TSM eyes new markets:
Seeking Growth Market, Chip Maker Eyes Solar Cells
By ASHLEE VANCE
New York Times
June 13, 2009
HSINCHU, Taiwan — Taiwan Semiconductor Manufacturing, or TSMC, has seen the light and now wants to make some.
The world’s largest for-hire chip maker could soon start manufacturing solar cells and LED lights. The company’s entry into these nascent industries will catch the attention of existing makers, which could find themselves battling one of the most formidable manufacturers on the planet. Taiwan Semiconductor could drive down prices, as it did for computer chips. But the lower prices could also stimulate demand for what are now expensive technologies.
For the company, the move far afield from semiconductors signals a sweeping change and a need to find growth in less-mature markets. “Their foundation that has been so successful over the last couple of decades is starting to slow,” said Michael McConnell, an equities analyst with Pacific Crest Securities. “It’s natural for them to want to branch out.”
Earlier this week, the company declared its new intentions with a bold gesture. It stripped Rick Tsai of his chief executive title and placed him in charge of a new unit created to look into fresh business opportunities. Morris Chang, the company’s 78-year-old chairman and founder, has returned as chief executive.
In an interview ahead of the management shuffle at Taiwan Semiconductor’s headquarters in Hsinchu, Mr. Tsai highlighted solar cells and LEDs as the most likely markets it would enter.
“I would expect we will make some decision before the end of the year,” Mr. Tsai said. “We have people who are working pretty hard on those areas.”
The manufacturer, with revenue of slightly more than $10 billion last year, hopes to make at least $2 billion in revenue a year from its new businesses by 2018. The company produces more chips than any other “foundry,” or contract chip manufacturer. It takes chip designs from companies like Nvidia and Qualcomm, both based in the United States, and turns them into the finished products that end up in personal computers and cellphones. This arrangement places the burden of building chip plants that cost $3 billion or more on Taiwan Semiconductor, while affording customers the chance to concentrate on engineering.
The foundry model has grown in popularity as fewer and fewer companies have been able to stomach the costs of building cutting-edge plants that can churn out chips using their latest technologies. Only a couple of giants remain, like Intel and Samsung, which are willing to design and produce their own processors for personal computers and cellphones.
TSMC’s business model puts it under constant pressure to keep its factories humming at full capacity. With demand for computing products slowing down during the global economic downturn, its business has declined at unprecedented rates. Net income in its first quarter dropped 94.5 percent compared with the year-ago quarter as revenue dropped 54.8 percent. “We have never seen this phenomenon before,” Mr. Tsai said. “It is more severe than any of the recessions or downturns or corrections before.”
So chip makers are looking for other things to do. Intel has moved to counter slowing PC sales by building chips that can power cellphones and provide the brains in products like cars, televisions and set-top boxes. Its former executive Andrew S. Grove has also called on Intel to begin making batteries, suggesting that its manufacturing expertise could improve the technology. So far, Intel has declined.
Built to look like a dragon, Taiwan Semiconductor’s sprawling main office located in one of Taiwan’s many science parks stands as a testament to the country’s rise as a technology powerhouse. The company has managed to outpace all of its rivals by building the most advanced chip plants, Mr. McConnell said.
“Their main rivals have slipped,” he said. “TSMC will never publicly admit this, but they will be able to force their hand on the pricing side, and this will give them better leverage with their operating model.”
With close to $7 billion in cash, the company can finance solar and LED projects that would tap into some of the manufacturing skills learned in the chip business. While there is considerable interest in green technologies, governments around the world have had to subsidize the purchase of solar cells and LED lights to stimulate demand. The costs of such devices are still not low enough to justify substituting them for existing technologies.
Pointedly, Mr. Tsai said its intentions in either area would be to create profitable businesses that could operate without government subsidies.
“You have to get the costs down really fast,” he said. “You don’t want to count on governments all the time for the viability of the business.”
Copyright 2009 The New York Times Company
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