UMC Registers Operating Loss in Q2, Cuts Operating Capacity to 30 Pct. in Q3
August 22, 2001 (TAIPEI) -- Taiwan's United Microelectronics Corp. announced its business results for the second quarter of 2001 on July 30, showing a significant drop in sales.
UMC's sales amounted to NT$15 billion, dropping by 38.6 percent from the same period in 2000 and down 36.4 percent compared with the previous quarter. Gross profit on sales was NT$2,350 million, plunging by 80.3 percent compared with the same term last year and down 75.5 percent from the previous quarter.
The company fell into the red by registering an operating loss of NT$770 million, a pretax loss of NT$3,050 million and a loss for the current term of NT$1,850 million on an operating profit and loss basis. UMC was greatly affected by flagging demand for Si foundry work compared with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC).
UMC's average capacity utilization rate is about 40 percent. Shipment volume in the second quarter was 345,000 pieces, down 22 percent from the previous quarter's 443,000 pieces, a smaller percentage decline than TSMC's minus 36 percent, but the fall in profit was steep.
This was caused by a drastic fall in the average sales price (ASP). While TSMC's ASP in the second quarter showed a slight increase compared with the previous quarter, UMC's ASP suffered a large 19 percent plunge.
It is believed that drastic cuts in orders from the company's large-lot customers and firms making extensive use of high-end processes such as Xilinx Inc., and SanDisk Corp., both U.S.-based, lie behind UMC's poor business performance.
Sales broken down by region show that the United States accounted for 39 percent (46 percent in the first quarter); Asia, 36 percent (24 percent in the first quarter); Europe, 21 percent (28 percent in the first quarter); and Japan, 4 percent (2 percent in the first quarter), showing that while orders from the U.S. and Europe declined, demand from Asia increased.
This situation may be explained by the fact that orders from the aforementioned large-lot U.S. customers (mostly fabless) and European customers (IDM) decreased, but orders from fabless design firms remained relatively firm.
Sales broken down by process show that under 0.18-micron chips increased rapidly in the first quarter, accounting for 14 percent (23 percent in the first quarter); 0.18-micron to 0.25-micron, 37 percent (32 percent in the first quarter); 0.25-micron to 0.35-micron, 27 percent (21 percent in the first quarter); and over 0.5-micron, 22 percent (24 percent in the first quarter), indicating the lowering ratio of high-end processes.
Gross profit rates also plunged from 40.7 percent in the first quarter to 15.7 percent, caused by lower capacity utilization ratios and sagging ASPs. Operating expenses rose by a large margin to curtail the company's profitability.
In particular, research and development costs soared as in the case of TSMC. The development of 300mm wafers and Cu distribution processes pushed up the R&D cost to NT$2,120 million (NT$1,870 million in the first quarter), causing the ratio to sales to rise to 14.1 percent.
On the other hand, marketing expenses were cut down sharply from the first quarter's NT$250 million to NT$90 million, and administrative expenses leveled off, showing that UMC is taking a more positive cost-reduction policy than TSMC. Yet, its operating costs added up to NT$3,120 million, or 20.8 percent of sales, exceeding the gross profit to register an operating loss of NT$7.70 million.
Nonoperating income and expenditures marked a red-ink settlement of NT$2,280 million, with major factors being redemption of dead stock and investment losses incurred by Taiwan Unipac Optoelectronics Corp., UMC's affiliated company handling TFT liquid-crystal panels.
Guidelines for the Third Quarter
UMC's guidelines for the third quarter are: (1) Lower the capacity utilization ratio to about 30 percent; (2) Raise the ASP a little; and (3) Make the third quarter hit bottom. The reasons why the third quarter should be the bottom are progress in stock adjustment on the part of customer firms and an increase in the number of new proposals from the customers.
No concrete guidelines with regard to sales and profits (losses) were given. But with the capacity utilization ratio plunging by as much as 10 points, and while ASP is expected to rise somewhat, the company obviously is prepared for a decline in sales from the second quarter and further expansion in operating losses and pretax losses.
The company plans to go ahead with capital investment in plants and equipment worth US$1.5 billion as originally planned, building 300mm plants to continue increasing production capacity, while on the other hand consolidating the production capacity of 200mm plants and preventing unnecessary production capacity from expanding.
Customer Base Expansion is Needed
The business results for the second quarter were lower than expected. Shipment volume of 345,000 pieces was in line with expectations, but the steep decline in the ASP exceeded by far the writer's projection for a fall within 5 percent.
UMC has reportedly lowered the sales price of the same process since April. In addition to the drop in prices, the decrease in the ratio of high priced high-end processes has greatly affected its business results.
As stated in the preceding paragraphs, the decrease in orders from customers handling communication ICs such as Xilinx has given the worst blow to the company's deteriorating profitability. But TSMC also has large-lot customers, including U.S.-based Altera Corp., which handles products in the same field, and is affected in the same way by the customer firms' inventory adjustments.
Moreover, TSMC's production capacity exceeds by far that of UMC, and is expected to surpass UMC by 52 percent in the whole of 2001. That being the case, it should be more difficult for TSMC to maintain its capacity utilization rate at the same level.
TSMC's relatively higher profitability than that of UMC is ascribed to the fact that TSMC's customers are scattered about in a variety of product areas, and that it definitely has a larger number of customers than UMC does.
With more customers, TSMC has: (1) a higher possibility of small-lot customers becoming larger-lot customers in the future, and (2) stands safer in terms of risk diversification and has a relatively stable source of demand in times of diminishing demand.
In that sense, the next step for UMC to take would be to bolster its customer base. UMC's strategy to affiliate with U.S.-based IBM Corp., Germany's Infineon Technologies AG and others would be right in the sense that it can learn cutting-edge process technology most effectively and in the shortest period of time, but the point in question would be how it will gain customers that can make use of the process (especially the fabless companies).
It will be important to see how UMC processes know-how that is not inferior to TSMC and how it is going to make use of its technology to gain new customers.
Related stories:
- UMC Suffers Heavy Losses in Q2
- TSMC Suffers Pre-Tax Loss in Q2
- Sales at UMC Continue to Drop; TSMC's Business May Have Hit Bottom
(Yasuo Nakane , Senior Analyst, Daiwa Institute of Research Taipei Representative Office, Special to Nikkei Microdevices) |
