The foundry model of making computer chips to order is failing, United Microelectronics Corp (UMC,
"The era of high margins for the current foundry model has gone forever," Tsao said. "Even the world's largest player cannot fight this fate," he said, citing the example of rival Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), where net profit has dropped by more than a quarter during the past two years. Pressure on profit margins will only increase as more foundries open across Asia and the US, he said.
The cost of staying ahead of the competition by continually upgrading expensive chipmaking equipment is forcing high-tech companies to increasingly outsource the manufacture of computer chips to specialist chip manufacturers, or foundries. TSMC and UMC are now the world's largest foundries, but TSMC has a six-month technological advantage over UMC, analysts said yesterday.
Instead of mirroring TSMC's model of making computer chips for a growing list of customers, Tsao proposed UMC build a network of partnerships between different tech companies and his foundry.
Analysts were unsure about Tsao's new model. "This model is confusing to me," said Alfred Ying (
Tsao needs time to work out his portfolio of partners, Ying said, and warned that the partners needed to share UMC's vision -- pledging to place orders exclusively with UMC -- or there would be nothing to stop them from benefiting from UMC's support, then switching to a rival foundry further down the line.
With UMC relying on a smaller customer base for income in the future, losing a key client could cause serious damage to the company's bottom line, Ying said.
UMC needs to convince the market they are on the right track, another analyst said.
"This is not a clear strategy to investors at the moment," CLSA technology analyst Cheng Ming-kai said. "UMC will have to point out how investors will benefit."
Yesterday Tsao also cited UMC's relationship with former rival Silicon Integrated System Corp (
The comments were met with mixed reactions. "With full support, UMC's customers can grow faster than before, and then UMC can benefit from more orders from them," Ying said. "However, the situation at Silicon Integrated will give other similar companies cause for concern."
UMC has been buying shares in Silicon Integrated since December. UMC and its subsidiaries now hold about 30 percent of Silicon Integrated's shares, a source at the company said yesterday.
On Monday, UMC's chief executive officer John Hsuan (
Cheng agreed that Silicon Integrated had already benefited from its partnership with UMC, gaining more orders and saving money on investments, but speculated the takeover might be a precursor of more to come.
"UMC probably has a controlling interest in more companies than we know of," Cheng said. "I expect we'll hear of a lot more mergers in the next few months."
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