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UMC braces for sluggish demand and oversupply

United Microelectronics Corp (UMC, 聯電), the world's second-largest wafer foundry manufacturer, is bracing itself for oversupply and weak demand in the first quarter of the year.

In addition to forecasting a drop in gross margin from 20.5 percent in the fourth quarter to between 12 percent and 13 percent for this quarter, UMC expects a 14 percent to 15 percent decrease in shipments from last quarter, with minor fluctuation in average selling prices (ASP).

Capital expenditure this year will drop to between US$500 million and US$700 million from US$900 million last year, chief executive officer Jackson Hu (胡國強) said, adding that a drop in shipments is expected as clients cut inventories during the traditional low season.

"Most of our clients are cautiously optimistic, anticipating single-digit growth for this year. But we will continue to monitor the impact of the US subprime crisis over end demands," Hu told an investors conference.

SinoPac Securities Corp (永豐金證券) analyst Chen Tsong-yue (陳宗岳) said a decline in first-quarter shipments was normal, but the significant cut in capital expenditure for the year reflects UMC's caution on market demand.

"I would not expect too much of a recovery in the second half of the year either," Chen said. "The subprime crisis is taking a serious toll on the global economy."

Shares of UMC remained unchanged at NT$17.8 yesterday. UMC share prices have dropped 11.67 percent this year.

UMC is working to improve its product mix, with 8-inch and 12-inch production lines, by increasing its use of advanced technologies to boost ASPs, Hu said.

The capacity utilization rate in the first quarter was projected at 70 percent, compared with 86 percent in the previous quarter and 74 percent in the first quarter of last year, he said.

UMC is seeing the largest seasonal correction in its communications products, followed by its consumer electronics. Price adjustments for PC-related products are relatively small, the company said in a financial statement.

When asked about the effect on the industry of plans to build a new fab by Shanghai-based Semiconductor Manufacturing International Corp (中芯), Hu said that any decision that ignores the market surplus will hurt the initiator in the end.

In the fourth quarter, UMC's net income was NT$1.36 billion, or NT$0.16 in earnings per share, down 85.3 percent quarter-on-quarter and 76.1 percent year-on-year.

Last year, net income totaled NT$16.96 billion, translating into earnings of NT$1.09 per share, a slide of 48 percent from 2006.

With regard to bonuses, the company will reserve 15 percent of profits for employee bonuses, in line with industry standards, CFO Liu Chi-tung (劉啟東) said.

Details of the bonus plan will be decided by the board in March, Liu said.
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