Taiwan Captures Industry's Attention

Taiwan's export orders peaked to an 18-month high in May, chalking up an increase of 14.3%, according to data recently released by the Economics Ministry of Taiwan. To cap it off, a double-digit yearly growth in export orders was predicted for the second quarter, with 3.4% growth expected for 2002, according to Chang Yaw-tzong, director of the Economics Ministry's statistics department. Export orders considered the lifeblood of Taiwan accounts for almost half of Taiwan's GDP.

"This strong growth is caused by strong demand for information technology and communications products as well as Taiwan becoming an outsourcing hub for U.S., Europe and Japanese electronics firms," said Freddy Lee, an electronics analyst from Axel Drexel Asset Management in Taiwan.

With Taiwan's share of worldwide chip sales expected to increase from 3.1% this year to 23.2% by 2003 — exceeding $177B and surpassing $200B by 2004, according to published data from the Semiconductor Industry Association (SIA) — Taiwan is poised to be an economic powerhouse reaping the giant's share in IC design, R&D and production.

However, the current slowdown in worldwide semiconductor demand, including graphics and PC chips, is very much dependent on the overall performance of the electronics industry from PCs, PC peripherals and accessories, communications and gaming. Gartner Dataquest (San Jose) recently readjusted its forecasts for PC shipments from 5% growth to 2-4% growth for the remainder of 2002.

Lanterns line the Love River during the annual Lantern Festival in Kaohsiung, one of Taiwan’s major cities. (Source: Tourism Bureau, Ministry of Transportation & Communications)

According to recent postings by the Semiconductor Association of Taiwan (SAT), there has also been a slide in the average price of wafers, which might delay the pick-up of wafer revenue in the final quarter of 2002. "There is a general correlation drawn from the SAT where a dip in average prices of wafers would also cause a dip in overall demand," said Samuel Tan, an economist with semiconductor research company Axiom Consulting (Hong Kong).

As countries in Asia — including South Korea, Singapore, Japan and most recently China — jostle for the No. 1 position in semiconductors, Taiwan has emerged to dominate the foundry business. Its wafer-producing capacity for high-end 200 and 300 mm wafers leads the world, housing two of the largest foundries in the business: Taiwan Semiconductor Manufacturing Co. (TSMC, Hsinchu) and United Microelectronics Corp. (UMC, Hsinchu).

Given current economic conditions, however, both UMC and TSMC have promptly trimmed their capital expenditure budgets for 2002. UMC shaved off close to $300M from its previous budget of $1.6B, while TSMC reduced its capital expenditure by $500M from its initial budget of $2.5B. UMC decided to spend less in its expansion drive for its 200 mm wafer capacity, and TSMC decided to slow down the early adoption of 300 mm wafer fabs. Both companies have directly impacted the worldwide semiconductor equipment market, which has seen a contraction by almost 41.9% for this quarter alone. However, in a recent statement, UMC said it will be on track for its 300 mm wafer capacity and its 130 nm copper modules.

Despite the grim forecasts, TSMC has reported a healthy balance sheet, where net profits increased by 41% in the second quarter to amount to almost $279M. Growth was driven by the communications and integrated device manufacturers. Wafer capacity utilization for the second quarter of 2002 averaged 67% for TSMC, and 72% for UMC's fabs.

UMC posted net sales of $554M in the second quarter, a nearly 23.8% increase over the same period last year. This compares with a $55M loss incurred last year. The demand for 0.18 µm production apparently shot through the roof, including the demand for consumer and communications devices and a general trend pushing the outsourcing of IDMs. Chipmakers such as Motorola, Texas Instruments and AMD are faring poorly in part because of higher manufacturing costs, and they are turning more to production outsourcing, mainly relying on TSMC and UMC. Other foundries such as Singapore's Chartered are also expected to benefit from this trend.

IDM outsourcing is becoming a distinct trend, said Sanjay Singh, senior industry manager, industrial technologies at Frost & Sullivan Asia Pacific. "Over time, the IDMs would move to a more fabless-oriented model; pure-play foundries and fabless companies that focus on design, marketing and branding whilst leaving the actual production to the foundries."

This trend would enable the foundries to have greater manufacturing economies of scale, where they would focus on building the next-generation manufacturing technologies and increasing their manufacturing efficiencies. Fabless companies, on the other hand, would focus instead on their core strengths in intellectual property.

"Newer companies in Taiwan should focus on the fabless model as it is estimated that around 45-50% of semiconductor revenues is contributed by fabless companies," Singh said.

To up the ante in development of submicron wafers, AMD and Infineon Technologies are collaborating with UMC to enable advances in next-generation wafer technology. "This collaborative move is seen as the next development cycle for the 65 nm and 45 nm technology nodes over 300 mm wafers," said Su Chin Low, a senior process engineer contracted to work on the project in Singapore that intends to house the 300 mm fab, called UMCi. Its first trial run is estimated to take place in early 2003. TSMC also intends to collaborate with Philips Electronics and STMicroelectronics in a five-year development project to research and develop advanced CMOS processes, starting from the 90 nm node and switching to the 65 nm node.

There is, however, one considerable threat to Taiwan's reign as the foundry hub of the world. China is expected to add a capacity of about 125,000 wafers per month in its 200 mm wafer plants, according to Singh, putting pressure on Taiwan. However, at least in the short term, there should be a rationalization of product categories between the two countries as China climbs a steep learning curve, he added.

"China is expected to compete more strongly if it can garner a larger share of the outsourcing from IDMs like Hitachi, Toshiba and Motorola, who have communicated their desire to offload manufacturing to foundries," Singh said. "However, IP protection is a major issue for IDMs, and China may face some challenges regarding this parameter."

China's fabs still lag far behind Taiwan's on the technology front, noted Jeffrey Bahar, an industrial consultant from Spire Research and Consulting (Singapore). "China's existing fabs are still doing low-end products," he said. "Taiwan will continue to have an edge in the short term and mid-term, unless the China semicon industry plans to take a giant leap forward in its core technology. Also, finding the right labor pool for high-end manufacturing in China will be an uphill task."

Taiwan's government has legislature in place insisting that IC manufacturers in Taiwan can only transfer their depreciated 200 mm wafer foundry machinery to China, and that the total number of wafer fabs set up in China by any Taiwanese company cannot exceed three by 2005. Also, only those companies that have started mass production of 300 mm wafers will be allowed to move their 200 mm foundries across the Taiwan Strait.

While Taiwan debates the question of protecting its strategic national interests at the cost of commercial interests, business lobby groups in Taiwan are already gaming for a showdown with Premier Yu Shyi-kun's cabinet. Several of them vehemently oppose the Taiwanese government's move of delaying their global semiconductor ambitions and causing them to lose their global competitiveness. If the business groups have their way, they could begin to bridge the technology gap between China and Taiwan.