Robert Tsao (
"We must go into combat mode," 54-year-old Tsao wrote in a staff memo on July 16, the day the second-largest contract chipmaker fired 3 percent of its workforce. "Those who are unwilling to work or unable to adapt, must be dismissed."
PHOTO: TAIPEI TIMES
Tsao may need to do more to turn around a company that expects to have an operating loss in the second and third quarters because reduced demand from computer and mobile phone customers has left half its production idle. UMC shares have tumbled 25 percent since June, when Tsao retook control of daily operations at a company he led from 1991 to 2000.
Investors favor his bigger rival, Taiwan Semiconductor Manufacturing Co (
"TSMC is more likely to show improvement in the third quarter. It has a better mixture of PC customers," said Albert King, who helps manage US$2.5 billion in shares at China Securities Investment Trust Corp (
Taiwan Semiconductor will get a boost later this year by supplying chips for Microsoft's new Xbox game console. The chips use the company's latest technology, which it expects to command a higher price.
Falling behind
TSMC has taken the lead in system chips, semiconductors that save space and conserve power in portable electronic products such as mobile phones and hand-held organizers. It was earlier in developing a single chip that combines memory and processing functions -- originally requiring separate chips that took up more space.
UMC yesterday reported a loss of NT$1.9 billion (US$54.7 million), or NT$0.16 a share loss, in the three months to June, compared with net income of NT$12 billion, or NT$1.10, a year ago.
Sales fell to NT$15.3 billion from NT$24.4 billion.
As company chairman, Tsao is up against an old rival in TSMC Chairman Morris Chang (
Tsao and Chang worked at the government-funded Industrial Technology Research Institute, which built the nation's first experimental chip plant in the early 1980s. UMC and TSMC were commercial spinoffs from the government project.
UMC in 1981 became Taiwan's first chipmaker, led by Tsao as president, selling products under its brand name. TSMC, started six years later under Chang, pioneered the idea of making chips under contract for other companies. By the mid-1990s, UMC aborted its brand-name strategy to also become a chip foundry.
Since that time, the company has struggled to close the gap on TSMC, whose US$30.7 billion market value is more than twice that of UMC.
Last year, both companies almost doubled capacity to expand market share while they had more orders than they could fill. Now those orders have dried up, the companies are operating at about 45 percent capacity, a sign UMC hasn't been able to take away market share.
Struggling stock
UMC shares have also lagged. Over five years, TSMC rose 460 percent, triple the gain for UMC stock. UMC's price-to-earnings ratio of about 9 times is almost half that of its rival.
"TSMC is trading at a higher valuation because of its customer base," said Mark Baughan, an analyst with Deutsche Bank Securities in Hong Kong. TSMC will be able to increase selling prices for its wafers in the second half because companies in the computer chip business such as Intel are clients.
UMC doesn't have such large customers in the computer chip industry, which will rebound earlier than communications and consumer electronics companies that need to reduce inventories caused by overinvestment, Baughan said.
Global mobile phone sales are on track to stagnate this year at 405 million handsets, forcing the largest cell phone maker, Nokia Oyj, to cut earnings forecasts and press suppliers for lower chip prices. STMicroelectronics NV and Infineon Technologies AG, two of UMC's largest customers, supply chips to Nokia.
Tsao also lacks Chang's personal touch, analysts said.
Contacts
Chang spends about half his time abroad, meeting with customers and suppliers and speaking at industry events. As the leader of Taiwan's largest company, he appears on the cover of several local books on business management and is thronged by reporters at every public event he attends.
At one seminar in Taiwan last year, Chang exchanged views with James Morgan, the chief executive of Applied Materials, the largest producer of chip-making equipment. Morgan should be close to Chang: TSMC is Applied Material's second-largest customer after Intel.
For the past year, Tsao has kept a far lower profile. He relinquished daily control of UMC to John Hsuan (宣明智), now a deputy chairman, and president Peter Chang.
"Robert [Tsao] thinks he needs to visit clients more like Morris [Chang]," Connor Liu, an SG Securities analyst, said of Tsao's reappointment as chairman.
Bigger pie
The key battleground is for the companies to make production more efficient. Both plan to do so by making larger silicon wafers, the disks from which chips are cut.
The two are among 10 chipmakers worldwide, and the only foundries, that are opening multibillion-dollar factories to make 12-inch wafers.
By late next year when new factories reach full production, the dinner plate-sized disks will cut costs by more than doubling the chips yielded from the standard 8-inch wafers made today, said Rick Tsai (蔡力行), a TSMC vice president.
UMC, which has started making 12-inch wafers in a venture with Hitachi Ltd, may need to scale back investment in three such plants as most of its capacity is now idle.
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