It appears to be the end, at least for now, of a great run for the foundry, and will add to a general feeling of uncertainty in the semiconductor sector. TSMC is widely considered an industry bellwether because of its wide base of customers. Hence, such a precipitous drop in utilization is certain to cast a negative pall over the next few quarters.

TSMC Chairman Morris Chang declined to offer specifics on 2005 capital expenditure, saying it could be up a few percent or drop by as much as 10 percent next year. He also revised his estimates for overall semiconductor industry growth from high, single-digit percentage expansion to zero. Foundries, he said, will do better, and he reiterated TSMC's internal target for average growth remains at 15 percent.

The unexpected pull back comes after four straight quarters of blisteringly hot fab activity, during which TSMC's lines ran at greater than 100 percent. Industry analysts expected a decline, but not such a large one. Just three months ago, Chang was decidedly more bullish, defying analysts by saying that the company's fourth quarter would be better than its third. On Tuesday, he acknowledged that things have soured since then. TSMC now sees all sectors of the semiconductor industry declining in the fourth quarter, with consumer being the worst affected.

The culprit is the widely-reported and much-dreaded inventory buildup. TSMC's customers came out of the second quarter with more product on hand than they wanted, and weren't able to pare it down to comfortable levels by the end of the third quarter. Chang said first quarter 2005 wafer shipments would "not be very strong" because he expects customers to wrangle with inventory reduction through at least then and possibly through the second quarter.

"It's a moving target," said Bhavin Shah, managing director of technology research for JP Morgan Securities. "It really depends on end-consumer demand, which can change fast in technology."

On the bright side, Chang said the industry doesn't appear to be headed for another 2001-style implosion. "We don't see any basic or serious problem with end-demand like we did in 2001," he said.

Despite an expected single-digit percentage drop in wafer shipments for the current quarter, Chang said the company will be able to maintain a 44 percent to 46 percent gross margin. That's down only a few percentage points from last quarter, when the foundry ran at 103 percent of its rated capacity.

TSMC expects 0.13-micron and more advanced process technology sales, which stand at 30 percent of revenue, to keep growing over the next few quarters and help offset price declines in more mature technologies. Specifically, Chang said 90 nanometer, 0.13 micron and 0.25 micron are "highly utilized." The soft spots are 0.18 micron and 0.35 micron.

TSMC's third quarter numbers were also a bright spot. The company took in about $2 billion, up 27 percent year on year and 7.5 percent over the previous quarter. Profit hit $823 million, up 84 percent from last year and 19 percent from the previous quarter. But the numbers also indicate slower growth. In its second quarter report, TSMC's sales increased 12 percent sequentially and its profit grew 24.6 percent.

Global chip sales are likely to grow 28.4 percent to a record $213.6 billion in 2004, according to the World Semiconductor Trade Statistics. However, after a high-growth 2004, the following year is expected to show 8.5 percent growth in 2005 followed by a 0.7 percent decline in 2006.

Semico Research Corp. is more bearish on 2005, calling for a minus 5 percent to minus 8 percent decline in 2005.