"Chipmaker Bucks Trend, Has Big Expansion Plans"
Date: 5/21/98 (From IBD)
Author: Reinhardt Krause
The world's largest contract manufacturer of chips, Taiwan Semiconductor
Manufacturing Co., is betting big that its factory expansion this year will
pay off as industry sales heat up again.
TSMC plans to increase its factory space 40% worldwide this year as it
starts commercial production this summer on its first U.S. factory. The
plant is a joint venture with three other firms in Camas, Wash., called
WaferTech. TSMC plans to increase capacity 25% annually starting in '99,
and spend $14.5 billion over the next decade.
Meanwhile, the rest of the industry is going through doldrums. One
estimate on '98 chip industry sales growth was recently slashed to 8% from
16.7%.
But Morris Chang, TSMC's chairman and chief executive, doesn't seem to
be flinching much.
''I'm not worried about (our expansion plans) being excessive. We're very
well positioned in the (chip) foundry industry,'' Chang said. ''We certainly
intend to at least hold our current market share, if not increase it.''
While the timing of TSMC's expansion may seem odd, the company
should be well prepared for a chip industry rebound, analysts say.
But they warn it takes a few years to plan a chip factory and then get it up
and running efficiently.
''Wafer foundries like TSMC are much like aircraft carriers,'' said Dan
Klesken, analyst at BancAmerica Robertson Stephens Inc. in San
Francisco. ''You can't start or stop them on a dime. You have to prepare
for the longer term.''
Based in Hsin-Chu, Taiwan, TSMC makes chips under contract for
semiconductor firms that don't have their own manufacturing plants - also
called fabs - or for companies that simply outsource production to save
costs.
In the first half of '98, TSMC concedes its gross margins may feel a pinch
as the fab space it uses is expected to fall to 90%. Some analysts say it
could dip to 80% in June. TSMC's factories will be less busy as more of
them are built and wafer demand stays flat.
Industry analysts say TSMC holds about a quarter of the chip foundry
market worldwide. The market for pure chip foundries is expected to climb
from $6.5 billion in '96 to $15.5 billion in '01, at an annual growth rate of
19%, says market researcher Dataquest Inc.
Chang is even more upbeat. ''Demand on foundries is growing faster than
the chip industry as a whole,'' he said. ''We normally talk in terms of 15%
for the industry on average, and foundries will grow probably in the 25%
range a year.''
TSMC does seem to be weathering the chip industry's slump well, though.
Wafer prices fell in '96 and much of '97 because of chip oversupply. Yet
TSMC's net sales rose 11.5% in '97 to $1.5 billion. Sales for the quarter
ended March 31 rose 73% to $477 million, from $276 million a year
earlier.
TSMC's closest rivals are United Microelectronics Corp., also in Taiwan,
and Chartered Semiconductor Inc. in Singapore.
UMC plans to spend $18.8 billion to build new fabs over the next decade.
Chartered and Lucent Technologies Inc. of Murray Hill, N.J., announced
plans in January to jointly build a chip factory in Singapore.
TSMC faces new players entering the foundry market, especially in the Far
East. To eke out profits, these memory- chip makers are trying to make
better use of their factories by making chips under contract for other firms.
''TSMC is under a lot of pricing pressure. They can't command a premium
like a year or two ago,'' said G. Dan Hutcheson, president of market
researcher VLSI Research Inc. in San Jose, Calif.
The foundry business calls for increasing specialization and flexibility.
TSMC can make wafers for dozens of clients out of the same factory.
Often, it must tweak production lines for individual customers, depending
on what kind of chip is being made.
TSMC's other advantage is that its factories are state of the art. Foundries
typically lagged other top chipmakers in manufacturing prowess a few
years ago, but that's no longer true.
Case in point: TSMC's $1.2 billion WaferTech plant will be equipped to
make chips with transistor widths as small as 0.35 micron. It will move into
0.25-micron production by late '98 and to 0.18 micron by '99. A human
hair is 100 microns wide.
The plant's advances allow TSMC to keep up with the industry movement
to squeeze more transistors on to chips. It also is helping to draw more
customers - well-established companies and start-ups alike.
''Companies come to us for our breadth of technology,'' said Ronald
Norris, president of TSMC's U.S. operations, based in San Jose. Earlier
this year, TSMC signed on a $150 million deal to make microprocessors
for National Semiconductor Corp. of Santa Clara, Calif., a major chip
player.
Two of TSMC's newest customers are young firms - 3Dfx Interactive Inc.
of San Jose and Sunnyvale, Calif.-based Nvidia Corp . Both companies
target multimedia PCs.
According to Norris, it's easier for start-up companies to acquire funding
from venture capital firms if they can point to a reliable wafer supplier such
as TSMC.
On the other hand, TSMC's San Jose sales office is always on the lookout
for hot start-up companies.
TSMC never takes a direct equity stake in start-ups, though. To do so
would compromise its position as a ''pure foundry,'' Norris explains. That's
because other companies might think the start-up receives special
treatment, such as better access to wafers, from TSMC.
''People always question your allocation of capacity when things are tight,''
he said. ''It's a high-confidence-oriented business. There has to be
complete trust.''
Mang |
