A Born Gambler Plays His Chips Right

UMC's Robert Tsao is well-positioned for a market upturn

Robert Tsao faced his share of skeptics when he set out to transform United Microelectronics Corp. four years ago. Having launched UMC as a designer and producer of integrated circuits in 1980, he wanted to make it a foundry, or contract manufacturer that turns out chips from other companies' designs. Doubters said he was too ambitious. But Tsao had a hugely successful predecessor: Taiwan Semiconductor Manufacturing Co., Taiwan's largest chipmaker and the industry's first foundry. "I felt the foundry model would be more competitive," Tsao says today. "As for TSMC, we watch each other very closely now."

Small wonder. UMC may be No. 2 behind pioneer TSMC, but the gap is closing. Tsao has expanded UMC's capacity in higher-end chips where TSMC isn't dominant. Last year he set up a Japanese beachhead by acquiring Nippon Steel Corp.'s chip subsidiary. He has managed UMC's transition amid a long slump in the IC market. But he's well-positioned for an upturn already under way. "It's a `me-too' model," says analyst Matt Cleary of ABN-Amro Asia Ltd. "But Tsao was pragmatic enough to recognize he'd be better off going in that direction."

Pragmatic is putting it mildly. At 52, Tsao cultivates his image as a street-smart local who plays by his own rules. And UMC is known as a maverick in Taiwan's famously freewheeling style--a reputation that worries some investors and customers. In shifting to foundry production, UMC spun off several divisions into joint ventures with U.S. companies. "It could become unfocused," says a local design-house manager. "It's hard to know what's really going on."

SOARING STOCK. There's no arguing with some of Tsao's strategic choices. Last year, as TSMC cut outlays, Tsao spent $1.3 billion on equipment that puts UMC on a par with its rival in processes that produce superfast chips. "We decided to go all out where TSMC has no clear leadership," says Tsao. The strategy is paying off. Tsao says he has already brought in new business from Silicon Integrated Systems, Cirrus Logic, and Sony.

Tsao has been just as aggressive raising money. After four bond issues in three years--two in the Eurobond market, two at home--UMC says it has a $1.8 billion war chest, even after its recent spending spree. And while Tsao paid just $12.5 million for a 56% stake in the Japanese acquisition, its stock price has jumped from $400 per share to $6,700 on Tokyo's over-the-counter market. The renamed Nippon Foundry Inc. already has a deal to make advanced chips for Kawasaki LSI, the IC unit of Kawasaki Steel Corp.

Tsao and 67-year-old Morris Chang, TSMC's visionary founder and chairman, are a study in contrasts. While Tsao earned his degrees in Taiwan and stands as a local boy made good, Chang is a U.S.-educated patrician who spent years at Texas Instruments Inc. and General Instrument Corp. Chang has stacked TSMC's ranks with American-trained managers and prefers reliability and reputation to the hardball tactics UMC is known for. And while Chang stays clear of comparisons, Tsao revels in them. "Morris is older--and a very capable manager," he says. "But I'm more of a strategist."

Tsao may have an argument there. UMC cut prices last year by up to 30% and switched some capacity to lower-end chips to keep production lines busy. TSMC hesitated--and watched capacity utilization fall to 60%. TSMC will do well this year. Analysts expect earnings to grow 27%, to $590 million, on a 21% rise in revenues, to $1.8 billion. But UMC's performance is likely to mark another contrast. Its earnings are forecast to double, to $210 million, on a 40% rise in revenues, to $748 million.

Tsao has plenty of critics. Investors complain about poor transparency. And UMC can't shake rumors that it manipulates its share price. "We don't do that," Tsao says flatly. As to Tsao's claim that he has overtaken TSMC in some technologies, Chang begs to differ. "I think we are still very much ahead," he says.

There is one point upon which Tsao and Chang agree: They will both benefit as the outsourcing trend deepens. UMC isn't likely to overtake TSMC anytime soon. But as a competitor, UMC can't be ignored.

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