UMC's Tsao readies his staff for combat

Robert Tsao (曹興誠) began his second stint in charge of United Microelectronics Corp (聯電) by sacking workers for the first time in the company's 20-year history.

"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."

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 (台積電), which has led UMC with investment in new technology and building close ties with Intel Corp, a key customer, and Applied Materials Inc, an equipment supplier.

"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 (中信投信). "Investors have to pay attention to these companies' business strategies."

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 (張忠謀). In three decades, the two men helped build an US$18 billion industry that has made Taiwan the biggest producer of chips to other companies' designs.

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.