At 73, Morris Chang has reason to boast. The business he founded 17 years ago, Taiwan Semiconductor Manufacturing Co, is the goliath of Taiwan's modern microchip industry and the world's biggest manufacturer of made-to-order chips. This month, it announced record quarterly revenue for the second time in a row.
But when Chang speaks of the future of the chip business, he sounds somber. Like many global executives, perhaps his biggest long-run worry can be traced to China's rising industrial power. His immediate concern, however, is more basic.
PHOTO: AP
"We're all going to see lower growth in the next 10 years," he said from his spartan office. Next year "will not be a very high-growth year, but it will be a positive year. Beyond that I'm pessimistic."
Investors seem to agree. After a yearlong boom in chip sales, orders have slowed since early summer. In recent weeks, many analysts have cut their projections for the fourth quarter and beyond, citing the dampening effect of high oil prices and bulging inventories.
The warnings have battered semiconductor shares, among them TSMC, as Chang's company is widely known, and Intel, the Silicon Valley global chip giant.
What is worse, Chang sees this looming downturn not simply as the latest plunge in the semiconductor industry's typical roller coaster progress, but as a more fundamental reordering of the business. Lower growth but greater outsourcing, rising competition from China and the spiraling cost of staying at the technological forefront, he says, are impelling industry leaders to reconsider their approach to the business.
TSMC -- a flagship of Taiwan's technology economy with revenues last year of nearly US$6 billion and the pacesetter for global contract microchip makers -- cannot afford to stand still.
"We have to maximize our advantage in technology, manufacturing and customer partnerships," Chang said.
As it braces for the changes, TSMC certainly has a head start over its rivals. Taiwan Semiconductor virtually created the made-to-order semiconductor industry it now dominates.
After a long career at Texas Instruments and a stint in charge of Taiwan's top industrial research lab, Chang started the company in 1987 with government support and private investment largely from Philips, the Dutch electronics concern.
At the time, microchips were nearly all designed and manufactured in-house by a few dominant companies. Chang saw an opening for a "foundry" company to custom-make semiconductors for firms that were developing their own designs and specifications without the industrial capacity to make chips themselves.
"TSMC was the first to provide that platform," said Marco Iansiti, a professor at Harvard Business School who studies the semiconductor sector. "They said, `We can have much more impact by giving our tools to third parties."'
Chang talks with the measured poise of a senior professor, but he is known as an unrelenting competitor. By the late 1990s his company and a handful of other contract chip makers nearly caught up with the technology of established full-range makers like Intel and IBM. Now TSMC churns out chips with nodes 130 nanometers across, the smallest scale widely on offer, and is moving, not far behind the pacesetters, to production at 90 nanometers and ultimately even narrower.
TSMC has about 40 percent of the world's contract chip market, double its nearest rival, United Microelectronics, another Taiwan-ese company. As the cost of building a state-of-the-art chip-making facility escalates toward US$3 billion or more, those capable of spreading that cost across a wide range of clients are expected to gain market share.
"We are in a new phase of lower growth," said Mark Edelstone, a semiconductor industry analyst with Morgan Stanley, "but the bigger factor is the trend towards outsourcing, which is going to accelerate."
He estimated that about a fifth of the US$210 billion semiconductor industry is outsourced to contractors like TSMC; by the end of the decade, he predicted, nearly a third of what should then be a US$350 billion industry will be made by contract manufacturers.
But as they scramble to maintain their edge, TSMC and the handful of other foundries are saddled with special burdens. Their industry combines the high-wire risks of constantly advancing technology, opaque and often erratic market demand, and a voracious appetite for capital to pay for manufacturing equipment.
"There is good money in foundries, but it's not for the faint of heart," said Len Jelinek, the principal semiconductor analyst of iSuppli, an electronics market research firm in El Segundo, California. "Foundries almost have to put capacity in front of demand."
The problem with that approach, Jelinek pointed out, is that almost invariably "manufacturers overshoot on capacity and then prices decline."
Even as the industry braces itself for the down slope of the next cycle, Chang says that the next upturn is unlikely to be as strong as before. The industry is maturing, analysts say. Even as digital technology continues to proliferate, demand for chips in laptop computers, cellphones and other electronic devices is not growing as fast as it once did.
Chang said that he expects growth over the next 10 years to average roughly 7 to 8 percent a year, well below the double-digit gains the industry has enjoyed for decades.
His company has plowed many billions of dollars into developing the next generation of chips to keep up with the industry maxim -- first propounded by Gordon Moore, a co-founder of Intel -- that the capability of microchips can be expected to double every 18 to 24 months or so. But Chang warned that the market may soon be lagging behind the potential for innovation.
"If Moore's Law has not slowed down in the lab," he said, "it will surely slow down in the marketplace, and that in turn will have an effect on foundries."
That slowdown, he says, may eventually make it easier for less technically savvy competitors to lure lower-end customers from TSMC.
For TSMC and other Taiwanese chipmakers, many new competitors and customers are in China, which buys 13 percent of the world's semiconductors, double its share four years ago.
Taiwan's semiconductor companies are eager to invest in China's booming electronics market. But they are caught in a political and diplomatic vise. In Taiwan's tense standoff with China over the island's status, Taipei is reluctant to allow the most advanced technology to move to the mainland, while China is all the more eager to establish a toehold in the sensitive semiconductor industry.
The biggest and most threatening of Chang's mainland rivals is Semiconductor Manufacturing International of Shanghai, which started production in 2001. It recently opened a plant in Beijing that is not at the technological frontier but which can already make chips with smaller transistors than Taiwanese companies are allowed to produce in China.
Beijing bowed to demands from Washington to stop giving SMIC and other local chip makers tax rebates that appeared to violate global trade laws. But the government said it will seek other ways to support the industry and China's share of global wafer capacity is expected to reach 9 percent by 2007, up from 4 percent last year.
In 2002 Taiwan's government removed its ban on investment in Chinese semiconductor plants, but it has resisted lobbying from chip makers to further lower the barriers to moving production to the mainland.
Chang, who is opening his first mainland foundry next year near Shanghai, said he fears excess Chinese capacity in low-end chips may drag down prices. But he remains confident that Chinese foundries are still years away from challenging TSMC's leadership role.
"It will be difficult for big customers to move over to SMIC," said Eric Fok, a semiconductor analyst with CCID Consulting in Beijing, a company closely linked with China's information industry ministry. "There may be some strategic relocation of orders, but unless TSMC makes major missteps it will be difficult to overtake."
Taiwan Semiconductor is also bolstering its defenses by suing SMIC for infringing on its intellectual property. Last December, the company lodged claims in US courts that SMIC stole its managers and production techniques. Chang and his colleagues refused to comment on the case.
Those closely guarded production processes are at the heart of TSMC's efforts to prevent customers drifting to Chinese competitors. Like other Taiwanese semiconductor makers, it is focusing on ways to deepen chip designers' and clients' dependence on their services.
Despite his age, Chang has no plans to quit running the company. After his early years in war-stricken China, Chang's family fled the encroaching communist forces in 1949 and moved to the US, where he earned an engin-eering degree from MIT. That unsettled childhood, he says, helped imbue him with his competitive resilience.
"I think after some time I will shift more executive duties," he said, "but I plan to be chairman for a long time."
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