The End of Taiwan's Chip Dip?

If you're looking for signs that the tech recession is finally over, talk to F.C. Tseng, deputy CEO of Taiwan Semiconductor Manufacturing Co. (TSM ), the world's premier foundry, or made-to-order chipmaker. For TSMC, 2001 was a year to forget. It barely eked out a profit, and its chip-fabrication plants operated at less than half-capacity.

Now, the plants are getting busy again. While demand for lower-end chips remains sluggish, Tseng says TSMC fabs that produce the most sophisticated types are humming. Tseng is completing a new, $3 billion plant to produce state-of-the-art 12-inch silicon wafers. "We will definitely speed up," says Tseng. "Our business is getting stronger." With orders coming in from semiconductor companies in the U.S., Europe, and Taiwan, TSMC profits are likely to bounce back strongly this year.

Production is also accelerating at TSMC's smaller Taiwan competitor, United Microelectronics Corp. (UMC ), and at the world's No. 3 foundry, Chartered Semiconductor Manufacturing Ltd. (CHRT ) of Singapore. The shouts of joy, however, are not yet raising the rooftops. "It's a slow recovery," says Dickson Ho, managing director at Morgan Stanley & Co. in Taipei.

With new rivals in China and Malaysia competing for business at the low end, the top foundries plan to stay on top by investing in more advanced technology. That includes spending billions on fabs to produce 12-inch wafers or on equipment to carve circuits with widths narrower than .13 microns. Most of the also-ran foundries can't match that level of technology--and neither can many brand-name chipmakers in the U.S. "The [leading] foundries are now on the frontier of technology," says Daniel Heyler, a chips analyst with Merrill Lynch & Co. in Hong Kong. The emphasis on the higher-end, more expensive chips has made profits possible despite a worldwide glut. Average selling prices increased 5% in 2001, Heyler says.

To maintain their technological and marketing edge, Taiwan's foundries are cementing alliances with their customers in the West. In February, UMC announced plans to build a new 12-inch fab in Singapore together with microprocessor maker Advanced Micro Devices Inc. (AMD ) of the U.S. It will adjoin another fab UMC operates with Germany's Infineon Technologies (IFX ).

TSMC isn't sitting still. In early March, the company announced a joint effort with The Netherlands' Royal Philips Electronics and STMicroelectronics (STM ) of Geneva to research the best way to make chips with circuits narrower than .10 microns. For now, the alliance is just for research and development, but TSMC's Tseng hopes it "will pave the way to some kind of manufacturing relationship."

When it comes to tech prowess, Chartered is catching up by accelerating R&D spending. "We used to be three years behind," says Bruno Guilmart, Chartered's president for Asia-Pacific and Japan. But by yearend, "we will be on a par with the Taiwanese guys." Chartered has one big advantage over its rivals: The Singapore company can move freely into China, where demand for lower-end chips is soaring. Taiwan's government still prohibits TSMC and UMC from expanding into that market. In December, Chartered took a stake in a new Shanghai foundry and is actively drumming up business from Chinese companies.

Taiwan President Chen Shui-bian sees the danger and is preparing to allow TSMC and UMC to shift some low-end production to China. But the fear that China will blunt Taiwan's tech edge may be overblown. Morgan Stanley's Ho says the foundries have shown that, at the high end, "no one can touch them." If this is the beginning of a worldwide recovery, the foundries are not likely to the miss the party.

By Bruce Einhorn in Taipei

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