Identifier
Created
Classification
Origin
07TAIPEI407
2007-02-16 07:13:00
CONFIDENTIAL
American Institute Taiwan, Taipei
Cable title:  

TAIWAN SEMICONDUCTOR INDUSTRY - SOARING PROFITS

Tags:  ECON EINV ETTC TW 
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VZCZCXRO9766
RR RUEHCN RUEHGH RUEHVC
DE RUEHIN #0407/01 0470713
ZNY CCCCC ZZH
R 160713Z FEB 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4182
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHUL/AMEMBASSY SEOUL 8479
RUEHGP/AMEMBASSY SINGAPORE 6820
RUEHKO/AMEMBASSY TOKYO 8509
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHHMUNA/USPACOM HONOLULU HI
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 000407 

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STATE PASS USTR
STATE FOR EAP/TC
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: DECL: 02/16/2017
TAGS: ECON EINV ETTC TW
SUBJECT: TAIWAN SEMICONDUCTOR INDUSTRY - SOARING PROFITS
AND CONFIDENCE

REF: A. TAIPEI 244


B. TAIPEI 25

C. 06 TAIPEI 4164

D. 06 TAIPEI 4095

E. 06 TAIPEI 4029

Classified By: AIT Economic Section Chief Daniel K. Moore, Reason 1.4 d

C O N F I D E N T I A L SECTION 01 OF 04 TAIPEI 000407

SIPDIS

SIPDIS

STATE PASS USTR
STATE FOR EAP/TC
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER
USTR FOR STRATFORD, ALTBACH

E.O. 12958: DECL: 02/16/2017
TAGS: ECON EINV ETTC TW
SUBJECT: TAIWAN SEMICONDUCTOR INDUSTRY - SOARING PROFITS
AND CONFIDENCE

REF: A. TAIPEI 244


B. TAIPEI 25

C. 06 TAIPEI 4164

D. 06 TAIPEI 4095

E. 06 TAIPEI 4029

Classified By: AIT Economic Section Chief Daniel K. Moore, Reason 1.4 d


1. (U) Summary: Taiwan's semiconductor industry showed
strong growth in 2006 at 23 percent overall. The top
producers of dynamic random access memory (DRAM) averaged
growth of 74 percent. Taiwan may overtake South Korea as
the largest supplier of DRAM this year. Taiwan contract
chip manufacturers or "foundries" continued to dominate
the world market and grew 18 percent. The threat of PRC
foundries appears much diminished compared to dire
predictions a few years ago. Taiwan's semiconductor
packaging and testing industries grew 23 and 39 percent,
respectively. Integrated circuit (IC) design firms
lagged slightly behind the rest of the industry in Taiwan
but still had respectable growth of 10 percent. The
impressive results show that Taiwan firms are still
highly competitive and can continue to grow through
further investment in Taiwan. End summary.

2006 - A Good Year for Taiwan's Semiconductor Industry
-------------- --------------


2. (U) Taiwan's semiconductor industry showed strong
growth in 2006 as the island consolidated its role as a
key player in the global semiconductor industry. The
industry rebounded from relatively sluggish growth in

2005. According to Taiwan Semiconductor Industry
Association (TSIA) estimates from November 2006, the
industry was headed to achieve overall growth of 23
percent in 2006 with total output worth NT$1.4 trillion
(US$42 billion) up from NT$1.1 trillion a year earlier.
All segments saw substantial growth. This reversed
relatively sluggish growth in 2005 of just 1.7 percent,
with a decline of 5.9 percent for the semiconductor
manufacturing segment.

DRAM - Expanding and Challenging Korean Giants
-------------- -


3. (U) The stars of Taiwan's semiconductor industry in

2006 were the island's dynamic random access memory (DRAM)
producers. According to data from Taiwan's quasi-
governmental Industrial Technology Research Institute
(ITRI),revenue for Taiwan's top four DRAM makers rose 74
percent. ProMOS, the third largest, more than doubled
its 2005 revenue, growing by 103 percent. Powerchip, the
island's largest DRAM maker, grew by 79 percent and is
near to overtaking United Mircroelectronics Corporation
(UMC) as Taiwan's second largest semiconductor company.
Together Taiwan's DRAM producers are the world's second
largest supplier of DRAM chips. ITRI estimated Taiwan's
2005 global market share at 22 percent. South Korea is
the largest with Samsung and Hynix, the world's top DRAM
makers. Some analysts believe that Taiwan could overtake
South Korea sometime in 2007. Profits for the top four
Taiwan DRAM makers have been forecast to grow by more
than 40 percent this year. January and February have
seen a sharp drop in DRAM prices this year of
approximately 30 percent, but many analysts expect the
industry to do well due to the release of Microsoft's
Vista operating system, which requires more memory.


4. (U) Taiwan's rapid growth in DRAM production has been
realized through massive investment in 12-wafer DRAM
manufacturing facilities (or "fabs"). Despite
construction costs of up to US$3 billion each, 12-inch
fabs are more cost-effective producers of semiconductor
chips than less advanced 8-inch fabs. Powerchip operates
three 12-inch fabs, tied with Taiwan Semiconductor
Manufacturing Corporation for the most 12-inch fabs on

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the island. It has four more fabs planned as part of a
joint venture with Japan's Elpida Memory Inc in
Taichung's Central Taiwan Science Park and possibly two
more for its own use at Hsinchu Science Park (ref A).
ProMOS currently has two operational 12-inch fabs with
two more planned in Taichung. According to Powerchip,
Taiwan already controls 40 percent of 12-inch wafer DRAM
output, compared to South Korea's 30 percent.


5. (U) Taiwan DRAM firms are also preparing to expand
production to Mainland China as well. Taiwan regulators
approved in December 2006 long-pending applications by
Powerchip and ProMOS to build fabs in the PRC (ref C).
ProMOS has indicated that it will build a fab in
Chongqing. The Chongqing municipal government has
reportedly agreed to invest US$200 million into
construction of the fab. ProMOS does not plan to produce
DRAM at the Chongqing facility but instead will make
power management and display chips for cellular phones
(ref E). Powerchip's plans do not appear to be as far
advanced as ProMOS's.

Foundries - TSMC and UMC Going Strong, SMIC Not So Scary
-------------- --------------


6. (U) Taiwan's semiconductor contract chip makers or
"foundries" consolidated their dominance of the global
market in 2006 despite dire predictions earlier that PRC
foundries would eat into their market share. Foundries
do not market their own semiconductor chips but instead
produce them for other semiconductor companies, most of
which lack manufacturing facilities of their own.
Revenue for Taiwan foundries grew by 18 percent in 2006
after declining by 6.3 percent in 2005. The industry
leaders had impressive earnings too. Taiwan
Semiconductor Manufacturing Company (TSMC),the world's
largest foundry, earned profits of US$3.8 billion in 2006.
UMC, number two in the world, earned almost US$980
million. Taiwan foundries were able to preserve their
global market share of approximately 70 percent.


7. (C) Until recently, many observers speculated that PRC
foundries, especially Semiconductor Manufacturing
International Corporation (SMIC),would begin to erode
market share and profitability of Taiwan firms. However,
that threat appears to have faded. SMIC has vied in
recent years for the position of third largest foundry
with Singapore's Chartered Semiconductor Manufacturing
but has been unable to overtake UMC. UMC Vice President
for Corporate Marketing Lee Chung told AIT recently that
SMIC has been good at getting recognition but has fallen
further behind the last few years, especially in
production of advanced chips with feature size of 90
nanometers. According to TSIA President T.Y. Wu, SMIC is
good at building factories but that just takes money.
TSMC and UMC can still beat SMIC on quality, technology

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and efficiency, he said. However, Wu also noted that by
adding capacity and lowering prices, SMIC has had a more
damaging effect on UMC than industry leader TSMC. TSMC
Public Relations Principal Specialist Michael Kramer
commented to AIT that his firm sees cooperation between
Chartered and IBM as more of threat than SMIC.


8. (C) After Taiwan's Ministry of Economic Affairs
announced in December 2006 that it would accept
applications from Taiwan semiconductor manufacturers to
build factories using 0.18-micron technology (ref B),
TSMC indicated that it would upgrade its facilities in

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Songjiang, China, to use the more advanced technology
soon. Until now, Taiwan fabs in Mainland China have been
limited to 0.25-micron technology. TSMC is the only
Taiwan firm with an approved operational fab in China.
UMC's Chung told us that his firm is no closer to
resolution of its legal difficulties regarding its
relationship and alleged investment in Hejian Technology,
another PRC foundry. He complained that personnel

TAIPEI 00000407 003 OF 004


changes at Taiwan's Financial Supervisory Commission have
delayed the case.

Packaging and Testing - Rising and Surprising
--------------


9. (U) It was also a good year for Taiwan's semiconductor
packaging and testing firms, which take wafers produced
mainly by Taiwan's foundries, cut them into individual
chips and package them into integrated circuits (ICs).
Taiwan's packaging segment grew by 23 percent in 2006.
Revenue for testing was up 39 percent. Taiwan has the
world's first and third largest packaging and testing
firms in Advanced Semiconductor Engineering (ASE) and
Siliconware Precision Industries Ltd. (SPIL). They may
have benefited in 2006 from financial difficulties for
their main rival, U.S. firm Amkor. Analysts have
commented that Amkor's financial situation may make it
difficult for the firm to keep up with expansion in the
industry.


10. (U) ASE has been the focus of much attention in the
industry with the November announcement that U.S. equity
investment firm Carlyle Group plans to buy 100 percent of
the Taiwan firm (ref D). The deal sparked controversy
because some observers argued that it was an attempt by
ASE to escape Taiwan's restrictions on investment in the
PRC. Others pointed out that ASE's investment in the PRC
was not yet close to Taiwan's capital limits. Many were
also concerned that Carlyle's likely plan to delist ASE
from the Taiwan Stock Exchange would lead to similar
deals for other firms and more delistings. However, the
deal now appears to be in jeopardy. On February 15, ASE
announced that Carlyle had terminated its exclusive deal
with ASE Chairman Jason Chang. The firm is now free to
consider other options.

IC Design - Lagging but Still Competitive
--------------


11. (U) Taiwan's IC design firms lagged behind the rest
of the industry last year. IC design firms, which design
and market integrated circuits but hire foundries for the
manufacturing process, grew by 10 percent in 2006.
Taiwan's IC design firms have the second highest market
share among "fabless" firms, which contract out all
manufacturing. They claim approximately 20 percent of
the global market, well behind North America with more
than 70 percent.


12. (C) Taiwan IC design firms may face a greater threat
from PRC competition than other segments of the industry.
TSIA's Wu told us that PRC design firms have the

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potential to catch up quickly because even a small firm
can develop a killer application. Firms in Mainland
China, he pointed out, have no lack of resources and
skill; in addition, they benefit from better access to
the PRC market and locally-developed standards. He noted
the recent success of Zhuhai Actions Semiconductor, which
reportedly grew by 174 percent in 2005. UMC's Chung,
however, was less impressed by growth of China's IC
design industry, commenting that Chinese firms were still
using technology two to three generations behind the most
advanced.

Comment - Still a World Power in Semiconductors
-------------- --


13. (U) The notable performance turned in by Taiwan's
semiconductor industry in 2006 sends a message to its
competitors in South Korea, China and elsewhere that it
is still a force to be reckoned with. Growth was
achieved largely through investment and expansion in
Taiwan, illustrating that the island's most successful
and advanced firms still believe that Taiwan is a good
place to do business.

TAIPEI 00000407 004 OF 004


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