonetheless, Chun stresses that Simmtech will never exit China or scale down operations there as it is a huge market for its products.

“We are also interested to learn how our customers will manage their operations in China, so we will work together with them and support the market,” he adds.

Simmtech’s production capacity in China accounts for 30% of the group’s total PCB capacity and contributes 15% of the group’s total revenue.

Still, for Simmtech, which is in the semi-conductor business, Chun is hopeful that tensions between the US and China will ease for the benefit of the industry.

“In the global supply chain, with China being the big manufacturing house, we hope they (the US and China) will get along well.

“The US-China trade war does not really affect Simmtech’s operations in China and revenue. But, we do not want this situation to drag on for too long. In the short term, we will benefit from customers exiting China. If, however, the situation does drag [on for] too long, then it will definitely have an impact on the overall industry,” he adds.

In the face of the US’ technology sanctions against China, which have seen the Biden administration block the sale of advanced chipmaking tools to the latter, Chun says Simmtech will keep an eye on the development. The group, which produces substrates and PCB, is not affected by the sanctions for now as equipment makers are expected to bear the brunt of the ban.

Lessons from past tech downturns

Chun says Simmtech has earmarked investments for capacity building to ensure the group can seize opportunities to capture market demand when it rebounds. It is also investing in new equipment to keep up with market trends and the dynamic needs of clients.

“There is a huge lesson from the previous downturn before the Covid-19 pandemic. When the market was in a downturn, nobody made any investments. Everybody held on to cash and cut capex [capital expenditure]. So, when the market turned around during Covid, there was not enough capacity to capture the market [demand]. That is the lesson learnt from the previous downturn cycle,” he says.

Chun further adds that it makes sense to invest when the market slows. This is because during the peak season, the group is usually busy meeting orders and it will be very difficult to make any adjustments to the production line because all the lines will be fully utilised.

“Whereas when the market slows down, we have lots of room to move around. So even within the existing factories, there are many activities internally for machine maintenance, relocation and upgrade to achieve better efficiencies,” he explains.

Aiming for top ranking in memory and non-memory substrates

According to Chun, Simmtech spent around 25% of its revenue on capex and research and development in a bid to grow its market share. The group’s ambition is to be top-ranked in both the memory and non-memory segments (or integrated circuit [IC] substrate) in terms of market share.

“That’s how much [investment] is required to stay on top of the line when it comes to competition. Compared to other companies serving the same industry, I am pretty sure we are on the upper to high side in terms of investment,” he says.

Simmtech produces about 30% of the global market share of memory modules and solid-state drive (SSD) PCBs, making it the world leader in this segment. To put things into perspective, one in every three electronic devices — be it a laptop, phone or digital camera — comes with a Simmtech product.

Meanwhile, in the non-memory segment, Simmtech is ranked among the world’s top 10 key suppliers, in terms of market share.

Well prepared for industry slowdown

Acknowledging the industry will continue to slow down at least within the first half of this year, Chun says Simmtech is “well prepared for the industry downward cycle”, given its diversified customer base and solid balance sheet. While the memory segment is facing a slowdown, Simmtech hopes to leverage its non-memory segment to cushion the impact.

“Comparing the memory and non-memory markets, as memory has fewer players, it is more volatile, wher as the non-memory is less volatile because there are many players. For example, non-memory has many different sectors — there are not only consumer products but also analogue, automotive and industrial businesses,” he says.

In Malaysia, Simmtech has a manufacturing facility in Batu Kawan Industrial Park through its local unit, Sustio Sdn Bhd.

“For the Phase 1 project, we just started and have not made much money. We announced that Malaysia’s manufacturing facility represents about 20% of the overall capacity.”

According to him, the Phase 1 project completed its product qualification in November last year and is set to ramp up production in the following quarters.

Phase 1, which costs US$120 million (RM512 million), was announced in July 2021. The company hired 1,200 full-time local talents in the fields of engineering, manufacturing and quality management for the 18-acre site.

The factory will be manufacturing the region’s first packaging substrates for dynamic random-access memory (DRAM)/NAND memory chips and HDI PCB for memory module/SSD devices.

The group announced last month investments of US$50 million for the second phase, bringing its combined investments in Malaysia to US$180 million to date.

“For Phase 2 investment, we hope to have a bigger contribution to Simmtech overall. What is more important is we want to continue to grow and expand here and become a more important location for the Simmtech business,” Chun remarks.

The latest expansion project is expected to be completed by the first quarter of 2023. Upon completion, it will double the HDI PCB production capacity while creating an additional 400 full-time jobs for locals.

Chun revealed that the name of the local unit, Sustio, is a combination of two words, substrate and studio. Sustio is ultimately owned by Kosdaq-listed Simmtech Holdings, the holding company that mainly focuses on investment activities for the group’s businesses.

Over the past one year, the counter has lost about 31.2% to close at KRW3,420 on Jan 26, giving the company a market capitalisation of KRW165.36 billion (RM531 million). The stock is currently trading at a price-earnings ratio of 2.5 times.

Simmtech Holdings also owns a majority stake in Simmtech Co Ltd, which operates the group’s factories in South Korea, China and Japan. Simmtech Co, which is also listed on Kosdaq, has fallen 32.9% over the past one year to settle at KRW30,650 on Jan 26, bringing the company’s market capitalisation to KRW976.33 billion.

Source: The Edge Markets