Taiwan: Going from Strong to Stronger

		At a Glance
	Taiwan's IC industry has a unique vertical integration covering design, manufacturing, packaging and testing. This aids the development of the dedicated foundry industry since it effectively lowers production cost and shortens production cycle.

To avoid sinking into the same financial crisis encountered by Japan and Korea, Taiwanese semiconductor vendors strengthened their competitive competence through large-scale strategic alliance. TSMC, for example, allied with ASMI, then let its subsidiary Vanguard ally with PowerChip and Mitsubishi to acquire DRAM technology. Similarly, after a new joint venture with Nippon Inc., the UMC Group announced a five-in-one program this June to accelerate capacity expansion and efficiency in implementing the company's roadmap for the next century.

While Taiwan will continue to be the worldwide center of foundry activity, Taiwan's other business segments, such as IDM, design, packaging and testing, are still working to achieve success in the competitive global market.

Industry infrastructure

Taiwan's semiconductor industry operates in a vertically integrated structure, which is unique in the world. Fig. 1 illustrates four major segments: design, fabrication, packaging and testing, along with supporting industries such as mask, wafer, chemical materials and lead frame supply. Despite the depression of the worldwide IC industry in 1998, several new startups joined the industry. As of early 1999, there were 201 companies in the four major segments of Taiwan's semiconductor industry: 115 design houses, 20 fabs, 36 packaging venders and 30 testing companies.

Fig. 1 Taiwan has a vertically integrated infrastructure. As of early 1999, there were 115 design houses, 20 fabs, 36 packaging vendors and 30 testing companies.

Fig. 2 illustrates the performance of all four industry segments. Despite -1.5% growth and a revenue drop of US $8.4B in 1998, packaging and design companies grew by 3.4% and 2.1%, respectively, outpacing other segments. Fabs and testing industries declined 3.7% and 5.8%, respectively.

Until now, Taiwan's semiconductor industry has relied heavily on manufacturing capability. Today, foundry-related businesses, including wafer foundry, testing and packaging, account for 58.8% of total industrial revenue.

Among the four segments of the Taiwanese semiconductor industry, fabs are the largest. Within this segment, 90% of revenue is generated by memory and foundry. The dedicated foundry business was born in Taiwan, and Taiwan remains the leader in this area. But total fabrication revenue declined due to the plunge of DRAM revenue. Lower DRAM prices hampered the growth in revenue despite ramped-up production capacity (Fig. 3).

Taiwan's foundry industry is predicted to perform better than the world average again in 1999. Considering the capacity expansion of existing foundries and the appearance of new players, ERSO predicts Taiwan's foundry product revenue will grow 44.8% in 1999, to US $4.19B.

Fig. 2 Performance of the four segments of Taiwan's semiconductor industry.

Packaging ranks second among the four segments of Taiwan's industry. Taiwan's packaging operation is the second largest in the world, with revenue of US $1.7B in 1998. R&D investments, strategic alliances with up- and down-stream vendors, turn-key service, and internationalization are major strategies that Taiwanese packaging companies practiced to sustain profitability during the recession.

Dedicated testing is a young business in Taiwan and enjoyed multifold growth in past years, with investment in startup testing companies peaking in early 1998. Memory testing contributes half of total testing revenue and is the major product of testing houses in Taiwan. The plunging DRAM prices in 1998 also lowered testing revenue growth, producing the first negative-growth year ever.

Taiwan's design industry ranks second worldwide in both number of companies and revenue. In 1998, 115 design houses generated revenue of US $1.3B. Compared with billion-dollar investments in IC fabrication business, design is a typical intelligence-intensive industry. Thanks to over-capacity in the local foundry industry, the Taiwanese IC design industry generated good profits out of lower foundry prices and abundant capacity supply in 1998 (Fig. 4).

1999: Foundry and testing soars

After the dark days of 1998, it is widely believed the worldwide semiconductor industry will head toward recovery in 1999, with revenue growth ranging from 6.6% to 11.8%, according to different sources. In Taiwan, ERSO/ITRI ITIS expects prosperous growth of 25.0%. Among the four business segments, IC fabrication and testing are expected to out-perform the others, with growth rates of 29.6% and 23.5%, respectively. Design and packaging companies are likely to grow by 17.1% and 19.0%.

With outstanding performance in past years, the foundry business attracted many players worldwide, including dedicated foundry service providers and IDMs (integrated device manufacturers) that provided part-time foundry services. With the core competence of quick cycle time and competitive price performance, many believe Taiwan's foundry business will continue to dominate in future years. Foundry revenue is expected to grow 29.6% in 1999, to US $6.6B.

Fig. 3  The wafer foundry business, which is gaining in worldwide market share, continues to be Taiwan's dominant industry.

The boom in testing facility investments in 1997 and 1998 brought a surge in testing capacity in Taiwan; but low-priced DRAMs, low utilization and high cost of testing facilities brought severe recession to the testing business. Significant change is likely in 1999. Differentiation in test products such as mixed-signal IC, RF IC, MCM testing, plus more start-ups in 1999, is expected to help the testing industry grow by 23.5%, to revenue of US $0.4B.

Thriving investments helped Taiwan's packaging industry in 1996 and 1997. In addition to integrating packaging and testing facilities to provide better backend turn-key service, Taiwanese packaging companies also worked on high value-added packaging types such as BGA, mBGA, CSP and MCM. In 1999, packaging revenue is expected to grow by 19.0% in Taiwan, to a new high of US $2B.

Taiwanese experience has proven the model of tight collaboration between design houses and foundry providers successful, as evidenced by the prosperous IC design industry and ever-growing sales of the top IC design firms (Table). It is widely expected this business model will become more popular worldwide in the next decade. The IC design business usually requires less capital, involves lower entry and withdrawal barriers, and can produce a higher value-added IC. Taiwan's IC design industry is now second largest in the world and is likely to remain there in 1999, with expected revenue of US $1.5B and 17.1% growth.

The semiconductor industry in Taiwan has enjoyed years of high growth thanks to its vertically integrated industrial infrastructure. Internationalization of the local foundry business not only led Taiwan's semiconductor industry into the world market, but also brought prosperity to downstream businesses such as packaging and testing. All these shape the current status of Taiwan's fabrication strength. The capital-intensive IC fabrication business has high entry and withdrawal barriers. Massive and continuous investment in manufacturing facilities remains the key to success in the industry. Taiwan's semiconductor industry likely will continue to grow due to continuous capacity expansion in fabs. But migration to a more value-added, intellectual-oriented industry would be the challenge the Taiwanese industry is going to face.

Fig. 4  Part of Taiwan's strength lies in its abilities to form joint agreements with companies around the world.

Under the double impact of financial crises and the DRAM price drop, many Japanese and German IC giants have become more and more reliant on their Taiwanese strategic partners for foundry service in 64Mb DRAM production; Taiwan's foundry industry is expected to churn out about 50% of their DRAM production in 2000. This reflects both the cost advantage and importance of Taiwan's IC industry.

In the development of Taiwan's semiconductor industry, TSMC and UMC not only cut themselves a distinctive role as foundry companies, but also paved a broad way for Taiwan's industry. However, Taiwan's DRAM manufacturers are in a dilemma -- whether to develop products sold independently or join an alliance. It is obvious Acer Semiconductor, PowerChip and Vanguard already have made their decision to be part of TSMC alliance. How about the others? On the one hand, they want full control of production capacity to create high profit; on the other, they tend to depend on foreign alliances for technical support. Despite this dilemma, the DRAM foundry is seen as a good survival strategy for Taiwan's manufacturers (Table).

Conclusion

The unique vertical integration of Taiwan's IC industry -- covering design, manufacturing, packaging and testing -- aids development of the dedicated foundry industry by effectively lowering production cost and shortening production cycle. If foundries can further heighten their flexibility in adapting to different processes and accumulate process capabilities for embedded systems, they may possess a competitive edge that enables them to bypass the dominant Korean and U.S. DRAM makers.

The author wishes to thank ERSO ITRI/ITIS for help in preparing this article.