UMC recently finished a tapeout and qualification of the Xbox Graphics Processing Unit, according to sources close to the Taiwanese company. So far, the sole supplier of the devices has been Taiwan Semiconductor Manufacturing Co., which makes them on its 0.15-micron process. Nvidia is one of TSMC's largest customers and is credited with helping the foundry move through the downturn in better shape than its closest competitors.

Even if UMC also begins producing the Nvidia chips, TSMC is not expected to suffer. The latter's capacity at .15 micron is nearly booked, which is one of the reasons Nvidia is looking around for another production source, analysts said. Microsoft Corp. is also reportedly putting pressure on the graphics company to find a second source for the processors to fulfill rising orders for Xbox, which was launched earlier this month.

"The demand for the Xbox during the introduction stage is very strong, so either way Microsoft will ask Nvidia to provide the target number of graphics chips," said Rick Hsu, semiconductor analyst with Nomura Securities. "But if you look at the current yield at TSMC, it means that Nvidia cannot get the target number of good dice per wafer."

Earlier this month, Nvidia CEO Jen-Hsun Huang said yields were falling short of expectations at TSMC. UMC is not expected to do much better, but if Nvidia wants to meet Microsoft's demands it needs to increase wafer orders. And with TSMC booked out, UMC is the next choice, Hsu said.