Philips Semiconductors has started pilot runs of its next-generation integrated MPEG-2 and MPEG-4 chips used in DVD recorders at Systems on Silicon Manufacturing Company (SSMC), a joint venture between Philips and Taiwan Semiconductor Manufacturing Company (TSMC), as DigiTimes.com reports.

Philips’s integrated MPEG-4 chip, which combines the functions of a decoder and encoder, will be manufactured with a 0.13-micron process, with volume production scheduled to start in early 2004, according to sources.

Meanwhile, Sigma Designs, a US-based optical chip supplier, has started volume production of integrated MPEG-4 chips based on a 0.18-micron process at United Microelectronics Corporation (UMC). Sigma Designs shifted its MPEG orders from TSMC to UMC in the second half of this year, and its current monthly starts at the UMC are at about 2,000 wafers, according to sources.

Other major players, including LSI Logic, ESS Technology and Cirrus Logic, have also reportedly started pilot runs of their DVD recorder-use MPEG chips at either TSMC or UMC. According to sources at the international companies, both TSMC and UMC are offering 0.18-micron and below processes for integrated MPEG-2 chip production, while the MPEG-4 manufacturing will mainly use 0.13-micron processes.

ESS, which has been producing servo chips at TSMC, has recently added UMC as a supplier for the chips, sources added.

Most DVD recorder-use MPEG chip suppliers, including Philips and LSI, still produce a majority of the chips at their own fabs, but have accelerated outsourcing to the two Taiwanese foundries under price pressure, sources said.

Although international companies have dominated the MPEG chip market, major Taiwanese IC design houses are expected to join the competition in the second half of next year, which is expected to further intensify the price war.

Rising demand is expected to be another driver for the outsourcing. With DVD recorder sales growing rapidly, the optical chip companies are expected to enjoy rising orders and will have to expand their capacity supply. According to a forecast by International Data Corporation (IDC) in late October, global shipments of DVD recording devices are expected to grow at a 126% CAGR (compounded annual growth rate) from 2002 to 2007.