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Taiwan Trip Report December 18, 2000
Taiwan Trip Report December 18, 2000
Taking the Pulse of Taiwan
Over the course of the past week, we visited 14 companies in Taiwan including
Dynamic Random Access Memory (DRAM) suppliers Nanya, Mosle Vitelic and
Powerchip; chipset manufacturers VIA Technologies, SIS and ALI; motherboard
manufacturers FIC, Asus Computer International and Acer; notebook manufacturers
Compal Electronics and Arima; flash provider Eon; and foundry United
Microelectronics.
Taiwan continues to be an important manufacturing center of electronics, with
the island accounting for more than half of the world's motherboards. This
visit was timely in that we confirmed the electronics slowdown for the current
quarter, but more importantly, gained a view into significant trends for early
2001. What we found was a land troubled by not only the slowdown in
electronics, but also by the political strains of a newly elected President and
a worsening bank debt crisis. A bad performance this year for electronics could
signal additional defaults on loans, adding to accumulated non-performing loans
that currently exceed 5.4% of outstanding loans.
The overall sentiment among local companies was that the current slowdown took
almost all by surprise. Most of the companies had continued to forecast and
build for a very strong C2H00. The slowdowns came rapidly and dramatically in
November and have continued into December. Some of the companies were
stockpiling commodity items such as DRAMs in anticipation of shortages that
never occurred during the end of C00. All these factors have caused a dramatic
falloff in semiconductor demand as they try to burn off the inventory in the
channel.
Although the Taiwanese companies are under pressure, many of the stronger
companies are restructuring and expanding to remain competitive. Acer has
announced the consolidation of several plants worldwide and an expansion into
mainland China. United Microelectronics is continuing to aggressively expand by
starting a new 12 fab in Singapore. Asus will manufacture more than 50% of
their motherboards in mainland China for C01. Many of these companies believe
the current slowdown will be short lived. Although the slowdown will impact
short-term financial performance, they believe that long-term growth prospects
remain very strong for electronics and continue to invest accordingly.
Motherboard Inventory Levels: Much Higher Than Desired
Through discussions with both component suppliers selling into motherboard
manufacturers as well as motherboard manufacturers themselves, we believe that
there are currently more than 10 million motherboards in inventory at local
manufacturers. Typically, at this time of the year we would expect only a few
million motherboards in inventory at most. Clearly the industry has badly
overshot production.
As we have noted previously at the time of our estimate and ratings reductions
on Intel, our greatest concern going into 1Q is always one of over-inventory.
Although motherboards are not typically populated with either the microprocessor
or memory, we believe that by proxy, inventory levels of finished motherboards
and complete systems also are likely to be higher than desired.
For those suppliers selling chipsets, we believe they will see both weaker
demand as well as rising price pressure as we enter 2001. The companies most
affected include local suppliers VIA, SIS and ALI. We believe Intel will also
be impacted in 2001 and are reducing our estimates on Intel today as well.
Merchant Market Chipset Vendors Gaining Share vs. Intel
Conversations with both suppliers and vendors suggest Intel continues to pay the
price for its unpopular support of Rambus Dynamic Random Access Memory (RDRAM).
With Taiwan's manufacturers reflecting both the desires of its OEM customers
as well as its own preference for mainstream technology, it's no surprise that
Taiwan continues to resist any adoption of RDRAM technology. We don't expect
this to change in 2001.
Exacerbated by the missteps that occurred in 2000 as Intel tried to drive the
adoption of RDRAM, and later as it enabled support for Synchronous Dynamic
Random Access Memory (SDRAM) through its ill-fated MTH chips, vendors in Taiwan
including VIA have benefited. Although Intel has spent considerable effort
promoting RDRAM, other vendors have gained significant success through timely
support of both SDRAM and DDR solutions.
Although definitive market share numbers are difficult to come by, we believe
Intel will likely see its chipset marketshare further erode in 2001. We expect
most merchant market chipset vendors to offer support of DDR and SDRAM for the
P4 before Intel. Specifically, we expect third-party support to be in the
market as early as late 1Q01, while we do not expect volume support from Intel
until well into 2H01.
Advanced Micro Devices (AMD) Gaining Share
We were surprised at the momentum that AMD seems to be achieving with some
customers, especially in portables. One high-volume manufacturer that builds
portables for PC OEMs including Hewlett-Packard, Toshiba, Fujitsu and Dell
suggested its share of AMD microprocessors could move from the 20% levels seen
in C00 to the 40% level in C01. Although this may represent a greater share
than what will be seen in the overall market, it does suggest the current
generation of AMD Athlons represent compelling price/performance solutions.
Increasing Signs of Price Pressure for Central Processing Units
Vendors we spoke with have suggested budgetary pricing for 1.5 GHz Pentium 4s in
the $200 range for 2HC01. This suggests mainstream pricing for Pentium 4s just
six months after introduction. Although we do expect Intel to have Pentium 4s
at 2 GHz in 2H01 at 0.13 mu., budgetary pricing being given now to customers
suggests a more rapid decrease than we would have expected.
DRAM's in Over-Inventory
Although Taiwan is still only a minor supplier of DRAM's, indications from local
suppliers suggest that high levels of inventory continue to be a problem. With
prices at the $3-and-lower level, few vendors are making money. Consequently,
we believe a number of vendors are actively holding back shipments.
Unfortunately, with a weaker PC demand environment, we believe that it could
take well through 1Q01 until inventory levels could see reductions, which in
turn could allow prices to firm. Although a number of vendors we spoke with are
actively considering the appropriate level and timing of capital spending, we
saw no indication of any impending production cut-backs, even given the current
pricing environment.
Compound Semiconductors
Although the current markets are soft for semiconductors, the Taiwanese
government still strongly believes the future for electronics remains very
bright, and the key to Taiwan's success is to remain the most advanced and
leading-edge electronics manufacturing country. In addition to silicon
technology, the Taiwanese government is aggressively investing in compound
semiconductor technology. The government has targeted compound semiconductors
as the next-generation technology needed for advanced communications chips. We
had the opportunity to attend the grand opening celebration of the WIN
Semiconductor new fab. The celebration was marked by speeches from the Vice
President of Taiwan along with several Ministers of Technology and Commerce. In
addition to WIN Semiconductor, we visited Compound Semiconductor Manufacturing
(CSMC), which the government has also invested in. Both WIN and CSMC are
compound semiconductor foundries, which follow the highly successful foundry
models that TSMC and UMC have shown. These investments in compound
semiconductor facilities will gradually come on line in 2HC01 and become the
source of foundry services to support the growing demand in GaAs chips during
the next several years. |
