TSMC chairman warns on slower growth in future

TSMC chairman warns on slower growth in future

TSMC chairman Morris Chang warned on falling sales and profits for contract chip makers due to slower chip industry growth and more competition.

The head of the world's largest contract chip maker said his industry will have trouble maintaining sales and profit growth in the future because the overall chip industry has slowed down and there's a lot more competition.

Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) plans to expand to new markets and find new work in product areas such as chips for mobile phones, digital cameras and other consumer electronics devices in order to meet these challenges, said Morris Chang, the chairman of TSMC, at the International Solid-State Circuits Conference in San Francisco on Monday. The company released information from his speech.

Overall revenue growth in the chip industry has slowed to around 6 percent per year between 2000 and 2010, from 16 percent each year prior to 2000, he said. At the same time, more new rivals have entered the contract chip making business. His company will have to find new ways to grow despite these challenges, he said.

"Growth opportunities exist in cell-phone applications, game systems, digital TV, LCD displays, power management, MP3 devices, and digital cameras," a paper Chang submitted to the conference reads.

Developing closer relationships with the chip design companies that create chips for these kinds of products will be a key strategy for TSMC in the future. TSMC manufactures chips that are designed by other companies, a business model it pioneered. Prior to the Taiwanese company's founding, small chip design firms had to ask Intel Corp., Motorola Inc. and other big chip makers to make their chips, and these companies would only comply if their factories weren't being fully used already. Most small companies didn't have enough money to set up their own chip factory because the high tech plants used to cost around US$1 billion each. Now, a new one can cost $3.5 billion.

TSMC stepped in to fill the gap, and the result has been the steady growth of chip design companies that never build their own factories. They rely on TSMC or other foundry chip makers, including Taiwan's United Microelectronics Corp. (UMC), to manufacture their chips. Mobile phone chip developer Qualcomm Inc. and graphics chip designer Nvidia Corp. are two examples of companies that have been wildly successful, despite not owning their own factories. They farm out production to foundries such as TSMC and UMC.

The success of TSMC and UMC has caused a number of new competitors to enter the chip foundry business. IBM Corp., Samsung Semiconductor Inc., and China's Semiconductor Manufacturing International Corp. are all examples of latecomers to the foundry business. These new rivals have been able to survive, and in some cases thrive.

"The growth of the industry has attracted many companies to offer foundry services. Consequently, competition between these companies increases the potential for commoditization of foundry services," according to Chang's report. He goes on to say that going forward, the best defense for TSMC will be to engage with chip design customers far earlier in the developing stage of their products, and to offer a wider range of production services.

TSMC and UMC hold around a 75 percent share of the global chip foundry business, according to investment banking firm Merrill Lynch & Co. Inc.

Last week, TSMC said it opened its first office Bangalore, India, to find new customers and help existing ones complete their chip designs faster and bring products more quickly to market.

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