Chang says TSMC may slow to 50%

Morris Chang (張忠謀), chairman of Taiwan Semiconductor Manufac-turing Co (TSMC, 台積電), was quoted in the latest Forbes Global magazine as saying his company's utilization rate is likely to fall "very close to 50 percent" or even slightly lower in the next few months.

A company's utilization rate describes how much of its production capacity is being used. The low rate indicates microchip orders are down for TSMC.

Chang also said he expects the semiconductor market to reach bottom "in the April-May time frame," but that the recovery "may not be a swift and brisk one."

The chairman of Taiwan's largest semiconductor foundry, which produces chips made to the design specifications of its customers, expects the third quarter of 2001 to be better than the second, and the fourth to be better than the third, leading to a long slow recovery into next year.

Semiconductors firms, along with other technology companies worldwide, hit rough times late last year. Salomon Smith Barney's Jonathan Joseph, made famous by calling the semiconductor industry downturn long before anyone else did last year said last week the industry has already hit bottom.

The statement by Chang supports Joseph's theory, but a slow uptake in the semiconductor foundry industry could cause already dwindling profit levels to be erased completely at TSMC.

"It could mean operating losses for TSMC in the second quarter," said Rick Hsu (徐禕成), senior technology analyst at Nomura Securities Corp (野村證券).

When the TSMC chief in February announced the utilization rate of his firm had fallen from 100 percent in the fourth quarter last year down to 70 percent, its stock immediately shed 7.7 percent over the next two two trading days to end at NT$90.5 per share. The stock price has trickled down another 7.1 percent since that time to close yesterday at NT$83.5 per share.

Part of the reason the stock dropped so sharply is the weight investors put behind comments made by Chang. When he said his firm's utilization rate would fall to 70 percent for the first quarter of this year, it came very close, hitting around 68 percent. His accurate estimates and market predictions have made him into an industry sage looked to for guidance.

Nomura's Hsu pointed out that since both TSMC and rival United Microelectronics Corp's (聯電) stock prices have fallen so much both are very attractive from a valuation point of view. The trouble is it will be difficult to predict when prices may begin to rise again.

With the TSMC chairman saying the industry bottom is coming in the next few months followed by a slow recovery, there is little reason to buy now when share prices could go nowhere. On top of that, if utilization rates do not pick up, TSMC could run an operating loss for the year.

Semiconductor manufacturing plants are expensive to run -- each plant can cost between US$1.5 billion and US$3 billion -- therefore any losses garnered by low utilization rates would add up quickly, according to another analyst.

In other industries, cutting back on production can result in some savings in labor, electricity and other costs. In the semiconductor foundry industry, those costs are negligible next to the cost of the factory, making losses build quickly when profit levels are down.