Rivals undercut prices of chipmakers

Taiwan's home-grown made-to-order chipmakers are coming under attack from overseas rivals who are competing for a piece of the local OEM market.

US-based International Business Machines Corp (IBM) and its manufacturing partner in Singapore are undercutting Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) and United Microelectronics Corp (UMC, 聯電) in an attempt to steal customers, but the ploy may fail, resulting instead in lower prices all round, analysts said yesterday.

"It is a definite trend that the average selling price of chips is coming down due to competition from IBM and Chartered Semiconductor Manufacturing Ltd (特許半導體)," said Abraham Lu (呂因彰), a chip foundry analyst at HSBC Securities in Taipei.

IBM set up an advanced 12-inch chipmaking fab, or foundry, in New York state last year to take advantage of the increasing number of companies opting out of the expensive manufacturing side of the business, preferring to outsource to third parties instead. Since then, IBM has been "aggressive" in its pricing policy in an attempt to gain customers, Lu said.

Chartered has also been increasing its presence locally. "More and more marketing people are moving to Taiwan from Chartered in Singapore," Lu said. "They might be trying to draw customers away from TSMC and UMC, but they need to win the customers' trust first."

The Taiwanese have a proven track record that Chartered lacks with local chip companies, Lu said.

Another analyst felt the price pressure would impact Taiwan's foundries, but would not result in a mass defection of customers.

"The effect of IBM's reduction of prices is negative on TSMC and UMC," said George Wu (吳裕良), an analyst at Primasia Securities Co. "But the relationship between Taiwan's foundries and their customers is very tight. It is unlikely IBM can steal many customers, but it may lead them to demand a better deal from TSMC and UMC, hurting their bottom line."

The outsourcing model has proved successful for Taiwan, with TSMC and UMC now the largest independent foundries in the world. Together they control over 90 percent of outsourced chip-manufacturing, according to figures from US-based research company In-Stat/MDR. In a move to gain a slice of the same pie, OEM newcomer IBM Microelectronics teamed up with Chartered in November last year to increase the number of chips they could pump out.

The disks of silicon, or wafers, from which chips are cut currently measure 8 inches across. The industry is moving to larger 12-inch disks, which results in more chips for less money. And more computing power is being compressed onto the same piece of silicon as transistors shrink down from 0.18 microns to 0.15 microns across, cutting costs further. But constructing fabs to create the most efficient and advanced chips has become prohibitively expensive, driving many smaller chipmakers out of the manufacturing side of the business.

IBM may have discovered the key to funding its expensive new 12-inch fab in the US. "When technology matures, IBM sells it on and collects royalties," Lu said. "In this way it gets other companies to fund its R&D costs."

IBM's New York foundry concentrates on 0.13 and 0.09-micron (90-nanometer) chips, whereas Chartered makes 0.15-micron chips using technology licensed from IBM.

But IBM lacks Taiwanese expertise in pumping out product.