Richard Redelfs, whose company places all its orders with Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), says he's never had better offers to switch from the world's biggest supplier of made-to-order chips.
Shanghai-based Semiconductor Manufacturing International Corp (中芯國際集成電路) is "talking about prices as much as 50 percent less," said Redelfs, chief executive officer of Atheros Communications Inc. He also "hears a lot" from rivals in Taiwan and Singapore.
A glut of chipmaking capacity -- especially since China entered the "foundry" market last year -- has created a buyers' market for chip designers such as Atheros. That may eat into the 59 percent market share of TSMC, which this week reported third-quarter profit was half analysts' forecasts. It may have an even greater impact on the profits of smaller rivals.
United Microelectronics Corp (聯電) of Taiwan may trim its profit target when it reports earnings on Tuesday, according to analysts. Singapore's Chartered Semiconductor Manufacturing Ltd (特許) reported its seventh-consecutive quarterly loss today.
"Chartered suffers the most," said Samir Mehta, who counts shares in Taiwan chipmakers among the US$2 billion he helps manage at Lloyd George Management. "So do the new rivals as customers would prefer TSMC given its reliability."
TSMC said this week as much as half of its capacity will be idle in the fourth quarter. Chartered forecast today its use of production capacity will fall to 35 percent in the fourth quarter from 39 percent in the third quarter.
Atheros isn't the only chip designer hoping to take advantage.
"We expect our foundry to cut prices in the fourth quarter," said Tsai Ming-kai (蔡明介), Chairman of MediaTek Inc (聯發科技), the world's biggest designer of chips for DVD players. MediaTek's chips are manufactured by UMC.
UMC, which has a 24 percent market share, "might offer a discount" to customers for increased orders, company spokesman Alex Hinnawi said. "There are incentive programs," he said, without elaborating.
The steepest price cuts are coming from China.
Semiconductor Manufacturing, which started production last year, is offering the lowest prices in the industry because it needs to fill up empty production capacity and recoup the cost of opening two multibillion dollar chip plants.
The Chinese and Shanghai governments, which have designated chipmaking as a strategic industry, have provided tax breaks that include a local value-added tax of 4.5 percent compared with 17 percent for imported chips.
Semiconductor Manufacturing also enjoys other incentives from the government that have saved the company about US$750 million. The company is exempt from income tax for five years, then subject to half the tax rate for the following five years.
Not all of TSMC's business is under threat.
Atheros, whose chips are used in wireless Internet links for notebook computers, uses TSMC's older technology to make chips with transistors measuring 0.25 micron in width.
Such chips cost less than those made with TSMC's 0.13 micron knowhow, which is the most advanced in the world.
TSMC said 0.13 micron technology accounted for 5 percent of its sales compared with 27 percent for 0.25 micron technology in the third quarter. The company this week said it expects average selling prices to rise in the fourth quarter as it sells more chips that use its most-advanced technology.
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