Asat, the world's fifth-largest semiconductor packaging and testing company, sees steady growth ahead as demand for semiconductors booms, driven by rapid growth in the communications industry.

Hong Kong-based Asat, which raised $240 million in an initial public offering on Nasdaq in July, expects its revenue to grow at a rate of 35% to 40% a year amid growing demand for computer chips tailored to the needs of companies that make products such as routers and cable modems for broadband and internet connectivity providers, says Jerry Lee, the company's chief executive officer.

While personal computers still make up the single largest destination for semiconductors, demand from broadband and internet connectivity companies is growing faster than for the PC sector; and while the semiconductor industry is growing at 20% to 25% a year - from $200 billion today to a projected $320 billion by 2003 - the packaging sector, in which Asat operates, is projected to grow faster, from $20 billion today to $38 billion by 2003.

"The outsourcing sector of assembly and testing is growing faster than the semiconductor industry overall," says Lee. "So we are in a fast-growing industry. We are in a fast-growing segment of that industry, and the end users we support are in the fastest growing segment of all."

Asat derives more than 80% of its roughly $420 million in revenue from companies such as US-based Broadcom, which makes integrated circuits that enable high-speed digital transmission of voice, video and data. Asat designs advanced packaging products for specific companies and specific applications. These products generate higher margins than standardized products that are sold as commodities. The company says it's on target to post gross margins of roughly 34% in 2000, a level it expects to continue.

Challenges ahead

Lee says Asat's greatest challenge is maintaining enough new products in its pipeline to offset an expected decline in margins of 12% a year on products that become high-volume industry standards and therefore cheaper. While some of Asat's products become standardized within 18 months, others have been produced exclusively by the company for a decade or more. Niche, or advanced packaging products, typically command 15 to 18 gross margin points more than their commodity counterparts, Lee says.

Those margins are not easy to maintain.

"We understand that you can't grow continually and continually be at the high-margin levels that we are at," Lee says. "We must have a continuous pipeline of new products, but we must also manage them as they come down the maturity curve and become more commoditized. That means we must have excellence in operations, manufacturing and cost improvements and the ability to grow and meet demand as certain products move into the high volume arena."

Some 85% of its revenue comes from US-based multinationals, with the rest coming from Europe. Lee says he expects Europe to be a major growth sector as mobile phone companies such as Nokia develop third-generation (3G) handsets that give users high-speed, always-on access to the internet.

The company is also beginning to build a presence in Asian countries outside Hong Kong where its manufacturing center is based. Within the last four months it opened a sales and customer support office in Korea and Singapore and it is considering opening an office in Taiwan. It aims to stay focused on the advanced packaging market where there are relatively high barriers to entry because of the special expertise needed to design niche products for wireless and broadband customers. Only 3% of its revenue is derived from PC-oriented products.

Asat's optimism over its future is based partly on its belief that the current semiconductor cycle will continue for at least another year to 18 months. "I don't think the current cycle is over," says Lee. "It is really only a year old and is being driven by the communications sector."