CHIP MAKING :Calculated Risk
Taiwan's foundries are expanding to serve new markets for chips, even as PC demand slows
By Mark Carroll/TAIWAN
Issue cover-dated January 11, 2001
ARE TAIWAN'S CHIP FOUNDRIES in denial? They continue to forge ahead with expansion and multibillion-dollar investments in bigger and better technology. Did somebody forget to tell them that demand for semiconductors is expected to slow, threatening to create an oversupply and eat into profits?
The global chip industry may be riding high right now, but it's highly prone to cyclical drops in demand. Worth $169 billion in sales in 1999, the industry grew 40% to $236 billion last year, according to U.S.-based semiconductor research firm VLSI Research. Indeed, the industry has been in a strong growth cycle for two years. But Bob Hutchinson, a VLSI analyst, thinks that good fortune is about to change. He expects only 20% growth this year. And while Taiwan's share of the global market is set to grow to 9%, or $22 billion, from 6% last year, a drop in demand could trigger a price war, ultimately hurting profits.
So why, on the cusp of a market squeeze, are the Taiwanese investing in new technology? Taiwan Semiconductor Manufacturing Co., the world's leading chip maker, will build two new 12-inch-wafer foundries this year. Rival chip maker United Microelectronics Corp. plans three, at a cost of $3.3 billion each. VLSI reckons Taiwanese chip makers will invest the equivalent of 80% of their revenues in new foundries this year.
With billions of dollars going out of the door at a time when demand is expected to soften, the risk to profits is obvious. But, to stay ahead of the game, foundries must continuously upgrade technology. And 12-inch wafers are the way to go. These wafers, which are larger than the industry standard 8-inch wafers, can hold more memory and integrated circuits, reducing computer-chip size, increasing chip output volumes and cutting production costs. Indeed, costs could fall by as much as 30% in 2002, once the new production lines have mastered what is still barely more than an experimental technology.
HANDHELD DEVICES
A string of profit warnings from personal-computer and other hi-tech companies, including Microsoft, Apple, Dell, Gateway, Motorola and Intel, have cast doubt on the chip industry's outlook. And there remains the issue of an expected slump in the global PC market. So where will the demand for more chips come from?
Peter Chang, UMC's chief executive officer, acknowledges that UMC is already producing fewer chips for PCs. Instead, he's banking on a surge in demand for chips for 3G ("third-generation") mobile phones, personal digital assistants and handheld Internet devices. In fact, demand is already picking up. "The amount of chips we made for telecom and information appliances has grown considerably. We expect this trend to continue in the future," Chang says. Making these highly sophisticated analog-digital chips is highly lucrative: They sell for 300% more than standard PC memory chips, the staple product of many foundries.
Capital Securities Investment Trust in Taipei expects UMC's profits per share to drop to NT$4 (12 U.S. cents) this year from NT$4.50 last year. Still, the Taiwanese have consistently gambled and won. Cash-rich from their last big gamble in 1998, when they expanded aggressively during the Asian economic crisis, they aren't prepared to rest on their laurels. Mindful of a potential threat from chip makers in Southeast Asia, China and South Korea, they are expanding beyond their home boundaries.
UMC recently announced plans to build a $3.6 billion 12-inch-wafer plant in Singapore with German chip maker Infineon Technologies. A 10-year tax holiday was one of the lures that brought UMC to the island. The project will be built in two phases beginning early this year and will have a total capacity of 40,000 wafers a month.
UMC has also formed a joint venture with Hitachi Corp. to build a 12-inch-wafer plant in Japan. The venture, Trecenti Technologies, has already completed a pilot run, and volume production is expected to begin in March. The move into Japan is significant, given that the Japanese are the world's leaders in consumer-electronics design.
So while analysts may question their timing, the Taiwanese continue to raise the stakes. They, at least, are confident of winning again.
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