Why Taiwan's Powerchip Is Juiced

A grim 2001 hasn't ruffled the chipmaker's CEO Frank Huang, who's building a $2 billion plant. This year, he says, will be better and better

By Bruce Einhorn

Like many manufacturers of memory chips, Taiwan's Powerchip Semiconductor had a brutal 2001. The company, which has an alliance with Mitsubishi Electric of Japan, saw sales plunge 80%, to $320 million, and losses are expected to come in at about $175 million.

With ailing Korean chipmaker Hynix driving down prices, smaller Taiwanese players were hurting badly -- and some started talking about whether companies like Powerchip could even survive. Now, Powerchip Chairman and Chief Executive Frank Huang is happy to say reports of his company's death were greatly exaggerated (for more on Powerchip and the Taiwanese economy, see BW, 1/28/02 "Taiwan: Lots of Pain, Not Much Gain"). He recently spoke with Bruce Einhorn, BusinessWeek's Hong Kong correspondent. Edited excerpts of their conversation follow:

Q: What's the outlook for the Taiwanese economy in the new year?


I'm optimistic. To me, this year Taiwan looks pretty good. Overall, the economy is picking up, the stock market [has risen], and the unemployment rate is starting to reverse.

Q: And how about the semiconductor business?


The industry is beginning to recover. Last month, Powerchip was doing something like $20 million. This month, we are looking for somewhere [around] $38 million. This month we can start to make a profit again, and quarter by quarter, this year will be better and better.

Q: Why?


First of all, the recovery of chip pricing. DRAM prices are about $3 for 128 megabytes. In December, prices were about 80 cents to $1. Also, demand is increasing: PC sales looked pretty good in the Christmas season. And we have a lot of confidence in the U.S. economy. Interest rates are so low, and things are looking good with the [progress in the war on terrorism].

Q: You had to adjust your plans to raise money from capital markets following the terrorist attacks on the U.S. Have you readjusted them now thanks to this improved outlook?


We had a plan for the last quarter of 2001, but September 11 stopped everything. After that, the investment community said companies should watch their cash position and delay construction, which I did.

Q: And now?


Now I want to make up the time we lost. [Our goal] is to raise $300 million to $400 million [from investors] between the end of the first quarter and the start of the second quarter, and everybody thinks that's possible. There's a lot of cash in the investment community, interest rates are low, and our [likely] return to profitability gives us a better position. It's all heading in a positive direction.

Q: Why do you need the money?


To help complete phase one of our 12-inch fab [a facility to make 12-inch wafers in Hsinchu, Taiwan]. It's a $2 billion project, and for phase one we need $1 billion. It should be completed by the end of 2002, and will produce 15,000 wafers per month. We'll complete it by the second quarter, and by the fourth quarter we'll start mass production. That was my plan before September 11.

Q: What's the reason to spend so much money on a fab?


It's a very important vehicle for our future. We are actually ahead of Japan in the 12-inch biz. Micron is planning one, but I don't think they have it -- they're too busy with [a proposed alliance with] Hynix. We can put Taiwan in a competitive position. [With] the most advanced fab, we can be at least 30% more cost-efficient. We have 6% market share now, and we can increase that to 8% to 10% with the 12-inch fab.

Q: There's so much talk about China's semiconductor industry (see BW, 1/21/02, "China's Chip Binge"). Are you worried that the Taiwanese will find themselves eclipsed by Chinese rivals?


We still think Taiwan is in a very competitive position. We are capable, we own the technology, and we're cost-efficient.

Q: President Chen Shui-bian's government had indicated it was going to ease the ban on Taiwanese semiconductor manufacturers investing in China in December. But then nothing happened. Is this issue finished?


The China market is growing. [Taiwanese companies] can't miss out on it -- we have to be there. There's no reason that the foundries should not be there. The ranking officers in the government all know that.

But for now, no one will say so openly. Whatever they say, the don't want to make enemies. People are very careful. They don't want to make decisions now, they don't want to be part of a decision until [the government's] position is clear. [But eventually] the government will allow it.

Q: You say there's no reason that foundries like Taiwan Semiconductor Manufacturing and United Microelectronics shouldn't be allowed to go to China. But what about memory-chip producers like Powerchip?


The memory business in Taiwan is very competitive. It requires the most advanced, state-of-the-art technology. [Taiwanese investment] will start with TSMC and UMC moving old 8-inch equipment to China. It's not very economical to build a new [8-inch] fab [in Taiwan], but it's very economical to move old equipment and manufacture products that fit China's needs.

Q: So when do you see a policy breakthrough taking place?


After the new Cabinet [takes office in Taipei], it will be O.K. This quarter, things will happen.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

Edited by Patricia O'Connell

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