TSMC's Next Move in China

The Chinese semiconductor industry was hit with a pair of shockers on Nov. 10. Shanghai's Semiconductor Manufacturing International Corp. (SMI) announced that Richard Chang, CEO of China's largest chipmaker, had resigned to "pursue other interests." At the same time, the company revealed it had reached a deal with its bitter rival and the industry's top player, Taiwan Semiconductor Manufacturing Co. (TSM), to settle several lawsuits in the U.S. and China alleging theft of intellectual property. SMIC has agreed to pay $200 million to TSMC as part of the settlement. In a surprising turn, SMIC also announced the Taiwanese company would take a 7.2% stake in SMIC, with a warrant for an additional 2.8%. SMIC took pains to assure outsiders that it will be business as usual, even with its primary foe now on board. "TSMC will not be granted representation on SMIC's Board of Directors…and will not be involved in the day-to-day operations of SMIC," the Shanghai company said in a statement. "TSMC is welcomed as a new shareholder." TSMC's statement announcing the settlement said nothing about buying into SMIC. Instead, TSMC said that, in addition to the $200 million, the Chinese company was going "to provide TSMC with other valuable consideration." A Road to Mainland Markets?The question now is how valuable that SMIC stake might be to TSMC. The Taiwanese company already owns a small fab—or chip factory—in Shanghai, but TSMC Chairman Morris Chang has said demand from mainland chip design houses has been disappointing. "The Chinese foundry market has not developed as fast as we had hoped," Chang said in a Nov. 5 interview at TSMC headquarters in Hsinchu, Taiwan. Most companies are too small to be of much interest to a giant like TSMC, he added: "Of the fabless companies in China, I don't think any of them are more than $500 million in revenue." So why, then, should TSMC now want to own 10% of SMIC? It's possible that Chang has suddenly seen the light about the Chinese market. It's also possible he was trying to mask TSMC's interest in China while negotiations with SMIC were under way. And SMIC, despite its history of losses, could be valuable to TSMC. The Chinese chipmaker has what are known in the industry as 12-inch fabs—the biggest and most expensive type of chip plants, which produce silicon wafers one foot in diameter—in Shanghai and Beijing. And it manages another (owned by a government company) in Wuhan. SMIC also operates less advanced fabs making 8-inch wafers. Under better management, those fabs might be able to turn a profit. And there's no company in the foundry business that knows how to manage fabs better than TSMC. TSMC also might need to expand its SMIC stake to stay ahead of its two biggest rivals. TSMC's main Taiwanese competitor, United Microelectronics (UMC), is in the process of taking over Chinese chipmaker HeJian Technology, although it doesn't have permission yet from the Taiwanese government to go ahead with the deal. Taiwan allows only three companies to operate chipmakers in China—and UMC isn't one of them. Shih-Wei Sun, CEO of UMC, says the company is optimistic that Taipei will change its policy. "We are just waiting for Taiwan's government to lift the restriction," he says. For now, though, "the three spots are occupied, and there's nothing we can do." TSMC's other big competitor is GlobalFoundries, a Sunnyvale (Calif.) spin-off of Advanced Micro Devices (AMD) that is controlled by Abu Dhabi's Advanced Technology Investment. GlobalFoundries has plants in Germany and upstate New York and recently agreed to buy Singapore's Chartered Semiconductor, the No. 3 foundry behind TSMC and UMC. One thing GlobalFoundries doesn't have yet is a foothold in China. By getting a piece of the country's biggest chipmaker, TSMC might looking to make sure GlobalFoundries has to look elsewhere to find a way into the country.

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