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UMC plummets on lay-off rumors

United Microelectronics Corp (UMC, 聯電), the world's second largest contract chipmaker, saw its share price plummet yesterday after local papers reported the firm would lay off an additional 500 workers to cope with the global high-tech downturn.

"I think a lot of rumors spin out of control in Taiwan," commented Alex Hinnawi, director of corporate communications at UMC. He would not confirm nor deny the report.

Last week, after repeated denials by UMC executives, the company dismissed 266 workers, or 3 percent of its work force. Rumors of a second round of lay-offs by the firm sent its share price plummeting on the TAIEX.

After dropping to a low of NT$33.9 per share, UMC shares regained ground before trading ended, finishing the trading day down 4.4 percent at NT$34.8 per share.

More bad news from IBM and other computer makers in the US overnight also contributed to the decline in UMC's stock price, as these reports crushed hopes of a rebound in the tech sector anytime soon.

UMC's top rival, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), dropped only 1.6 percent on the bourse yesterday to NT$61 per share -- showing more resilience to bad industry news.

"TSMC has a little higher exposure to the PC market, which is seeing relatively better growth ? whereas sectors such as communications, where UMC has greater exposure, are hurting now," said one analyst who asked not to be quoted.

So far, there are few signs to indicate the glut of excess chips and other high tech equipment is abating. A research report by Primasia Securities Co Ltd in Taipei says UMC is already experiencing mass order cancellations from customers in the communications industry, and estimates the company will only use 38 percent of available manufacturing capacity during the third quarter.

In addition, the past month saw at least two companies that sell communications equipment that contain large amounts of microchips take massive write-offs on excess inventory. Cisco Systems Inc wrote off US$2.3 billion in excess networking equipment and Nortel Networks Ltd took a US$950 million inventory write down, adding to industry woes.

"The write-off doesn't mean it goes away, so write-offs or no write-offs, there's inventory everywhere. What happens is that stuff that gets "written off" gets disposed of into the market at a discounted rate," said Dan Heyler, regional semiconductor analyst at Merrill Lynch.

Industry analysts say a lot of the equipment being written off is gear used to power the Internet, including routers and network building equipment. Slower growth in Internet companies and reluctance on the part of traditional companies to experiment with new ways to use the Internet to streamline business practices is partially responsible for the slowdown.
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