Fitch: Consumer Electronics Key to Stable 2008 Semiconductor Outlook

CHICAGO & LONDON--(Business Wire)--Fitch's 2008 Rating Outlook for the semiconductor industry is
stable, mostly driven by the expectation of solid unit growth for PCs
and mobile handsets. As the semiconductor industry continues to expand
its total available market while pursuing a lower-capital intensive
profile, Fitch believes the industry will experience less volatility
and relatively more predictable free cash flow. Consistent with the
broader technology industry, Fitch expects several semiconductor
companies will continue to evaluate potential opportunities to alter
their mostly equity-dominated capital structures via acquisition
activity and/or potential debt-financed stock buyback actions,
resulting in additional technology debt issuance. From a business and
operating profile standpoint, as well as within the context of Fitch's
credit considerations, semiconductor companies continue to be subject
to the highest technology risk within the technology industry.

Fitch believes the global semiconductor industry will grow in the
low single-digit range in 2008, following modest revenue growth for
2007. Embedded into Fitch's expectations are that unit demand -
particularly for consumer electronics - will remain solid,
semiconductor content within an ever widening range of applications
will expand further, and increasing consumer spending in developing
economies will partially offset slower spending anticipated in the
U.S. and Western Europe. However, Fitch's expectations for significant
pricing pressures, excess manufacturing capacity for the memory
segments (DRAM and flash memory), which aggressively added capacity in
2007 to meet strong NAND demand, and slightly elevated inventory
levels (albeit still within manageable ranges) will weigh on otherwise
solid growth drivers. Book-to-bill and inventory metrics remain within
rationale ranges by historic standards, and Fitch believes any
potential correction is likely to be significantly less severe than
the more than 30% decline experienced in 2001.

KEY INDUSTRY TRENDS

Several key trends impact Fitch's outlook for the semiconductor
industry in 2008:

Consumer Electronics:

Fitch believes that consumer electronics will continue to be
responsible for the majority of semiconductor unit growth in 2008.
Fitch also believes consumer electronics devices will be sold
increasingly into developing economies and, therefore, at lower
average selling price (ASP). As a result, efficiently bringing new
products to market is increasingly becoming the competitive
differentiator for original equipment manufacturers (OEM) and
prompting semiconductor makers to use foundries for process
development and manufacturing, outsource back-end packaging and test,
and form research and development partnerships. Ultimately, Fitch
expects continued pressures on returns on investments will prompt
long-awaited consolidation in certain segments.

Increased use of foundries:

Fitch believes foundries will expand their share of global
integrated circuit (IC) production in 2008, due to the continued
increase in use of foundries by integrated device manufacturers (IDMs)
- albeit to varying degrees - and the rise of 'fables' semiconductor
suppliers. At the same time, Fitch expects foundries to gain a more
vital role in the semiconductor industry through the development of
next generation process technology, in addition to accelerating the
ramp of leading-edge wafer fabrication services (such as 65nm) by
converting more orders from older process generations to advanced
technologies. The increased use of foundries by IDMs reduces ever more
costly investments in manufacturing capacity, particularly at the
leading edge, and over the longer-term should result in more stable
and consistent free cash flow available for alternative uses,
including share repurchases and acquisitions. Importantly, Fitch
believes a greater use of foundries will result in the maintenance of
a healthier supply and demand balance for the broader semiconductor
industry, as foundries consolidate a significant amount of capital
spending on leading-edge technology (required for cost effectively
manufacturing volume, highly standardized products), despite the
anticipation for a second consecutive year of reduction in foundry
capital spending in 2008.

Memory makers volatility:

Fitch believes memory makers, mainly large integrated electronics
companies who toggle between DRAM and NAND flash memory production
based upon relatively dynamic demand prospects, aggressively added
capacity in 2007 to meet strong demand for NAND in an increasing
number of applications (driven by increasing storage capacity).
Despite robust anticipated unit demand, Fitch believes memory makers
will be negatively impacted by excess supply in 2008. Furthermore,
because of significant competition in this highly commoditized market
and that the vast majority of production is manufactured for use in
consumer electronics devices, gross margins will remain extremely
thin, prompting ongoing significant investments in leading-edge
manufacturing capacity and ASP reductions for consumer electronics.

Better inventory management:

Fitch believes the electronics supply chain will continue to be
disciplined in 2008, supporting continued stability within the
semiconductor market. Due to investments into more advanced
information systems, greater use of foundries and, as a result, less
uneven in-house utilization rates, and increased inventory discipline
by components distributors, the supply chain has become more efficient
in correcting pockets of excess inventory. While inventory levels
remain at the high end of acceptable ranges, recent inventory
corrections have been brought back into equilibrium in one-to-two
quarters, approximately half the time that such corrections took
historically.

KEY COMPANY OUTLOOKS

U.S.

Advanced Micro Devices Inc. (AMD): The Rating Outlook for AMD is
Negative due to Fitch's expectations for further erosion in the
company's competitive position and worsening financial flexibility in
2008. Financial and operating performance for the fourth calendar
quarter of 2007 is a significant factor in determining the long-term
outlook for AMD. Fitch believes AMD's profitability is likely to
decline following ongoing delays in ramping next-generation products
across platforms and Intel's extension of an already significant
manufacturing advantage.

While microprocessor unit demand is expected to grow in excess of
10% in both 2007 and 2008 due to a strong PC unit demand environment,
Fitch believes AMD will be challenged to keep pace with Intel's
product roadmap over the near-term, likely resulting in AMD's
profitability deteriorating further in 2008 from already pressured
levels. Fitch anticipates AMD's operating EBITDA for 2007 will decline
75% from 2006 levels. At the same time, Fitch expects Intel to use its
manufacturing process technology lead (believed to be one full process
generation) to maintain meaningful pricing pressures on AMD.
Positively, profitability for AMD should benefit from the company's
headcount reductions during 2007.

As a result of competitive pressures and the resultant impact on
profitability, Fitch expects AMD's financial flexibility will erode in
2008. Despite recently having received $608 million in net proceeds
via an equity investment from the government of Abu Dhabi, Fitch
expects AMD will likely need additional funding to support ongoing
annual capital spending, which Fitch anticipates will remain in excess
of $1 billion in 2008. Although AMD has continually lowered
expectations for capital expenditures in 2007, Fitch believes the
company will be challenged to meaningfully further reduce ongoing
capital spending for 2008 and beyond without potentially jeopardizing
supplier relationships with certain original equipment manufacturers
(OEMs). In the near-term, the company's capital spending reductions
will aid short-term liquidity. However, consistent with AMD announcing
its intentions to pursue an 'asset light' strategy, Fitch believes AMD
will need to expand outsourcing relationships in order to keep pace
with Intel's capabilities over the longer-term.

Freescale Semiconductor Inc. (Freescale): Fitch's Stable Rating
Outlook on Freescale in 2008 is supported by the company's diversified
end market, customer, and product portfolios, proven manufacturing
outsourcing strategy, and leading market positions. While Freescale's
financial flexibility remains modest, the company's free cash flow has
exceeded Fitch's original post-LBO expectations, due primarily to
aggressive cost cutting. For 2008 Fitch expects Freescale's revenue
growth will be essentially flat and Motorola's (its largest customer
representing approximately 25% of total sales) operating performance
to only modestly and gradually improve throughout the year.

Fitch believes negative rating actions could occur in 2008 if
Freescale's profitability meaningfully erodes, which is likely in the
absence of ongoing cost reductions (potential for research and
development sharing and consolidating manufacturing facilities) or an
improving mix, primarily higher margin analog and sensors business.
Fitch believes Freescale's greatest opportunity to bolster free cash
flow in 2008 will be to reduce its cash conversion cycle, which
increased 10 days to a Fitch-estimated 71 days for the latest 12
months (LTM) ended Sept. 28, 2007 from the prior year period. Fitch
believes the erosion in Freescale's working capital efficiency was
primarily due to excess Motorola inventory, which should be reduced
over the next couple of quarters.

Spansion Inc. (Spansion): The Rating Outlook on Spansion remains
Negative and is driven by Fitch's expectations for continued pressure
on the company's financial flexibility. Financial and operating
performance for the fourth calendar quarter of 2007 is a significant
factor in determining the long-term outlook for Spansion. Fitch
believes Spansion could achieve break even operating profitability in
2008 but will nonetheless continue to burn cash, albeit at a modestly
lower rate than the more than $1 billion of negative free cash flow
for the latest 12 months (LTM) ended Sept. 30, 2007. Unit growth
prospects remain solid for Spansion, highlighted by a 1.3 times (x)
book-to-bill ratio exiting the third calendar quarter of 2007 and
share gains within the NOR flash memory market due to leadership
related to MirrorBit technology platform. However, NAND memory's
rapidly increasing storage capacity continues to curtail revenue
growth opportunities for NOR (Spansion's primary market) in rapidly
growing markets addressable by both NAND and NOR solutions.

Despite Spansion's leading technology, Fitch remains concerned
with the company's inability to command premium pricing, although
price per bit trends turned positive in third quarter-2007 after
declining meaningfully throughout the preceding year. However, Fitch
anticipates Spansion's ramp of MirrorBit ORNAND products on 65nm from
its recently opened 300mm manufacturing facility (Spansion 1) will
reduce its cost structure, providing a boost to the company's
profitability in 2008. Nonetheless, Fitch anticipates Spansion will
pursue additional financing in 2008, given that liquidity is likely to
be stressed given the company's cash burn rate.

Texas Instruments Incorporated (TI): Fitch's Rating Outlook on TI
is Stable and is also driven by the company's diversified end market,
customer, and product portfolios, proven manufacturing outsourcing
strategy, and leading market positions. TI's strong annual free cash
flow, expected to approximate $2 billion, and financial flexibility
also support the rating and stable outlook. Fitch believes TI is an
example of a company in the technology industry that could issue debt
to adjust its 100% equity-based capital structure, given expectations
for a less capital-intensive operating model and, therefore, more
consistent annual free cash flow going forward.

Fitch believes the negative effect of continued ASP pressures
related to a lower mix of handset sales (related to faster growing
ultra low-cost phones) in 2008 will be mitigated by solid growth rates
of TI's highly profitable analog and mixed-signal business, which
represents approximately 40% of the company's semiconductor sales and
serves thousands of small customers. Fitch believes TI's agreement to
outsource the development of next-generation process technology to
long-term foundry partner, TSMC, represents a next step in the
evolution of its hybrid manufacturing strategy and, if successful,
will lower capital spending requirements further. And while TI is
anticipated to lose some share at Nokia, as global handset makers
diversify their semiconductor suppliers, Fitch anticipates potential
share losses will not be significant, particularly given expectations
that Nokia will at least maintain its current share of a growing
global handset market, and be partially offset by longer-term share
gains at Motorola. Fitch's stable outlook for TI in 2008 incorporates
that TI will continue to aggressively repurchase shares approximating
annual free cash flow.

Europe:

STMicroelectronics NV (STM): The Stable Outlook for STM remains
solid given the company's strong market positions in a number of
segments with relatively good demand fundamentals. STM is number three
worldwide in automotive ICs - which are forecast to enjoy above
average growth over the next three-to-four years. A number three
position in wireless communications has been strengthened in 2007 with
a number of key partnership arrangements with Nokia. STM continues to
focus on restructuring its business portfolio, via the announced flash
memory joint venture with Intel, a key step in improving available
opportunities for this business and reducing the stand alone risk from
what is a quite challenging and capital intensive segment. Fitch
expects consolidated earnings and cash flow will both benefit from the
transfer of this business to the joint venture in 2008.

Despite challenging operating conditions (particularly in first
half-2007) STM has performed well in 2007, and is on plan to meet
fiscal year targets. Cash flow performance has been solid, as the
company generated EUR270 million of free cash flow in the first nine
months of 2007 despite a significant increase in the 2007 dividend
payment. Free cash flow largely accounts for an increase in cash and
marketable securities to EUR3 billion at the end of the third quarter
of 2007 and net cash to approximately EUR870 million. The rating is
however unlikely to improve in the near-term given relatively low
operating margins compared with international peers and the potential
for increased acquisition activity in 2008.

ASML Holdings NV (ASML): The Rating Outlook for ASML, the world's
leading manufacturer of lithography equipment, is Stable. ASML has
built a 65% market share in an industry in which it has only two
competitors, Canon and Nikon, and believes that 70% market share is
within reach. With its equipment installed at around 90% of
fabrication plants worldwide it commands a significant pricing premium
to its competitors and is consistently the first to market with next
generation tools. With lithography representing an increasing share of
equipment investment, and a high degree of flexibility in its cost
structure, Fitch believes ASML is well-placed to post solid earnings
and cash flow through the cycle. Despite the weak operating
environment for many of its customers in 2007 the company posted
strong sales for the first nine months of 2007, up 12% from the
comparable year ago period, and with fiscal year 2007 likely to be
another record year. Demand from the memory segment has been strong,
despite the difficult conditions in these markets, reflecting the fact
that ASML sales are driven by bit rather than end market growth. Fitch
could foresee upward pressure on the rating in the event of a robust
set of full fiscal year numbers, subject to any change in ASML's
financial policies.

Asia:

Taiwan Semiconductor Manufacturing Company Limited (TSMC): Fitch's
Rating Outlook on TSMC in 2008 is Stable and is driven by the
company's broad product range, state-of-the-art technology, large
production capacity as well as integrated service for IC design and
manufacture that lead to its dominant market position and
strengthening customer relationships. The long-term growth prospects
of foundries, TSMC's ample financial flexibility and consistent free
cash flow mitigates Fitch's concern on its reliance on outsourcing
orders, continuous capital spending needs, and operating volatility
due to the industry's cyclical nature. Fitch believes the negative
effect of continued pricing pressures related to industry competition
and slow technology migration by customers will be mitigated by
continued growth for the overall semiconductor market in 2008, more
outsourcing orders from integrated device manufacturers (IDM) and its
acquisition of eight-inch facilities from Atmel Corporation to capture
increasing opportunities in consumer electronics application (such as
liquid crystal display (LCD) driver IC and power management IC). More
conservative capital spending in 2008 is also likely to support TSMC's
capacity utilization and hence its profitability.

Fitch anticipates additional share repurchases by TSMC pursuant to
an agreed upon orderly reduction in Koninklijke Philips Electronics
N.V.'s (Philips) equity interest in TSMC. Nevertheless, Fitch believes
TSMC's share buyback plans will have negligible negative implications
on TSMC's credit metrics due to expectations for positive free cash
flow and the maintenance of a net cash position in 2008.

United Microelectronics Corporation (UMC): Fitch's Stable Rating
Outlook on UMC in 2008 is supported by the company's full range of
production capabilities, solid relationships with a diversified and
growing client base, and strong market position as the second-largest
dedicated foundry in the world. The increasing outsourcing of wafer
fabrication by semiconductor suppliers and UMC's sound financial
profile characterized by its strong cash flow from operation and
conservative capital structure mitigates Fitch's concern on its
reliance on outsourcing orders, capital intensity resulting from
significant requirement in capital spending and R&D, and operating
volatility related to the cyclical nature of the semiconductor
industry. Fitch believes the negative impact of continued pressures on
ASP related to slow technology migration by customers and its narrowed
technology edge against competitors will be mitigated by strong unit
growth of the overall semiconductor market in 2008 than 2007, more
outsourcing orders from IDMs and its cooperation with Elpida Memory,
Inc. in developing next generation memory technology to bring to
market more advanced embedded memory system-on-chip (SoC) solutions.
Fitch expects UMC to focus its operation on capacity utilization,
profitability and cash flow with significantly reduced capital
spending in 2008.

Fitch does not expect UMC to conduct similar shareholder friendly
action in 2008 in addition to annual dividends linked to regular
earning, in view of its research and development of advanced process
technologies and continued expansion of manufacturing capacity,
including its second 300mm wafer fabrication plant.

Hynix Semiconductor Inc. (Hynix): Fitch's Rating Outlook for Hynix
is Stable, reflecting the company's strong position in the
semiconductor memory market, proven technology, efficient production,
and improved financial status. Hynix is the world's second-largest
DRAM maker and third-largest NAND flash memory producer. Hynix has
improved its cost-reduction capability and maintained pace with the
global memory chip technology migration while maintaining a stable
yield. Compared with competitors, Hynix currently has a lower
production cost and a leading edge technology despite a lower
installation ratio of 12-inch fabrication facilities, which is assumed
to be more than two times more productive than eight-inch fabs.
Nevertheless, Hynix is facing tough challenges. The volatile DRAM and
NAND flash memory prices and large capital spending requirements for
technological migration are major business risks for Hynix. In
addition, the difficult pricing environment for NAND flash memory
could result in further margin compression.

Fitch currently has the following Issuer Default Ratings (IDRs)
for the following entities:

--Advanced Micro Devices, Inc. ('B'; Outlook Negative);

--ASML Holding N.V. ('BBB-'; Outlook Stable);

--Chartered Semiconductor Manufacturing Limited ('BBB-'; Outlook
Stable);

--Freescale Semiconductor, Inc. ('B+'; Outlook Stable);

--Fujitsu Limited ('BBB+'; Outlook Stable);

--Hitachi, Ltd. ('A-'; Outlook Negative);

--Hynix Semiconductor Inc. ('BB'; Outlook Stable);

--International Rectifier Corp. ('BB'; Rating Watch Negative);

--LG Electronics Inc ('BBB-'; Outlook Stable);

--NEC Corporation ('BBB'; Outlook Stable);

--Samsung Electronics ('A+'; Outlook Stable);

--Spansion Inc. ('B-'; Outlook Negative);

--STMicroelectronics N.V. ('A-'; Outlook Stable);

--Taiwan Semiconductor Manufacturing Company Limited ('A-';
Outlook Stable);

--Texas Instruments Incorporated ('A+'; Outlook Stable);

--Toshiba Corporation ('BBB'; Outlook Stable);

--United Microelectronics Corp. ('BBB'; Outlook Stable).

Fitch's special report on the semiconductor sector will be
published in early January 2008.

Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Jason Pompeii, +1-312-368-3210 (Chicago)
Nick P. Nilarp, CFA, +1-212-908-0649 (New York)
Stuart Reid, +44 (0)20 7417 4323 (London)
Kevin Chang, +886 2 8175 7609 (Taipei)
Jongwan Kim, +82 2 3278 8371 (Seoul)
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
Peter Fitzpatrick, + 44 (0)20 7417 4364 (London)
Lisa Lim, +65 6796 7214 (Singapore)
Shivani Sundralingam, + 65 6796 7215 (Singapore)

Copyright Business Wire 2007