Taiwan’s IC industry grew 12% year-on-year to produce NT$348.5 billion worth of products in the first half of 2003, according to the Industrial Technology Information Service (ITIS). Taiwanese semiconductor manufacturing companies are investing to upgrade technology to improve earnings and widen their lead over worldwide competitors.
Foundry revenues reached NT$134.5 billion in the first half, packaging NT$42.5 billion (NT$50.4 billion if operations of foreign companies were included), testing NT$16.0 billion and IC design NT$77.1 billion. Total output is projected to hit NT$800.4 billion for the full year.
Having learned a lesson from the business slowdown of the past three years, the semiconductor industry is staging a strong comeback. Reversing the past practice of blindly expanding capacity, the companies fully utilized the slow period to improve manufacturing efficiency and intensify R&D operations.
The efforts are beginning to pay off. Advanced production processes have become the key contributor to increasing revenues. Taiwan’s IC companies have not just moved up to a higher technical level, but also further outstripped the pace of competitors from other countries.
Top-notch chipmakers slug it out with tech upgrading
IC Insights forecast that global foundry services will grow 28.4% to reach US$14.0 billion in 2003. Production value is expected to continue increasing to US$20.4 billion next year. Although the market will take a dip in 2005, the CAGR (compounded annual growth rate) for the sector from 2002 to 2007 will remain high at around 24%, more than double the 10% rate for the overall semiconductor market.
Source: ITIS, compiled by DigiTimes, July 2003.
Source: SICAS, compiled by DigiTimes Research, August 2003.
Taiwan’s foundries continue to maintain the premier role on the world market. Taiwan Semiconductor Manufacturing Company (TSMC) chalked up net sales of US$2.571 billion in the first half of 2003, compared with the US$1.142 billion of United Microelectronics Corporation (UMC). According to IC Insights, they held a respective 51% and 25% of the global foundry market.
Multinational IDM (integrated device manufacturer) giants like IBM, NEC and Samsung Electronics have all expressed keen interest in branching out to offer foundry service to cash in on the comparatively higher growth rate of the sector. IC Insights estimates that IDM companies will account for about 20% of the foundry market with about US$2.9 billion in production in 2003.
Among the IDMs, IBM has been the most aggressive in expanding into the foundry business. Armed with its superb R&D capability and intellectual property (IP) patents, IBM has given considerable pressure to both TSMC and UMC. The strong IP database supporting the IDMs’ forays into the foundry business has moved the key players’ R&D capability to center stage in the escalating fight in foundry services in the major league. The maintaining of unmatched manufacturing process and technical capability has become a crucial factor to attract and keep important customers.
Like IBM, both TSMC and UMC have been extremely active in developing advanced manufacturing processes, which are gradually becoming major revenue sources. In the second quarter of 2003, revenues from 0.13-micron processing contributed 17% of TSMC’s revenues, compared with 21% from 0.15-micron processing, 24% from 0.18-micron, 20% from 0.25-micron, 9% from 0.35-micron and 9% from 0.5-micron. The share from 0.18-micron processing hovered between 21% and 25% during the past year. But the share from 0.25-micron process shrank from 27% to 20% while the proportion of 0.35- and 0.5-micron slid from the double digits to only 9%.
Concerning UMC’s revenue structure, revenues from 0.13-micron processing accounted for 6%, compared with 8% from 0.15-micron; 24% from 0.18-micron; 22% from 0.25-micron; 28% from 0.35-micron; and 12% from 0.5-micron. The proportion of UMC’s revenues from advanced technology is not as high as TSMC’s, but the trend towards greater reliance on more advanced processes is the same.
Source: companies, compiled by DigiTimes Research, August 2003.
Second-tier chipmakers entangled in price war
Chartered Semiconductor Manufacturing, the world’s third-largest foundry, reported revenues of US$3.05 million for the first half of 2003 for a global market share of 6%, followed by Dongbu Anam Semiconductor with US$175 million for a 4% share. Other companies like Semiconductor Manufacturing International Company (SMIC), Jazz Semiconductor (a spin-off from Conexant Systems), X-Fab Semiconductor Foundries, Silterra Malaysia and 1st Silicon have market shares of only 1-2% each.
Under mounting pressure from the “Big Two” (TSMC and UMC), the second-tier foundries are seeing the continuous erosion of their market shares. Realizing their inability to compete head-on with the two market leaders in technical advancement, the smaller companies have resorted to price-cutting for products of mature production processes to lure customers. Chartered quoted its 8-inch mixed-signal wafer produced on 0.25-micron processing at US$800. SMIC’s prices for SRAM chips on 0.25-micron process averaged between US$500 and US$700. The quotes represent a difference of 20-25% compared with US$1,000 quoted by TSMC and UMC for wafers generated with 0.25-micron process.
For the first half of 2003, third-ranked Chartered has only a quarter of the revenues of second-place UMC. Unable to compete with TSMC and UMC on technology, Chartered mainly targeted other second-tier companies like SMIC, Dongbu Anam and Silterra. In the absence of major breakthroughs in technical R&D and expanding production capacity, it is difficult for these companies to sway the current position enjoyed by TSMC and UMC with their price-slashing strategy.
Steep rise in demand for PBGA packaging
Taiwan’s packaging and testing enterprises used to rely heavily on foundries. But the prolonged business slowdown from 2000 to 2003 prompted IDMs to suspend developing advanced packaging techniques and expanding capacity. Their pace of farming out packaging orders was even faster than their outsourcing of wafer production. Even before the semiconductor market staged a recovery, the IC packaging and testing enterprises started showing signs of revitalization in the third quarter of 2002. The demand for packaging with advanced techniques was especially strong, reflecting the companies’ dwindling reliance on foundries.
Thanks to the inflow of orders from the IDMs, Siliconware Precision Industries Ltd. (SPIL) and Advanced Semiconductor Engineering (ASE) were approaching full capacity in the third quarter of 2002. The gradual upgrading to plastic ball-grid array (PBGA) packaging is one of the factors for the sustained increase in demand for IC packaging services.
Packaging companies based in Taiwan actually did not reap a fair share of profits even though IDMs started releasing PBGA packaging orders in 2002. The business slowdown also dragged down the packaging prices. But the rising demand for PBGA packaging in 2003 is induced mainly by the switching to the more sophisticated packaging method for chips with 100 to 200 pins – like LCD controller and wireless communications chips – which used to use quad-flat packaging (QFP). The increase in application ICs induced the demand for PBGA packaging capacity, forcing companies to vastly expand to fulfill the orders from customers. Companies that have completed installation of facilities for PBGA packaging services are poised for the massive gains by taking advantage of the perking demand.
Flip-chip packaging holds the key for 2004
There is an interlocking relationship between the development of Taiwan’s semiconductor industry and PC companies. This can be reflected from the ratio of PC business in the overall revenues of ASE and SPIL. PC products contribute about 30% of ASE’s revenues and a much higher level of almost 50% at SPIL’s. Flip-chip packaging technology will play an even more crucial role for Taiwan’s packaging companies since the new tech will be widely applied for graphics chips and chipsets.
Taiwan is the only place possessing the complete flip-chip packaging chain in the world. Companies in Taiwan are engaged in all aspects and stages of the operations, ranging from solder bump, flip-chip load board and flip-chip packaging. They have also achieved economies of scale. Taiwanese packaging firms’ flip-chip orders come mainly from companies supplying graphics chips, computer chipsets and FPGA. There is a projected global demand for packaging 20 million graphic chips and chipsets in 2004. Taiwan is expected to enjoy a 30% share.
Gradual return to reasonable testing charges
The deep business slump in the current business cycle has thrown IC testing companies into disarray. Many client companies chose to cut corners by skipping certain testing procedures, forcing testing firms to hold down their prices to stay alive. Quite a few small- and medium-sized testing companies collapsed or were acquired by larger enterprises. The initial business recovery has created demand for testing service, but the difficulty of raising prices has prevented many companies from installing new equipment to expand capacity. The short supply gives the well-established testing firms the opportunity to negotiate for more decent service charges.
Companies engaged in DRAM testing took the brunt of the business slowdown. Since prices for DRAM chips at one point fell below manufacturing costs, companies sacrificed certain testing steps to reduce costs. This further aggravated the situation faced by testing firms. Yet the resurgence in demand for DRAM chips created room for price rises, giving testing companies the opportunity to catch their breath.
Advantest of Japan continues its monopoly on the DRAM testing equipment market in Taiwan. In early 2003, the charge for IC testing employing T5581 equipment ranged between only NT$3,500 and NT$4,000 per hour. But the price rose to the more reasonable level of NT$5,000 in August, shielding testing companies from taking a loss while offering the services. The charges for testing using T5585 equipment rose to NT$7,000 an hour in early September, but the reasonable price level should be set at over NT$7,500. The rising costs for equipment and the uncertainty in DRAM chipmakers’ acceptance of higher charges have all added pressure to testing firms concerning their procurement of new equipment and business operations.
The more advanced T5592 and T5593 testing equipment commands more than NT$200 million each unit and currently only three sets of T5592 equipment are in operation in Taiwan. It should be reasonable to levy a testing charge of close to NT$20,000 per hour.
In addition to DRAM chips, the transmission speed of all ICs has been ever accelerating. This underscores the need for more advanced testing equipment, which carries much higher price tags. To boost the capacity for advanced testing, companies in Taiwan should first enhance their “capital management.” Testing companies can keep pace with demand for advanced testing services from customers only by achieving better capital management and more effective cost control.
Article translated by Ken Liu and edited by Zoran Pavlovski
