UMC's capacity use falling as orders dip

United Microelectronics Corp (UMC, 聯電), the world's second-largest made-to-order chip company, and rivals in Taiwan are likely to cut use of production capacity as semiconductor customers reduce orders by half from last year, local media recently reported citing unidentified sources at UMC.

US chip companies Xilinx Inc and Altera Corp, two of the largest buyers of chips made by UMC and Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), have cut their orders by as much as two-thirds from last year, which will help push UMC's and TSMC's output to less than 60 percent of capacity, the report said.

Capacity use is a yardstick analysts and investors use to gauge the profitability of a chipmaker. Factories that cost as much as US$3 billion to build incur depreciation costs if they aren't operating at full capacity.

"There will be aggressive cutting of orders by Xilinx, Altera and Broadcom Corp," said Janardan Menon, an analyst with Dresdner, Kleinwort Wasserstein Securities. "It's not impossible they will fall below 60 percent of utilization in March, April and May." "There has been no guidance from UMC other than what we gave in our fourth-quarter earnings announcement," said Alex Hinnawi, a UMC spokesman. "We said that our capacity utilization rate would be somewhat better than our competitors." TSMC expects its capacity use during the first quarter this year to be about 70 percent, said Chuck Byers, a spokesman for TSMC. "We only give guidance on utilization a quarter at a time," he said.

Signs of Recovery While business should rebound in the second half of the year, full-year capacity use for both companies will probably exceed 70 percent, Menon said. Signs of a recovery in the computer industry are appearing, he said.

Silicon Valley-based Altera, one of TSMC's largest customers, designs reprogrammable chips mainly used in telecommunications equipment. Altera and TSMC were joint venture partners in a US

chip factory until last year when TSMC acquired Altera's stake.

Altera rival Xilinx is one of UMC's biggest customers.

Altera is one of TSMC's five-largest customers in North America, said Byers.

UMC and TSMC roughly doubled their production capacity last year to meet an increase in orders from customers. The companies, which reported record profits for fourth-quarter 2000, said they will slow expansion this year because chip demand failed to meet their earlier expectations.

Still, reversing an expansion in capacity can take months for factories that take more than a year to build.

With no signs of a rebound in business for UMC's and TSMC's other customers for telecommunications and computer chips, the two Taiwanese semiconductor makers have been forced to accept more orders for memory chips, which boost use of production capacity but fail to earn money, the report said.

UMC said monthly production in January fell from the almost 230,000 8-inch silicon wafers produced in December, without specifying how many wafers the company produced. TSMC Chairman Morris Chang (張忠謀) earlier this month said the company's use of capacity would fall to 70 percent during the first quarter.

While TSMC and UMC should still report profits in the first half of this year, their smaller rival in Singapore, Chartered Semiconductor Manufacturing Ltd will probably report a loss, Menon said.