Loomis Sayles & Co sold its stake in Taiwan Semiconductor Manufac-turing Co (台積電) last month, saying earnings prospects didn't justify a higher price for the No. 1 supplier of made-to-order chips. The move was just in time: Analysts are beginning to conclude that the advent of startups into the chipmaking business is the beginning of the end of the prevailing business model for foundries.
TSMC shares fell 10 percent between March 26 and April 1 after its largest customer, Nvidia Corp, asked International Business Machines Corp to make its latest graphics chips. TAIEX fell 3.5 percent in the same period.
TSMC's loss highlights the chipmaker's dilemma as it fends off competition from the likes of IBM, which says it has a technological edge, and newer rivals including Shanghai-based Semiconductor Manufacturing International Corp (SMIC, 中芯國際集成電路), which say they can make chips for less.
"With IBM's entry into the foundry business and Chinese companies attacking the lower end, the Taiwanese appear to be getting squeezed from both ends," said John Litschke, who helps manage US$600 million of stocks at Loomis in San Francisco, which sold the TSMC stake about three weeks ago.
A sign
Nvidia's decision to turn to IBM is a sign of things to come.
By 2006, Nvidia, the world's largest maker of graphics chips with US$1.9 billion of sales in the year ended January, will send half its chipmaking orders to IBM, Pacific-Crest Securities Inc analyst Michael McConnell wrote in a note to clients, citing information Nvidia gave to analysts after the IBM announcement.
TSMC, like IBM, is one of only a handful of chipmakers able to make chips from 12-inch (300mm) wafers, cutting costs by producing more chips from a single piece of silicon.
What concerns Loomis's Litschke and George Wu (
"If IBM expands capacity like crazy, there will be severe price competition," Wu said. "That will erode profitability and will be the end of the foundry business model."
More pie pieces
Competition is already starting to splinter the market.
TSMC, United Microelectronics Corp (UMC, 聯電) and Singapore's Chartered Semiconductor Manu-facturing Ltd (
A delay in the chip industry's recovery promised to benefit made-to-order chipmakers as more companies accelerated outsourcing or pared expansion plans.
The difference now is that established made-to-order chipmakers like TSMC must cope with start-ups such as SMIC, Silterra Malaysia Sdn in Malaysia and Grace Semiconductor Manufacturing Corp (
SMIC has already inked agreements to produce chips for Japan's Toshiba Corp and Infineon Technologies AG, Europe's second-largest chipmaker, albeit for memory chips, which TSMC doesn't make.
"The last thing the foundry model needs at this stage is more competition," said Charles Isaac, a fund manager at Swissca Portfolio Management AG, which manages the equivalent of US$32 billion, including shares of TSMC and UMC.
IBM may have reasons of its own to seek out new customers.
Outsourcing
Foundry sales will probably outperform other parts of the market as more chipmakers outsource, according to Primasia's Wu.
Made-to-order chip revenue will jump by a quarter to US$10 billion this year, Wu estimates. In February, Gartner Inc's Dataquest market- research unit said worldwide sales of semiconductors will rise about 9 percent this year to US$167 billion.
The Armonk, New York-based company, which is working with Advanced Micro Devices Inc. to develop ways to make speedier computer processor chips that consume less power, says it will win more customers to its foundry business by using its technological advantage.
IBM has pioneered the use of copper wire in chips instead of aluminum. It will work with Advanced Micro using materials such as copper and new insulation to shrink the size of circuits to less than half today's smallest products.
"It takes a lot more than just low prices to deliver effectively on these very complex technologies," said Sumit Sabana, director of strategy for IBM's Microelectronics Division.
TSMC, whose shares have slumped 46 percent in the past year, disputes IBM's contention that the US chipmaker has an edge on technology.
"We certainly know there will always be competitors coming in and out during our journey," TSMC spokesman Tzeng Jinnhaw (曾晉皓) said. "We must be a technology leader and the most reputable, service-oriented and total benefits provider."
UMC, the world's second-largest supplier of made-to-order chips, says being equipped with the latest chipmaking technology isn't necessarily the best business decision. A rush to stay ahead of competitors can lead to overspending, UMC Chairman Robert Tsao (
Still, among the three biggest foundries, TSMC is in the best position to maintain profitability, said Loomis' Litschke. He would buy the company's shares again if they were to fall to around NT$35. The company's shares declined 0.7 percent to NT$44.50 today on the Taiwan Stock Exchange.
Other investors aren't as optimistic.
"The whole foundry model has a question mark over it," said Richard Keery, a money manager at Edinburgh Fund Managers, which manages about US$500 million in Asian stocks outside Japan. "The next card is TSMC's. We'll see how they respond."
Taiwan Transport and Storage Corp (TTS, 台灣通運倉儲) yesterday unveiled its first electric tractor unit — manufactured by Volvo Trucks — in a ceremony in Taipei, and said the unit would soon be used to transport cement produced by Taiwan Cement Corp (TCC, 台灣水泥). Both TTS and TCC belong to TCC International Holdings Ltd (台泥國際集團). With the electric tractor unit, the Taipei-based cement firm would become the first in Taiwan to use electric vehicles to transport construction materials. TTS chairman Koo Kung-yi (辜公怡), Volvo Trucks vice president of sales and marketing Johan Selven, TCC president Roman Cheng (程耀輝) and Taikoo Motors Group
Among the rows of vibrators, rubber torsos and leather harnesses at a Chinese sex toys exhibition in Shanghai this weekend, the beginnings of an artificial intelligence (AI)-driven shift in the industry quietly pulsed. China manufactures about 70 percent of the world’s sex toys, most of it the “hardware” on display at the fair — whether that be technicolor tentacled dildos or hyper-realistic personalized silicone dolls. Yet smart toys have been rising in popularity for some time. Many major European and US brands already offer tech-enhanced products that can enable long-distance love, monitor well-being and even bring people one step closer to
RECORD-BREAKING: TSMC’s net profit last quarter beat market expectations by expanding 8.9% and it was the best first-quarter profit in the chipmaker’s history Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), which counts Nvidia Corp as a key customer, yesterday said that artificial intelligence (AI) server chip revenue is set to more than double this year from last year amid rising demand. The chipmaker expects the growth momentum to continue in the next five years with an annual compound growth rate of 50 percent, TSMC chief executive officer C.C. Wei (魏哲家) told investors yesterday. By 2028, AI chips’ contribution to revenue would climb to about 20 percent from a percentage in the low teens, Wei said. “Almost all the AI innovators are working with TSMC to address the
Malaysia’s leader yesterday announced plans to build a massive semiconductor design park, aiming to boost the Southeast Asian nation’s role in the global chip industry. A prominent player in the semiconductor industry for decades, Malaysia accounts for an estimated 13 percent of global back-end manufacturing, according to German tech giant Bosch. Now it wants to go beyond production and emerge as a chip design powerhouse too, Malaysian Prime Minister Anwar Ibrahim said. “I am pleased to announce the largest IC (integrated circuit) Design Park in Southeast Asia, that will house world-class anchor tenants and collaborate with global companies such as Arm [Holdings PLC],”