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A Little Shakeout Doesn't Scare Taiwan's Chipmakers (Int'l Edition)


International -- Int'l Business: TAIWAN

A LITTLE SHAKEOUT DOESN'T SCARE TAIWAN'S CHIPMAKERS (int'l edition)

A global chip glut gives Taiwan a chance to grab business

Executives over at Texas Instruments/Acer Inc., the computer-chip joint venture of TI and Taiwan's leading computer maker, took a look in June at plunging prices for memory chips and did the sensible thing--they postponed construction of a $1 billion semiconductor factory. Another Taiwanese company, Hualon Co., went a step further, canceling a new plant. With Taiwanese companies building 13 chipmaking plants in the coming 18 months, no doubt other Taiwanese who have ordered expensive machinery wish they could apply the brakes, too.

They might not need to. Yes, a worldwide glut in dynamic random access memory (DRAM) chips has pushed prices to unforeseen lows. While a shakeout seems likely among newer arrivals, the island's nimble companies may stand a better chance to gain market share in the medium term than giants in Japan and the U.S. "This could be a very good opportunity for Taiwan companies," says strategist John Nelson at Jardine Fleming Securities in Taipei.

Why? For starters, demand is strong in Taiwan, home to the world's biggest PC and motherboard industries. Taiwan imports about 70% of the $8 billion worth of chips it uses annually. If local companies can produce DRAMs at the same price as foreign rivals, advantages in proximity and shipping costs can help them gain share. Equally important, Taiwan companies are gearing up with leading-edge technology, below 0.35 microns for line width in DRAMs, putting them technologically on a par with the Japanese, Americans, and Koreans.

The coming two years will determine whether Taiwan can compete as a low-cost manufacturing base for DRAMs as well as in niche semiconductors and run-of-the-mill computer hardware. Companies that face the biggest challenges include startups Nan Ya Technology Corp., a subsidiary of the Formosa Plastics group, and Vanguard International Semiconductor Corp., a government-backed company. They have deep pockets but lack experience and competitive technology. Macronix International Co., another newcomer, lacks a foreign partner. Powerchip Semiconductor Corp. has a strong partner in Mitsubishi but got a late start in the business. These companies may become takeover targets.

LEAN MONTHS. For established companies, prospects should remain favorable. Because the local market for semiconductors is strong, they will be able to run their plants at 100% capacity. "That could give them a cost advantage and a chance to take some big market share from other DRAM manufacturers" such as Samsung, Toshiba, and Micron, Nelson says. The Taiwanese could then still realize their goal of increasing their share of the world chip market, from about 3% currently to as high as 8%.

Taiwan companies have mapped out strategies that will help carry them through the lean months. Leaders such as Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC) have established themselves in niche markets in foundry production, a business that should be insulated from the worst of the damage the memory-chip segment will see.

Achieving Taiwan's ambitions is going to hurt profits, at least in the short run. Companies that started 1996 with solid profits are slashing earnings projections. Mosel Vitelic cut its profit forecast in half, to $280 million. Winbond Electronics Corp. had forecast earnings of $440 million but now expects profits of $220 million. Next year could be worse: Taiwanese semiconductor earnings could drop 14%. "There will be a lot of blood on the streets," says Derek Tien, senior analyst for ING Barings' Taiwan branch. Lower earnings will hurt companies that survive the current downturn, since they will need cash to invest in new technology when the market finally comes back.

But Taiwan insists its strategy will pay off. Companies are counting on high demand as low prices prompt PC makers to load new models with more memory and as manufacturers come out with "intelligent" products that rely on memory chips. Taiwan companies don't much fear the South Koreans, whom they expect to cut production to stem losses. "We think we can compete with Samsung," says UMC spokesman Andy Chen. That kind of thinking is likely to keep Taiwan companies going for the brass ring while others head for the exits.By Jonathan Moore in Taipei


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