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Chip demand slowdown threaten TSMC

Date:2013-11-08

              Welded to the ceiling of TSMC’s semiconductor factory in south Taiwan is what looks like the world’s most high-tech, and certainly its most expensive, model railway.

        Few humans work on this massive factory floor belonging to the planet’s biggest contract chipmaker. In their place, hundreds of metal containers whoosh along the 43km of tracks hanging from the ceiling.
 
        Every few minutes, one of the robotic containers stops, and the box of silicon wafers packed inside glides down on cables to dock gently at the next step of the assembly line.
 
        The process is precise enough to make chips with as little space as 16 nanometres between transistors. It is also very expensive.
 
        Each robotic box costs as much as a car, says one worker at this plant in the Taiwanese city of Tainan. Overall, construction on this factory, one of several such plants TSMC runs, will cost $17bn.
 
        “They are spending a small fortune to keep it going,” says Dean Freeman, a semiconductor manufacturing analyst with Gartner. “As long as investors aren’t too concerned about profitability, that’s fine.”
 
        But those concerns are now starting to surface, as demand for smartphone growth begins to slow and PC sales continue to fall.
 
        TSMC’s sales next quarter are forecast to plunge 10.5 per cent from this year as demand for high-end smartphones falters, its chairman and chief executive, Morris Chang, said yesterday as the company reported its third-quarter results.
 
        Those results show some demand has already started falling – sales of communications chips for phones and tablets were down 3 per cent. Demand for computer chips is down 18 per cent.
 
        Overall, revenue rose to NT$162.58bn (US$5.5bn) – a record – but in the lower half of the company’s early guidance. Net income hit NT$52bn, up 5.2 per cent year on year.
 
        The inventory of 28 nanometre chips – the kind used in most smartphones – held by TSMC’s key customers is at its highest since early 2009, suggesting future sales will slow as consumer demand catches up with existing stocks. The company expects overall smartphone demand to increase by 35 per cent this year, slowing to 25 per cent next year.
 
        “TSMC is particularly exposed to the slowing high-end smartphone growth,” says Mark Li, an analyst at the brokerage Bernstein.
 
        TSMC’s downbeat forecast follows a similar outlook from Intel, which focuses more on the struggling market for PCs.
 
        Intel earlier this week said its sales would rise 2 per cent between the third and fourth quarter – half their usual rate of growth – as the group cut its capital expenditure budget for the second time in two quarters.
 
        TSMC’s prospects will probably improve next year with the launch of new chips and the expected addition of Apple, which has so far used Samsung as a supplier of its smartphone chips, as a major customer.
 
        However, “the key is whether they can actually get the business to fulfil the capacity they are expanding”, says Mr Li.
 
Working in TSMC’s favour, analysts point out, is that the rising cost of making chips keeps down the number of competitors.
 
        A few generations ago in chip technology, TSMC was one of more than a dozen groups making the most advanced chips. Now, it is one of only four – together with Intel, Samsung and GlobalFoundries – pushing to advanced chips with 20 nanometres between circuits, the company says.
 
        But cost and competition are not the only concerns facing the company. Remarks that the 82-year-old Mr Chang made after presenting the company’s results pointed to what one analyst called TSMC’s “biggest threat” – its still unclear plan for leadership succession.
 
        Mr Chang, one of TSMC’s founders and chief executive since 1998, had earlier announced his intention to retire as chief executive and retain only the chairmanship, sparking worries both among those who fear TSMC will flounder without him and those who fear it is not moving fast enough to bring up a new generation of leaders.
 
        Pacing back and forth in front of investors and analysts, the affable and white-haired Mr Chang pledged to appoint a new chief between now and June, but also to play a “hands-on role” as chairman.
 
        “I want to emphasise ‘hands-on’,” he said.

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