Taiwan's Chipmakers Embrace Bold Expansion Plans Amid Robust Market Recovery
2010/05/17 | By Ken LiuBoth silicon foundries and memory-chip makers in Taiwan have at least one thing in common this year: the challenge of adding capacity to handle a deluge of orders-a sharp contrast to the situation at the height of the global economic downturn in 2008.
No.1 foundry Taiwan Semiconductor Manufacturing Co. (TSMC) plans to spend US$4.8 billion on expansions this year, almost 80% more than the capital it laid out last year. United Microelectronics Corp. (UMC) has decided to spend US$1 billion, nearly double its 2009 expenditure. The island's dynamic random access memory (DRAM) chipmakers plan to raise an estimated NT$138.9 billion (US$4.3 billion) to finance their expansions their plans.
During the worst days of the economic meltdown, most of the island's high-tech companies, including chipmakers, were forced to cut costs by unpaid leave programs and moratoriums on expansion investment.
Most of the unpaid-leave programs were put in place in the third or fourth quarter of 2008 and it was not until the second quarter of last year that most such programs were ended.
Roaring Back
Business growth has accelerated into the first quarter this year. TSMC earned NT$33.66 billion (US$1 billion) in after-tax net income, or NT$1.3 per share, in the first quarter, skyrocketing 2059.8% from a quarter earlier, on consolidated revenue of NT$92.19 billion (US$2.8 billion).
Based on the after-tax net income result, TSMC is recognized as the best money maker of all Taiwan's publicly held companies in the first quarter of the year, earning an estimated NT$570 million (US$17.8 million) a day.
Consolidated revenue for the first quarter represented a 133.4% increase over a year earlier and a 0.1% gain from a quarter earlier. Compared with results for the fourth quarter last year, the first-quarter net income and EPS represented a 3.1% growth.
As demand for TSMC's wafers remained strong, the silicon-foundry supplier shipped 2.5 million 200mm equivalent wafers in the first quarter, increasing 4.8% from a quarter earlier. The higher Q1 shipments relative to the Q4 level, is a reversal of the normal seasonal pattern, company executives said.
They added that wafer sales from consumer applications grew 9% in the first quarter from a quarter earlier while the sales from communications applications inched up 2% in the same period. Sales from computer applications declined 3%.
"Business continues to stay robust. Relative to the first quarter, consumer and communications segments in the second quarter will persistently increase whereas computer segment will remain flat," commented Lora Ho, TSMC's vice president and chief financial officer. "Based on our current business outlook, management expects overall performance for this quarter to steadily improve."
In the second quarter, the company projects revenue at NT$100-102 billion (US$18 billion), with gross profit margin increasing to 48-50%, and operating profit margin to swing between 36.5% and 38.5%. Industry executives estimate growth drives will mainly come from Qualcomm, Nvidia, AMD-ATI, and Altera, which have increased contracts to TSMC for leading-edge processes.
Bottlenecks
During a recent high-profile technology forum held in March in Taipei, executives of Broadcom, Altera, Qualcomm and Nvidia visited TSMC to ask for more leading-edge foundry capacity for their contracts as strained production capacities at foundry suppliers began taking toll on shipments.
These design houses were desperate for leading-edge foundry processes, notably of the 65/55 and 45/40 node type, for their latest chips and asked TSMC to complete installation of additional capacity as soon as possible.
TSMC Chairman and Chief Executive Morris Chang has given these heavyweight customers his word that the company will quickly add new production lines so that some new capacity will be available in the second quarter.
According to chip-making equipment suppliers, after TSMC resolved trouble caused by low output of its 40-nm process Nvidia immediately secured a large part of TSMC's 40-nm capacity for its chips, including the DirectX10.1 graphics chip and the supporting Fermi chip for DirectX11. Consequently, many other design houses like AMD-ATI, Broadcom and Altera have been wrestling TSMC supply shortages.
Robust demand has forced TSMC to extend lead-time for the second quarter to 10 to 12 weeks from the normal eight to 10 weeks. It also has pushed up the ratio of revenue contributed by advanced processes at the company. In the first quarter of this year, 0.13-micron process and below accounted for a combined 71% of the company's wafer revenues, with 0.11-micon and 0.13-micron nodes constituting 13%, 90-nanometer node comprising 17%, 65-nanometer 27% and 40-nanometer 14%. By the end of 2009, TSMC's 40-nm process capacity put out around 100,000 wafers, representing over 80% of global supply of the process.
Revenue from 40-nm process is estimated to increase to NT$20 billion (US$625 million) in the fourth quarter this year alone, accounting for around 20% of TSMC's total revenue. It represents an estimated 150% increase over the same period of last year and compares with NT$9 billion (US$281 million) the leading process contributed in the first quarter of 2010.
Chang recently pointed out that the company's supplies of 0.13-micron process and below are already 30-40% short of demand.
The shortage, he added, would grow as many integrated device manufacturers (IDMs) have begun increasing outsource to pure manufacturers. IDMs contributed 15.7% of the company's annual compound growth rate (ACGR) between 2003 and 2008.
TSMC will spend its 2010 budget mostly on expansions at 300mm wafer fabs providing 40/45-nm processes and construction of new 300mm fabs in addition to deployment of 28/20-nm process.
Once all of TSMC's 2010 expansions are completed, the company's total output will surge to 11.24 million 200-mm equivalent of wafers by the end of this year, with output using advanced process technologies at its 300-mm fabs estimated to increase by 35% to account for half of the company's total wafer revenues.
With foundry contracts surging, Chang recently forecast that the global revenue of the chip-foundry industry will increase by 36% this year, higher than the 22% pace forecast for the semiconductor industry as a whole.
Some institutional investors said that TSMC's plans to ease tight capacity also include acquiring 300mm tools from integrated device manufacturers (IDMs), chipmakers supplying brand-name chips. The foundry giant has reportedly approached STMicro, Infineon, Fujitsu and Toshiba over deals of acquiring their tools.
Upping the Tech at UMC
UMC is also busy working on expansion projects. According to company chief executive officer (CEO), S.W. Sun, the company's 2010 budget will mainly fund expansions of its 45/40-nm process capacities at Fab12A in Southern Taiwan Science Park, expansions of 65/55-nm process capacities at Fab12i in Singapore and deployment of 28-nm process capacity. Industry executives estimate that once the expansions are completed, the company's revenue for this year will grow over 36% from last year.
From the second quarter, production using 65/55-nanometer processes and below will increase to account for approximately one quarter of the company's revenue. Production using 45/40-nm logic processes will account for around 3% of the company's revenue next quarter and the company's 28-nm gate-last high-K metal gate process will begin a pilot run at the end of this year.
Sun says he is optimistic about not only market of this quarter but also market of the second half in light of tightening capacity at his company. Throughout this quarter, the company's capacity utilization rate would likely swing between 96% and 99%, gross profit margin would rise to a 22-year high of 28-29% and wafer shipments would gain 6-9% sequentially.
In the first quarter of 2010, UMC shipped a record-breaking 1.03 million 200mm equivalent of wafers, posting an after-tax net income of NT$3.4 billion (US$108 million), or NT$0.28 per share, slightly higher than expected.
The expansion plans have also involved ambitious hiring of talent. TSMC has announced it will hire at least 3,000 engineers to support its expansion plans while UMC says it will need 1,000 recruits to serve its expansions this year. Both numbers set new highs in the two companies' recruitment history in last five years.
New recruits will increase TSMC's total staff to 25,000 worldwide while increasing UMC's total staff to 12,000.
Memory Loss, Now Gain
After suffering three consecutive years of loss, the island's memory-chip makers have also launched aggressive expansion plans to keep up with a go-go market now. Nanya Technology Corp., Inotera Memories Inc. and Macronix International Co., Ltd. are estimated to raise a total of NT$138.9 billion (US$4.3 billion) or so for expansions throughout this year.
Industry executives point out that strong demand, which sent April prices of contract DRAM chips surging at least 10%, have inundated capacity at memory-chip makers including DRAM makers and makers of NOR Flash and NAND Flash memory chips.
Nanya and Inotera plan to increase DRAM-chip output by 30% this year using 50-nanometer process technology.
Inotera is Taiwan's exclusive DRAM chipmaker to go from 70-nm process production straight into 50-nm territory, skipping the 60-nm stage. Company president Charles Kau says Inotera can produce 2-gigabite double date rate 3 (DDR3) DRAM chips using 50-nm process and sent samples for customer verification in late April.
Kau reports that the company will increase output of 50-nm chips at rate of 10,000-15,000 300-mm wafers a month, with an ultimate goal of turning out 130,000 wafers a month at each 300-mm fab.
In light of the US$365 million of net income Micron Technology Inc. earned in the first quarter, Kau asserts Inotera, a strategic partner of the U.S.-based Micron, will not have much difficulty making NT$100 million (US$3.12 million) a day with its 50-nanometer process technology.
Nanya will ramp up output to 50,000 wafers a month at its only 300-mm fab, up from current 30,000 wafers or so. The company's president, R.C. Lien, estimated 50-nm process to help the company's output increase two folds by the end of this year from last year's level.
Both Nanya and Inotera plan to hire 6-10% more workers this year in conjunction with their expansion plans, making them Taiwan's first DRAM chipmakers to begin hiring after the global economic recovery. Nanya will add a combined 250 R&D specialists and engineers this year to its 4,000 workforce. Inotera plans to recruit 300-400 R&D specialists and engineers, expanding its staff size to 3,500-3,600.
Lien has shown that talent is the key to the company's competitiveness by citing the company's success in migrating in short time to Micron Technology's Stack process from Qimonda's Trench process.
As part of its plan to quickly build capacity to deal with the business boom, flash-memory maker Macronix recently signed an agreement to buy a 300-mm wafer fab from ProMOS Technologies Inc. for around NT$8.5 billion (US$265 million).
Macronix Chairman Minn Wu points out that the recovering economy has given his company enough firm contracts to keep plants humming through next year, and the company will need to build additional capacity to handle the orders. Wu says rather than building new factories, Macronix is acquiring the ProMOS factory to quickly add capacity at a lower cost.
The factory, set to start production in June this year, will begin to produce revenue next year. It is designed to have maximum output of 45,000 wafers a month, an equivalent of 90,000 wafers at a 200-mm wafer fab.
Wu adds that the company will spend NT$15-20 billion (US$468-625 million) over the next two years on expansions and development of 32-nm process technology. An estimated 1,500 recruits will come to serve the expansions. (April 2010)