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."
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