With increasing startup costs of new semiconductor "fabs" (chip production facilities) and falling chip prices, U.S. and Japanese chipmakers are shifting their manufacturing strategies and using semiconductor foundry companies. Outsourcing makes sense because the chipmakers do not need to be concerned about huge capital equipment spending costs. By using several foundry companies to manufacture a product at a time, the chipmakers have the power to control both wafer costs and quality.

From the viewpoint of Mr. Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), the world's largest semiconductor foundry as reported in Electronic News, the semiconductor foundry service allows the chipmakers to focus on chip design rather than chip manufacturing. "I think it's a foolish company that distracts themselves and worries about a fab.", he added.

So far this year, the world's-largest chipmakers including Motorola, Hewlett- Packard, Toshiba, and Kawasaki LSI have already made announcements ranging from technology and manufacturing alliances to outright outsourcing the manufacturing of their products... everything from the chips used in cellular phones to DRAM chips.

Although most of the chipmakers are still cautious about a 1999 recovery in the chip business, Mr. Chang announced that the silicon foundry business will increase at a 22 percent compounded annual growth rate during the next 10 years, reaching $39.4 billion in revenues compared to $5.4 billion in 1998, according to Electronic News.

There are sufficient reasons for Mr. Chang to be overly optimistic. As reported by Reuters, Mr. Chang is planning to break ground on a new US $1.2 billion foundry fab in Singapore. The new manufacturing plant, which is part of the joint venture between Taiwan Semiconductor, Philips Electronics, and EDB Investments of Singapore, is expected to begin production in December 2000. His company presently has two foundry fabs under construction in Taiwan and an over 67 percent interest in WaferTech, a US $1.5 billion newly constructed foundry fab in Camas,Washington.

Although TSMC 200 mm wafer fabs are now running at 90 percent capacity according to Mr. Chang in Electronic News, TSMC net sales are still  descending. All bets are on and stakes are high for Taiwan Semiconductor with such a large excess manufacturing capacity. If the chip business turns around this year as speculated, Taiwan Semiconductor could end up to be one of the big winners. Taiwan Semiconductor, with an estimated 16 percent of the Taiwanese IC market share in 1998, is followed by United Microelectronics Corp. (UMC) Group, and Windbond Electronics Corp with approximately 6 and 5 percent market share, respectively.

Tough Competitors from Abroad - Key direct competitors to the Taiwan semiconductor foundry business are the US's IBM Blue Logic Technology, Singapore's Chartered Semiconductor Manufacturing Ltd., the world's third largest dedicated chip foundry and Tower Semiconductor which was established as a joint venture of Data Systems & Software Inc., The Israel Corporation Ltd., and National Semiconductor Corporation.

IBM Blue Logic Technology, which offers a broad range of proprietary state-of-the art designs and manufacturing to their customers such as copper wiring, interlayer low-k dielectric and silicon-on-insulator (SOI) technologies, is considered to be the most advanced semiconductor foundry in the world. In comparison to Taiwan's foundry companies, which only have a low-labor cost advantage, IBM could cut down wafer manufacturing costs and prices charged to their customers by switching to silicon-on-insulator technology.

The SOI technology allows IBM to cut chip processing steps by one-half, compared to the conventional process. Dell Computer, the world's largest direct PC manufacturer, recently signed a long-term purchasing pact, valued at over $US 16 billion, with IBM. Customized microchips with IBM's copper, SOI, and other advanced technologies were included in the purchasing pact. Other "fabless" component manufacturers and chipmakers who seek leading-edge chip technology could follow soon.

The announcements by Motorola, Hewlett-Packard (HP) and Chartered Semiconductor Manufacturing, to form a technology and manufacturing alliance and the startup of the Chartered Semiconductor Partners (CSP), a joint-venture company between Chartered and HP could send a signal to Taiwan's foundry companies that a tough time might be ahead. According to Reuters, Chartered and CSP will receive the next three generations of the HiPerMOS technology roadmap from Motorola, beginning with 0.15-micron. 

Mr. Barry Waite, president and CEO of Chartered Semiconductor Manufacturing stated in a Reuters report that as part of the agreement, a new facility in the northern part of Singapore with a 35,000 wafers a month capacity will start production of chips in the second quarter of 2000. The agreement could advance Chartered to become Motorola's key supplier ahead of Taiwan Semiconductor and UMC in the next few years.

At the present time, Chartered already has a joint venture with Lucent Technologies, the communications equipment giant. Silicon Manufacturing Partners (SMP), the Chartered and Lucent joint-venture 200 mm wafer fab in Singapore, is capable of producing 26,000 wafers a month, according to Electronic News. The "wannabe" DRAM supplier strategies developed by Taiwan's foundry companies could face strong competition from South Korean Samsung and Hyundai Electronics as the South Korean chip business begins to recover. Micron Technology, who previously complained to the U.S. government about the "DRAM chip dumping practice" by foreign chipmakers, could again raise a similar issue with Taiwan's foundry companies.

Declining Revenue and Negative Net Income Growth - An increase in the competitive environment, erosion in wafer prices and massive spending on new fabs and chip manufacturing equipment, have sent the net income growth of Taiwan's foundry companies into a negative spin.

According to Semiconductor Business News, Taiwan's chipmakers are extremely aggressive in their willingness to invest, compared to other cautious semiconductor companies worldwide. Bill McClean, president of IC Insights Inc., a semiconductor research firm based in Scottsdale, Arizona, estimated that Taiwan Semiconductor and UMC alone spent close to $2 billion last year on chip manufacturing equipment.

Without clear visibility regarding the outlook of the chip business and with increasing research and development costs, which are approximately 6 to 7 percent of sales, we believe that the net income growth for Taiwan's foundry companies could remain in negative territory throughout 1999. Anticipating the continuation of uncertainty in the PC business, Y2K issues, pricing of chip components and increased pressure from IBM Blue Logic Technology and Singapore's Charter, we don't expect to see a return to healthy positive income growth for Taiwan's foundry companies in 1999 unless the overall chip business has a strong and solid recovery in the second half of 1999.

(Currency Conversion: 1 $US = 33 $NT)