The United Microelectronics Corp (UMC) fell under the media spotlight last week on Tuesday, when the world's No. 2 contract chipmaker reported its first profit gains in five quarters. The next day, however, the firm became the subject of less positive news, after the government slapped it with a fine of NT$5 million (US$154,400) for helping a Chinese chipmaker. On Thursday the company bounced back after its shares posted their biggest gains in two years, in response to a stock buyback plan. Friday saw the firm decide to appeal the government's fine.
Boosted by the company's stock buyback plan to raise per share earnings, investors turned positive on UMC, sending its shares upward to close at NT$19.1 on the main bourse on Friday. Even so, UMC has underperformed the market, given its weak fundamentals and poor corporate governance.
Last year, UMC's net income declined 78 percent year-on-year to NT$7.027 billion, or NT$0.38 per share, while arch-rival Taiwan Semiconductor Manufacturing Co (TSMC) reported NT$2.91 billion in net income, or NT$3.79 a share. UMC's gross margin recovered to 18.1 percent in the final quarter of last year, but still lagged far behind TSMC, which reported gross margin of 49.1 percent.
UMC is one step ahead of TSMC in investing in China. As early as 2001 the company had secretly helped He Jian Technology (Suzhou) Co set up a plant there, while TSMC began building its first foundry in China in 2003 after gaining the government's approval.
But UMC's shares are worth less than one-third of TSMC's, which closed at NT$61.7 on Friday. A few years ago UMC shares were worth almost half of TSMC's. This underlines not only the challenges facing UMC in terms of technology and profitability, but also TSMC's strength in safeguarding its leading position in this highly cyclical industry.
Analysts have warned that UMC needs to work hard to boost its average selling price (which the firm forecasts will fall by 1 percent to 2 percent in the first quarter from the previous quarter) and factory utilization (which the company said would drop to 75 percent in the first quarter from the previous 86 percent) if it wants to stay competitive in this line of business, which faces price pressure from emerging chip foundries in China, South Korea and Japan.
To investors, TSMC outranks UMC in every respect, including sales, profits, shipments, gross margin, factory utilization and wafer fabrication technology, making the former the obvious investment choice. In addition, TSMC also wins praise from investors and shareholders for its corporate integrity, independent board and financial transparency.
Nevertheless, UMC seemed to be more interested last year in spending millions of NT dollars on newspaper advertisements panning the government's China-bound investment policy, disregarding the rights of around 900,000 local shareholders.
Richard Chang (張汝京), formerly president of Worldwide Semiconductor Manufacturing Corp in Hsinchu, boasted of China's advantage in offering inexpensive engineering talent when he founded Semiconductor Manufacturing International Corp (SMIC) in Shanghai in 2000. But SMIC has since disappointed investors with continued quarterly losses. Its American depositary shares closed at US$7.61 in New York on Friday, a decline of 56.52 percent from the initial offering price of US$17.50 in 2004.
Lower costs are not the only consideration for Taiwan's chipmakers when picking a place to build facilities, and shifting production to China should not be the only direction guiding them to remain competitive. Other factors count.
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