TAIPEI, Taiwan Caution reigned last week in the foundry world, with the top three players happy to close the books on a tepid 2002 but still unable to get a solid reading from the tea leaves for demand in 2003.
For the next few months, at least, foundry executives are sprinkling their outlooks with words like "flat" and "weak." Beyond that, most are reluctant to offer any predictions whatsoever. The only certainty, it seems, is that they will be spending less on equipment, and the money they do parcel out will mostly go to improving yields on advanced processes and in 300-mm wafer operations.
Taiwan Semiconductor Manufacturing Co. is expecting one or two key customers to substantially increase orders for 0.13-micron technology over the next few months, and that will drive its expansion plans this year. "We do not have any plans to upgrade the older technology," said Rick Tsai, president and chief operating officer of TSMC. "We are working with customers for their demand forecasts in the next few quarters and the forecast is that 0.13-micron demand will definitely increase."
The foundry intends to trim capital spending this year to a range of $1 billion to $1.5 billion, a level not seen since 1999. Yet this seems to be a temporary, rational reining in of spending after an aggressive ramp-up over the past few years, analysts said.
The switch to a more-guarded strategy follows a mixed fourth quarter, during which sales increased 3.3 percent sequentially to $1.18 billion, but profits took a hit, declining 19 percent. At the same time, utilization dropped to 61 percent from 79 percent. Annual profit at TSMC was up 49 percent.
Utilization still falling
TSMC expects things to get slightly worse in this quarter, with a utilization rate of 60 percent. Yet despite its reduced capital-expenditure budget, the foundry intends to increase advanced capacity (0.18-micron and below) to more than 45 percent of total capacity by year's end, up from 38 percent in 2002.
"It's not a function of execution or technology for TSMC they have continued to do very well there," said Dan Heyler of Merrill Lynch. "It's a function really of the end market. . . . Technology upgrades occur in waves, and on a broader basis we think the next wave will be in 2004 and 2005. What you're likely to see on IT spending until then is more subsistence capex capital expenditure, bottoming out this year."
At United Microelectronics Corp., the mood is muted as well. Looking forward, UMC said that during the first quarter it expects margins to be around the break-even point, as wafer prices remain flat and utilization dips to around 60 percent from 64 percent.
Chief executive officer John Hsuen called 2002 an "extremely challenging" year for the semiconductor industry, but promised that UMC would toe the line on R&D for advanced process technology and wafer fabs. "By the end of 2002, yields on 300-mm products were better than many of the similar products that were fabricated on 200-mm wafers," Hsuen said.
"In the fourth quarter, leading-edge 0.13-micron shipments accounted for 6 percent of UMC's revenue, and we are expecting 0.13-micron shipments to be one of our major sources of revenue growth in 2003. We continue to make steady progress on, and continue to develop, 90-nanometer process technology," he said.
The premiums associated with such advanced technology will be welcome, since the company is still under pressure to lower prices. As average selling prices and utilization dipped, UMC's profit fell to $28 million in the fourth quarter of 2002, down 30 percent. Revenue from the third to the fourth quarter slid 8 percent, to $504 million.
UMC said it would spend $500 million this year on technology upgrades and maintenance at its plants, paying special attention to the ramp of its 300-mm wafer capacity. That compares with an original target of $1.6 billion for 2002, which was subsequently scaled back to about $800 million.
Joining its peers, Chartered Semiconductor Manufacturing Ltd. also sounded tones of caution and reduced expectations for the new year. Coming off a 2002 that wasn't as good as hoped for, Chartered predicted slow growth for 2003. Consequently, the Singapore foundry will cut capex to $275 million, against $420 million last year.
"The latest estimates indicate that there was little or no year-over-year growth" in 2002, said Chia Song Hwee, president and CEO of Chartered, "as three quarters of sequential increase were followed by an abnormally low fourth quarter."
Indeed, Chartered lost nearly $109 million in Q4 and is still losing money in the first quarter of 2003. It brought in $409 million in 2002, down 2.9 percent from the year before, and lost $417 million last year, vs. $384 million lost in 2001.
The $107 million Chartered brought in in the fourth quarter was 16 percent below Q3, a decline it attributed to the computer and memory segments. Year on year, fourth-quarter revenue was up nearly 42 percent, thanks largely to the communications segment, Chartered said.
Chartered expects things to improve in 2003, but most likely not by much. About 60 percent of Chartered's lines will be idle in the first quarter, average selling prices will be down and revenue will fall 5 to 10 percent. The company expects a loss of approximately $96 million to $99 million in the quarter.
"We believe that 2003 will be a transition year for the semiconductor industry, with a somewhat weak first half followed by accelerating growth in the subsequent quarters, as the global economies begin to improve," said George Thomas, vice president and chief financial officer of Chartered.
As he has done in the past, TSMC chairman Morris Chang predicted that his company's growth would outpace that of the general semiconductor industry, which he pegged at about 8 percent this year.
Chang also noted that TSMC would not start producing wafers at its China operations until late 2004 at the earliest. TSMC is currently winding its way through a Taiwan government approval process that will determine whether it can invest in mainland China. It recently received a preliminary OK and is expected to win final approval.