Click Focuses on Taiwan

The BBC technology program Click this week focused on the Taiwan computer industry. The writeup on the BBC pages says:

Spencer Kelly visits Taiwan to see how the country's manufacturers are thriving in the global consumer electronics market.

Sitting just off China's east coast, Taiwan has long been overshadowed by its big brother in the manufacturing game.

While China is on its way to becoming the planet's biggest economy, Taiwan is considered the technological workshop of South East Asia.

Already 90% of the world's laptops are produced in Taiwan, along with vast quantities of electronics from motherboards to mobile phones.

But Taiwanese companies have started to realise the favourable commercial conditions offered by its neighbour.

Some have moved their manufacturing to China, where enormous quantities of goods can be produced at bargain basement prices.

"Thirty to forty years ago Taiwan was manufacturing for USA and Japanese companies," said Jonathan Tsang, the chairman of Asus. "But now because the living standard is already high, the manufacturing cannot compete with China, so the manufacturing has been moved to China."

I did find the highlighted phrase above amusing. Taiwan has not STARTED to realize, they realized this many many many years ago. They are among the biggest investors in China and have been heavily involved in manufacturing in China for a long time. There are laws which prohibit the migration of certain technologies to China but, for the most part, a lot of the manufacturing is carried out by Taiwanese companies in China. Perhaps it is even more truthful to argue that the conditions in China are becoming more and more unfavourable with increased taxes and increased minimum wages.

OK enough about that. To be honest I was thrilled to see the program come to Taiwan and highlight the tremendous potential and innovation here. Taiwan definitely deserves the exposure and I feel Taiwan will continue to hold its on in the tech industry for some time to come.

You can watch the program online by clicking here.

BBC: Taiwan takes on tech innovation

Chip Manufacturing Orders Down

CNET reports that orders for the equipment is used to manufacture chips has decreased. According to CNET, the orders for equipment reflects the situation for the entire computer value chain. Apparently orders are at the lowest for some time. CNET argues the industry is being plagued by both the financial crisis and the difficulties in the memory industry. CNET writes:

The chip equipment business is "on hold," said an analyst at a major industry association, and that bodes ill for the electronics industry in 2009.

Chip equipment makers signal how the electronics industry will fare in the future. They take orders from chipmakers which, in turn, take orders from electronic gadget makers.

Lara Chamness, a senior market analyst in industry research and statistics at Semiconductor Equipment and Materials International, talked about prospects for the industry in an interview. SEMI is an industry watchdog that covers the manufacturing supply chains for the microelectronic, display, and photovoltaic industries.

"We were hoping that 2009 would be the comeback year for semiconductor equipment. Now our outlook is much more cloudy," Chamness said.

On October 16, SEMI issued a report saying that the book-to-bill ratio for North American semiconductor equipment manufacturers slipped to 0.76 in September, the lowest ratio since November 2001. A lower ratio indicates lower orders.

While Chamness said the economic crisis is affecting everyone, the chip equipment industry is facing a double whammy of downturn and glut. Above and beyond the financial crisis, the overcapacity in memory has been affecting the bottom line of just about every major chipmaker, including Intel, SanDisk, Samsung, Taiwan Semiconductor Manufacturing Co., and Micron Technology.

"Things have been really difficult for the memory guys in the last few years...They're focusing on cleaning up their own operations and not expanding," Chamness said.

Then there is the worldwide financial problem on top of this. "Capital markets are freezing. So that's directly impacting capital equipment. It's indicative of what's happening in the worldwide economy," she said. "The addition of fab capacity is on hold right now. People are being very conservative with their money."

She cited TSMC, the largest contract chipmaker in the world, as an example of a company where factory utilization rates are low. "TSMC has announced a pretty significant drop-off as far as utilization goes."

This is inline with the expectation that companies will hold on to their cash (see Pundits urge companies to tighten belts, hold cash). The reason is clear. Anticipated weak demand in the near term future is forcing companies to cut back on capacity expansion directly and reduce their capital expenditures to ensure they are able to survive the storm. Companies will also be reluctant to raise debt right now as the mistrust in the credit markets has made the issuance of debt very expensive. Furthermore, borrowing money from the bank creates additional leverage with no certain mechanism to guarantee payments in the short term.

CNET: Chip gear industry's funk is a red flag

Taiwan Computer Industry Challenging Silicon Valley

OK. Don't get too excited yet. I don't think Taiwan is going to take over from silicon valley anytime soon but they are certainly starting to make strong challenges in certain technology sectors. Mercury News writes:

TAIPEI, Taiwan — First came the slim fashion models, hugging the slim new laptops.

Then a tuxedo-clad Jerry Shen, chief executive of Asus, stepped onto the stage earlier this month to introduce his company's new S101 mini-laptop to a horde of reporters. He stood in front of a sign that likened the new product, which is now going on sale in the United States, to "fashion on the go."

And just Wednesday, another low-profile Taiwanese tech company took center stage: Little-known HTC introduced the much-hyped first cell phone based on Google software.

These moves signal a dramatic shift in the island's high-tech focus as it seeks to step out of its behind-the-scenes role as a manufacturer and into the spotlight as a direct challenger to Silicon Valley's dominance in the consumer product market.

It wasn't long ago that the closest a Taiwan technology company came to buzz-making was through assembling products for the likes of Apple and Hewlett-Packard.

"A company going bankrupt in Silicon Valley had a better image than a successful company in Taiwan,'' said Stan Shih, founder of Acer who now heads iD SoftCapital, an investment management and consulting company. "Brand Taiwan" includes computer makers Asus and Acer, the world's No. 3 PC vendor, as well as HTC, a manufacturer of mobile phones. They are among a host of Taiwanese tech companies — along with Chinese computer maker Lenovo — trying to move out of the shadows of Western super brands.

It is funny that a bankrupt company would have a better reputation than a successful Taiwanese company. However, as the article states, Taiwanese companies are starting to stand on their own two feet and starting to grow in market around the world. Tech companies in the US and elsewhere need to be especially cautious. If Taiwanese companies actually manage to get their branding right they will be very tough competitors. However, it is a big if.

I recently spoke with the marketing manager of a big computer company in Taiwan. The manager has a masters degree from an overseas university and is fluent in English. When I asked how the company manages the brand portfolio she didn't understand what I meant by brand portfolio. When I asked how they brand products I was told they thought of creative names. Unlike Acer, Asus, VIA and a few others, most tech companies fail to see the importance of employing professional brand managers. It is all lumped under the product manager who inevitably focuses on a number of products from different product lines.

From my experience many companies in Taiwan view brand managers as unnecessary luxuries. They would rather do the best they can with what they have got. It is sad really as many of these companies could be great if they could brand their products properly. I am sure in time they will learn but for now they will have to continue up the learning curve.

Mercury News: Taiwan PC makers ready to challenge Silicon Valley in the tech marketplace

Notebooks Continue to Grow in EMEA

Research group IDC says the notebook industry in EMEA has continued to show strong growth despite the current economic crisis. According to IDC:

Driven by continued buoyancy in the notebook market and the additional momentum created by the new "Mini Notebook" segment, PC shipments recorded a robust 27% increase in EMEA (Europe, Middle East and Africa) in the third quarter of 2008 (3Q08) compared with the same quarter last year, according to preliminary data released by IDC EMEA.

Despite gloomy economic confidence in several European countries, notebooks continued to drive overall market growth at over 52% year on year as consumer demand showed no sign of slowing down in Western Europe and continued to grow in CEE and MEA, while the market also benefited from sustained demand in the business space.

A large portion of this growth has been driven by the introduction of mini PCs into the market a year ago. ASUS first released the Eee PC but was quickly followed into the sector by other players such as ACER. According to IDC, ACER is now the no. 1 supplier of notebooks in the EMEA region. IDC says:

Acer made an explosive entry in the mini notebook market, which, combined with continued growth of its mainstream notebooks as well as desktops, propelled the Taiwanese vendor to the number 1 position in the overall EMEA PC market ranking for the first time. Acer deployed a massive push of its Aspire One across both the retail and telco channels, which contributed to soaring volumes, further strengthening its position in the notebook market. The vendor also continued to gain share in the desktop space, benefiting from the exit of local players from the Western European desktop market.

Asus in the meantime maintained their no. 4 postion in the EMEA region. IDC notes:

Asus stepped further up to fourth place shipping over 2 million units this quarter, leveraging from the unabated success of the Eee PC product range. Boasting the largest mini notebook portfolio with varied spec options, the vendor maintained strong push into the retail channel, whilst sealing a multitude of deals with telco operators across EMEA. The elevated exposure and brand recognition gained through the Eee PC also contributed to strong growth of its mainstream notebook portfolio.

Although this is optimisitic news in declining times, one should remember the average selling price of the mini PCs is much lower than a notebook computer and therefore although per unit sales have grown rapidly, the overall revenue streams would not have grown as quickly.

IDC: Major Push of "Mini Notebooks" Boosts Consumer Demand and Drive A Strong Back-to-School Quarter in EMEA, Says IDC

AUO’s Q3 Profit Drops

AU Optronics (AUO) Q3 profit has dropped to the lowest in six quarters further reflecting the declining economic situation. AUO are not sure how long it will take for the industry to recover and are taking steps to ensure they can survive the current storm. According to the Taipei Times:

AU Optronics Corp (AUO, 友達光電), the world’s third-largest maker of flat panels, posted the weakest quarterly net profit in six quarters as corporations and consumers tightened spending on PCs and slim-screen TVs.

Net income plunged 96 percent to NT$860 million (US$25.83 million) in the July-September quarter, from NT$22.57 billion a year earlier. It was the lowest level since the second quarter of last year, during which the company made NT$5.92 billion, AUO said in a statement.

“We are not sure how long it will take for the industry to pick up from the U-shape trough. But, we are taking actions against this downturn,” vice chairman Chen Hsuen-bin (陳炫彬) told investors.

AUO plans to cut its capital spending for this year and next year by a combined 20 percent to less than NT$200 billion by pushing back the start of mass production of a new advanced line by one year to 2010, joining bigger rival LG Display Co Ltd’s step of slowing capacity expansion.

Cutting back on CAPEX and downsizing the workforce is probably all they can do right now. It is good to hear they have chosen the former option. Companies should also right now be looking to aggressively control their costs and improve their efficiencies accross the board. To gain advantages in any other area is going to be difficult.

The reduction in profits also reflects a reduction in the average selling price and the intensification of competition. According to the Taipei Times:

In the third quarter, the average selling price for liquid-crystal-display (LCD) panels dropped 21 percent from last year to an average US$137 per unit, which drove gross margins down from 23 percent a year ago to 8 percent, as the weakening global economy reduced consumer consumption.

AUO is one company big enough and smart enough to weather the current downturn. It all depends on how long the downturn lasts.

Taipei Times: AUO’s Q3 profit drops to six-quarter low

Taiwan Weathering the Storm

So the financial crisis is getting deeper. Trying to ignore it doesn't help. It seems there is not much anyone can do. Paulson in the states is trying to figure out a new rescue package but the markets must self correct before there is any hope of recovery. How much worse will it get? Nobody knows. Are we at the bottom yet? Nobody knows (but I suspect not). Taiwan hasn't escaped the storm however.

First up the Taipei Times reports the unemployment rate on the island hit a four year high. They said: "Global financial turmoil took the blame yesterday for pushing the nation’s unemployment rate up to 4.27 percent last month, a figure expected to continue climbing as the crisis unfolds." The Times continues writing: "The unemployment rate hit a four-year high of 4.27 percent last month, up 0.13 percentage points from a month earlier, defying a seasonal drop in unemployment normally seen at the end of summer, a report by the Directorate General of Budget, Accounting and Statistics (DGBAS) showed yesterday."

The Taipei Times also reports Nanya posted their sixth straight quarterly loss. The times says: "Nanya Technology Corp (南亞科技), the nation’s second-largest supplier of computer memory chips, yesterday posted its sixth consecutive quarterly loss, which it attributed to the collapse of chip prices over an unresolved glut and sagging demand." The Times continues saying: "In the quarter ending Sept. 30, net losses widened to NT$8.77 billion (US$265 million), compared with NT$1.66 billion a year earlier and NT$7.36 billion in losses in the second quarter."

Reuters reports Nanya's main Taiwanese competitor, PowerChip, also has had a rough time. According to Reuters: "Shares of Powerchip Semiconductor Corp Taiwan's top DRAM chip maker, fell more than 3 percent to a one-month low on Wednesday, a day after the company posted a record quarterly loss that was worse than forecast. At about noon, Powerchip shares had slid 3.4 percent to T$4.61, underperforming the main TAIEX's 1.4 percent fall."

Circuits Assembly (CA) writes the globabl financial meltdown is having an impact on EMS/ODM companies. According to CA:

There’s no question the broader economic situation is being felt at the EMS/ODM level. ODM shipments are dropping tremendously this year. The No. 1 company, Compal Communications, a supplier to Motorola, Nokia and LG, has seen shipments drop 33.3% from last year. No. 2 Quanta dropped 7.5%, while Qisda is down a whopping 50%. TPV dipped 14.3%, and Asus is down 6.1%.

CA continues:

The big question now is, Of the EMS companies and ODMs, who’s going to survive? And are there any likely bankruptcies? According to a new report by iSuppli, most firms are okay. However, without naming names, Pick suggested some firms could be in trouble during a recession. The iSuppli report, “Recession Hits EMS/ODMs,” is due out Nov. 7.

Digitimes reports leading IC Testing and LCD vendors have also seen a significant decline in their profits. According to Digitimes:

Two leading Taiwan IC testing and LCD equipment suppliers Mirle Automation and Test Research (TRI) have seen a decline in profits for the first three quarters of 2008 due to weak market conditions, according to the companies.

Mirle said that its pre-tax profits dropped 46% on year to NT$43 million (US$1.31 million) in September 2008 although its sales for the month were up 4% from a year earlier to NT$3.4 billion.

For the first nine months of the year, pre-tax profits totaled NT$440 million, down 24% from a year earlier, Mirle noted. FPD (flat-panel display) and materials handling equipment accounted for 55% of Mirle's total revenues.

There are many other doom and gloom stories out there. There is not much left companies can do until demand for computer products picks up again. Computer products in most households are luxury items and people will cut such items out of their budgets first. If the economy continues to slide there will be a lot of strife in the future and all these companies can really do is to continue working towards their strengths, staying as financially strong as possible (easier said than done), and getting ready for when the economy recovers. Until then, life is going to get increasingly uncomfortable for all those in the tech industry.

Taipei Times: Jobless rate hits four-year high
Taipei Times: Nanya posts sixth consecutive loss
Reuters: Powerchip shares hit 1-month low after record loss
Circuits Assembly: Recession Spells End of Foxconn Effect, Analyst Says
Digitimes: IC testing and LCD equipment vendors report declined profits for Jan-Sep period

Financial Crisis Affecting Electronics Industry

We have noted before on this blog that the electronics industry will not be immune to the downturn in the US Economy and that the financial impact will have some effect on the consumer electronics industry. Business Week recently wrote about the predicted downturn. According to Business Week:

Spending on electronics and appliances fell 13.8% in September, compared with 5.5% in August, according to MasterCard Advisors' SpendingPulse service, which provides data on MasterCard (MA) transactions. Electronics retailer Best Buy (BBY) may have had a 9% to 10% sales decline in the second half of September, according to Bernstein Research analyst Craig Moffett, citing company filings. The financial crisis that's crimping interbank lending and dragging down stocks accelerated in the second half of last month.

Sales of big-ticket items such as flat-screen TVs may be in for the biggest drubbing, analysts say. Rather than pony up for a new high-definition TV set, many consumers with analog TVs may simply opt for sub-$100 digital TV converter boxes as they gear up for the February 2009 deadline for the digital-TV transition. "HDTV sales may be the next shoe to drop," Moffett wrote in a recent report. That bodes ill for manufacturers like Sony (SNE), Samsung, and LG. Fewer TV purchases could in turn have an impact on satellite-TV providers DirecTV (DTV) and DISH Network (DISH), whose sales of service packages are closely linked to new TV purchases, Moffett reckons.

Makers of high-end laptops also have cause for concern, says Roger Kay, founder of consultancy Endpoint Technologies Associates. Apple said on Oct. 14 that it's shaving $100 off the price of its entry-level MacBook (BusinessWeek.com, 10/15/08). Other manufacturers may follow suit or roll out more ultramobile PCs, smaller, less powerful laptops that can cost $50 to $200 less than laptops, Kay says. So far, that category of machines "has not cannibalized our notebook sales," says Mark Hill, general manager for U.S. sales. Nor has Acer detected a slowdown in demand, he says.

Declines in the consumer electronics industry will definitely impact the entire electronics value chain. Right from the raw material suppliers, through to the PCB manufacturers, chipset manufacturers, silicon foundries, computer manufacturers etc. This value chain is predominant in Taiwan and therefore the negative effect of a worsening global economy may be magnified in Taiwan.

The technology industry in Taiwan is the predominant industry and tech companies make up a large portion of the TAIEX. Also, a lot of Taiwanese people have a lot of their wealth invested in the markets. Any decline in the market will significantly impact their desire to spend.

No doubt there will be interesting times ahead for many companies here in Formosa. Some industries will at a guess consolidate and over the short term there maybe cutbacks and layoffs but, when the economy improves, those companies left standing will have a lot of opportunities.

Business Week: Rough Times Ahead for the Electronics Industry

Sales Down Accross the Computer Industry

Yep, sales for computers and associated products are in decline. The following list is a smattering from some of yesterdays headlines:

• Nanya parent level September sales down 20.92% from a year earlier and down 16.87 pct from the previous month. -- Trading Markets
• "Advanced Semiconductor Engineering (ASE) has posted consolidated revenues of NT$8.32 billion (US$256.8 million) for September, down 5.3% on month and also down 15.1% on year" -- DigiTimes
• "Citigroup yesterday lowered its forecast for growth of global PC shipments this year to 13 percent from 15 percent on concerns of slowing demand amid global financial turmoil." -- Taipei Times
• "UMC, the world's No. 2 contract chip maker, said on Wednesday its September sales fell 23.6 percent from a year ago, declining for a fourth straight month, after a slowing global economy hurt technology demand." -- Reuters

Yep, the economy is hurting so it seems.

More Pressure from the Financial Markets

Yesterday in Madness in the Markets we looked at the effect of the financial meltdown on some tech sector companies. Following this theme today we read on the China Economic News (CENS) that spending on semiconductor manufacturing equipment is predicted to be in decline. According to CENS:

Semiconductor Equipment and Materials International (SEMI) recently cut its 2009 forecast of global capital expenditure on semiconductor manufacturing equipment to somewhere between a 5% growth and a 10% decline, sharply down from a 20% surge it previously forecasted.

The trade organization, which represents suppliers of semiconductor equipment and materials and suppliers of liquid-crystal display equipment and materials, ascribed the bearish forecast mostly to the worsening global financial crisis.

Some equipment suppliers pointed out that the market is now anemic. Taiwan Semiconductor Manufacturing Co. (TSMC), the world`s No.1 silicon foundry, is reported to further cut on expenditure plan for next year while No.2 supplier United Microelectronics Corp. (UMC) is said to spend US$400 million, compared with this year`s US$600 million outlay.

Total 2009 expenditure by Taiwan`s top four dynamic random access memory chipmakers-PowerChip Semiconductor Corp. (PSC), ProMOS Technologies Inc., Nanya Technology Corp. and Inotera Memories Inc.-is estimated to be only half the NT$88 billion (US$2.7 billion at US$1:NT$32) they spend this year. Weak market has sent spot market price of 1-gigabyte DDR2 chip slumping to only US$1.2 apiece.

SEMI estimated the financial meltdown to force global spending on equipment down by 20% throughout this year. Applied Materials, the world`s No.1 supplier of semiconductor manufacturing equipment and materials, even announced a drastic 40% drop.

Such downbeat mood has infected fabless houses: Realtek Semiconductor Co., Ltd.`s vice president, J.S. Chen, estimated the downturn would last at least six to nine months.

Industry watchers pointed out that, unlike past market downturns, this downtrend is across-the-board, giving almost no sector a chance to bring about a boom cycle. To weather such hardship, chipmakers choose to hold more cash.

I don't think any industry is immune to the meltdown. The semiconductor manufacturing is an expensive game and holding on to cash is an important part of the equation. Highly-geared companies in this environment with uncertain or declining cash-flows may be in serious trouble. Semiconductor manufacturers will then be loath to spend on expensive fabs.

As if to reiterate the effect of the financial meltdown on different companies,Winbond revenues decline by 40%. According to Digitimes:

Winbond Electronics reported September revenues of NT$1.677 billion, a decrease of approximately 9.25% compared with NT$1.848 billion in the previous month. September's sales were also down more than 40% from the same period one year earlier.

Accumulated revenues for January to September of 2008 were NT$18.05 billion, down 29% from one year earlier.

September business was negatively affected by a soft DRAM pricing. Under a weakening macroeconomic environment and in order reduce losses, Winbond continues shrinking technology, driving cost reduction and adjusting production capacity to niche products.

Winbond are struggling but at least they are proactively trying to reposition themselves by focusing on cost reductions and targeting niche product markets.

CENS: SEMI Cuts 2009 Forecast of Semiconductor Equipment Capex
Digitimes: Winbond September sales down 40% on year

ITRI Taking the Lead Again

Taiwan's Industrial Technology Research Institute (ITRI) is reportedly forming an R&D alliance with industry to develop AC LED applications. The China Economic News (CENS) writes:

Taiwan`s government-funded Industrial Technology Research Institute (ITRI) has teamed up with scores of LED (light-emitting diode) makers to form an R&D alliance, in a bid to integrate industry resources to develop applications for AC LED technology, according to industry resources.

ITRI has led the development of AC LED technology, which allows LED makers to build AC drivers instead of DC drivers into LEDs for improved thermal conductivity and advanced packaging. Besides, AC LEDs are smaller and more energy efficient than conventional models-cutting energy consumption by 15-30% by going from DC to AC.

Johnsee Lee, president of ITRI, noted that AC LED technology is the pride of the institute, which is fully protected by international patents and has piqued intense interest among major, international LED makers, such as Philips. And the institute`s move to ally local LED makers will hopefully urge its members to set testing standards and safety certifications for AC LED applications.

So far 19 LED makers have joined the alliance, including Epistar Corp., Lite-On Technology Corp., Tyntek Corp., Everlight Electronics Corp. and Forward Electronics Co., Ltd. Lite-On indicated that the AC LED technology will likely help insiders to go upmarket with patents and spark a revolution in Taiwan`s LED industry.

In fact, four Taiwan-based LED makers are already working on AC LED technology by themselves, with Tyntek and Epistar already engaged in development of high-efficiency AC LED chips; Forward in mass production technology of 5W AC LED modules, and Lite-On in packaging technology for high-power AC LEDs.

ITRI as a government organization is a rather effective group. Most of the semiconductor industry in Taiwan grew out of their initiatives and they are constantly looking for ways to enhance Taiwan's globabl competitiveness in the technology sector. This alliance therefore comes as no surprise. Encouraging Taiwanese companies to become sector leaders is good for Taiwan and the industry here and hopefully the alliance is a success.

CENS: Gov`t-Funded ITRI in Taiwan Forms R&D Alliance for AC LED

ASUSTek Sees Notebook Shipment Growth in 2009

ASUSTek are predicting growth in sales during 2009. According to the Taipei Times:

Asustek Computer Inc (華碩電腦) expects its annual notebook and netbook computer shipments to total around 12 million units next year, up from 11 million units this year despite the global economic slowdown and sluggish consumer demand, a company official said yesterday.

The specific forecast will be released in December, Jerry Shen (沈振來) Asustek’s chief executive officer said in a media briefing yesterday.

The company’s notebook sales are expected to reach between 6.2 million and 6.3 million units, Shen said, adding that the Taipei-based company wants to expand its customer base and enter into the middle
and high-end notebook market early next year.

Isn't it great to see optimism by some companies in these dark times of financial market metldowns and credit market concerns? ASUSTek have done well since the launch of the netbook last year and are growing in competitive strength. It is also interesting to see they are broadening their customer base and will be targeting a new market segment next year. The high-end notebook market is certainly where the higher margins can be made but it will be a little more difficult to penetrate this sector I feel. However, if they can use their pre-existing channel to bring these products to market there is no doubt they can succeed.

Taipei Times: Asustek expects shipment growth for notebooks

AMD Split and Implications for TSMC

I am scratching my head here a bit because I just read an article on internetnews.com that looks at AMD's foundry spin-off (The Foundry Company) competitive targeting of TSMC. The reason I am scratching my head is that they claim AMD will have a technological advantage over TSMC because they already have 45 nm processing technologies in place. According to them (emphasis added):

With a long-term goal of being a player in the semiconductor foundry space, TFC now has its sights set on TSMC and other established players. But it won't have the capacity to go head-to-head, notes Spooner. While TSMC has 11 fabs, AMD had only its Dresden facility and its planned New York facility, which is years away from completion.

But TFC will also have an advantage of being much more cutting-edge in its manufacturing capabilities than TSMC, putting it closer to Intel. TSMC is just reaching 55 nanometer die sizes, while AMD, thanks in part to a technology alliance with IBM, is at 45nm and heading to 32nm.

The Foundry Company will join IBM's joint development alliance, a group of leading semiconductor companies collaborating on next-generation silicon technologies, with the ultimate aim of reducing die sizes to 22nm.

This means mean TFC can go gunning for TSMC customers. TSMC has an impressive collection of customers, including Broadcom, Conexant, Marvell, NVIDIA, VIA and ATI, which AMD now owns.

"The Foundry Company will be aimed at the very high end of the market, because they will offer very cutting-edge technologies and will be able to come to market before TSMC," Spooner told InternetNews.com. "I'm not sure how much revenue they can generate going forward. It all depends on how quickly they bring on partners."

This will also let TFC invest more heavily in the fabs than AMD could have all by itself, and it can make more money by making chips for other firms than AMD. AMD's fabs have some problems, most notably they don't use 300 millimeter wafers yet, they still use 200 mm.

A larger wafer means more chips can be made at once, and thus reduce manufacturing costs. Spooner said that with the backing TFC now has, it can make that transition.

First up, TSMC does have a 45 nm fab. All one needs to do is check their website here and you will see the following graphic:

Notice they do have at least one 45 nm fab with an additional two in the works and a plan for three 32 nm fabs. They also seem to have plans for 28 nm processing technology by 2010. TSMC is very competitive in the foundry business and should not be taken lightly.

There is also an issue of long term contracts and established partnerships with TSMC. TSMC also has a great deal of knowledge of how to be competitive in the pure-play foundry industry. AMD spin-off The Foundry Company (TFC) may have big ideas, but it will not be as easy for them. They are going up against a smart competitor with large market share. Remember the last time they did that against Intel they lost.

At any rate, I guess TFC knows more about TSMC's capabilities than either me or the author of that article and I am pretty sure they will not enter this market naively. If they do, they will be in trouble.

Internetnews.com: AMD Dumps Fabrication Plants

AMD Loses Their Manhood

In July in Is AMD Going to Spin-Off their Manufacturing we noted foundry industry observers were commenting AMD were going to have to spin-off their fabs to stay viable. Later we noted in AMD's Asset Smart Strategy: What is it? AMD had adopted an asset-smart strategy. Although this strategy was not clear it was predicted that AMD meant they would be dumping their fabs. Well, its come to pass. AMD will no longer manufacture their own chips. According to the New York Times (NYT) AMD are going to split into two companies. One will focus on chip design and the other on manufacturing. According to the NYT:

Advanced Micro Devices said Tuesday that it would split into two companies — one focused on designing microprocessors and the other on the costly business of manufacturing them — in a drastic effort to maintain its position as the only real rival to Intel.

In addition, the company said two Abu Dhabi investment firms would inject at least $6 billion into the two firms, mostly to finance a new chip factory that A.M.D. planned to build near Albany, N.Y., and to upgrade one of the company’s existing plants in Dresden, Germany.

A.M.D., based in Sunnyvale, Calif., makes graphics, computer and server processors. It will own 44.4 percent of the new entity, which has been temporarily named the Foundry Company, a reference to the technical term for a chip factory. The Advanced Technology Investment Company will own the rest.

Advanced Technology, which was formed by the Abu Dhabi government, has promised to put up $2.1 billion immediately and contribute $3.6 billion to $6 billion more to build or upgrade chip fabrication plants, also known as fabs. A.M.D. said the two companies would share voting control equally.

The Mubadala Development Company, an Abu Dhabi company that bought 8 percent of A.M.D. in November, will pay $314 million for 58 million newly issued shares, increasing its stake in the presplit company to 19.3 percent. It will also get warrants to buy 30 million shares. A.M.D. stock closed Monday at $4.23 a share, down 30 cents.

“We generally believe this deal is a game changer for the industry,” said Khaldoon Al Mubarak, chief executive of Mubadala. “It’s bold, and I think it’s smart.”

Coming up with the billions of dollars needed to construct each new chip plant has proved to be a huge drain on A.M.D., the perennial No. 2 to Intel in the market for microprocessors, the powerful chips that control the functions of personal computers and the larger corporate machines known as servers. As of June, A.M.D. reported that it had $5.3 billion in debt and just $1.6 billion in cash.

With the constant need to devise smaller, faster, more energy-efficient chips to keep up with Intel, A.M.D. was forced to turn to outside help.

Well this turn of events was certainly not unexpected. AMD have been smashed around for the better part of three years in a ruthless price war with Intel. They are on the ropes and there is nowhere to go except to be broken up and allow the latent value in either firm to be unlocked somehow.

This will however have an impact on the global semiconductor industry. A new foundry provider in these dark times will increase the competitive environment in the pure play foundry business and smaller competitors may feel the pinch of it. I suspect TSMC, the world's pre-eminent pure-play foundry, will not be effected initially but they certainly cannot ignore the emergence of a new player in the game.

So why is this piece titled "AMD Loses Their Manhood"? The NYT answers (emphasis added):

The split, which has been in the works for more than a year, did not come easily to A.M.D. According to company lore, A.M.D.’s co-founder and longtime chief executive, W. J. Sanders III, known as Jerry, once remarked that “real men have fabs.”

Under the deal proposed by A.M.D., the company would retain many of the traditional benefits of fabs, since part of Foundry will be dedicated to serving A.M.D. and will remain in close communication with the company’s engineers.

“We feel like we’re still pretty manly at A.M.D.,” Mr. Meyer said. Noting that Mr. Sanders made his quip over a decade ago, he added, “Frankly, the math has changed.”

Welcome to a whole new semiconductor landscape, the future will be interesting.

New York Times: A.M.D. to Split Into Two Operations

Madness in the Markets

OK OK. We have to comment on the stock market. Everyone else is so why not us? If you are reading this blog you probably do know the markets have declined significantly (at least I hope you do!) Yesterday the Taiwan stock market slumped to a four year low! According to Forbes:

Share prices tumbled to close at a four-year low, led by financials, on fears that the bailout program for the US financial sector may not be able to avert a worsening of the economy, dealers said.

Last month's heaviest US job losses in five years outweighed congressional approval of a sweetened 700 bln usd rescue package for stricken financial institutions, they said.

The weighted index closed down 236.53 points or 4.12 pct at 5,505.70, the lowest close since 5,427.75 on Aug 18, 2004.

Yesterday (last night) the Dow Jones index slumped 370 points after a spectacular 800 poin intraday decline. The NASDAQ slumped 4.34% and the S&P500 closed down 3.85%. Yes, its all misery in the markets! What can be expected today? Who knows. These are mad times with sudden declines and fantastic bounces. The market is meant to be efficient, perhaps it is hyper-efficient these days or something more.

Personally I was surprised when people were cheering the US$700 billion bailout. The bailout may provide some relief to the system but the underlying cause of the crisis is still there. The cause being mistrust between banks and between banks and customers. Nobody knows who had got debt and where and if they loan money to someone if they will ever see the money repaid. This toxic debt is everywhere and a banker friend of mine said the toxic debt has seeped out of the mortgage backed debt securities and into other asset classes. Bankers the world over are expecting to see worse to come. When I was in Hong Kong on the weekend, the South China Morning Post had a big article saying HK's top banker predicts HK has still not experienced the worst of it yet. But who really knows what the future holds? (DO we still trust the bankers?)

However, for the companies still competing this meltdown does have incredible significance. Interest rates on loans are soaring and this means debt financing of capital expenditures and other growth endeavours will be increasingly limited. Bloomberg writes:

Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge more to renew lines of credit.

"Capital is fleeing to safety," said Edward E. Liebert, treasurer of Rohm & Haas Co., who took part in the 90-minute call organized by the National Association of Corporate Treasurers. ``Interbank lending is not free-flowing any more,'' said Liebert, 56, chairman of the Reston,
Virginia-based trade group.

One bank charged a participant in the call 80 basis points to renew a routine $25 million credit line, according to Liebert, who wouldn't identify the speaker or the company. Rohm & Haas, based in Philadelphia and rated BBB by Standard & Poor's, is paying 8 basis points for a $750 million revolving line of credit provided by 13 banks, the treasurer said. A basis point is 0.01 percentage point.

And how does this affect the Taiwan hi-tech industry? Well, Bloomberg continues saying:

The Association of Corporate Treasurers, a London-based group similar to NACT, has advised members to draw down credit lines on a two- to seven-day basis, rather than the one to three months that's typical. This may prevent triggering so-called market-disruption clauses that allow banks to renegotiate terms and raise rates, said John Grout, the association's policy and technical director.

Such a clause was invoked against Taipei-based Hon Hai Precision Industry Co., the world's largest contract-electronics manufacturer, after Lehman Brothers Holdings Inc. declared bankruptcy Sept. 15, the company said. A group of 12 lenders including Bank of Tokyo-Mitsubishi UFJ Ltd. more than doubled the premium they charge Hon Hai for a $1.04 billion loan, according to Bloomberg data.

Hon Hai was unfortunately in the middle of the squeeze and will now have to pay a higher premium. But this has implications for the entire industry here. Many of the tech industries are capital intensive and require large amounts of funds to build factories and develop R&D capabilities. If banks are charging higher premiums and pushing up interest rates, debt financing becomes more expensive. Companies will then probably scale back CAPEX and expansion and development plans leaving them to grow more slowly.

iSuppli highlights how the credit crisis is impacting the DRAM industry as a whole:

Already reeling from a major downturn in business conditions, DRAM suppliers now face another challenge: raising money for servicing debt and for funding capital spending, according to iSuppli Corp.

“Although the epicenter of the credit crisis is in the United States, banks from all over the world are being strained by the U.S. housing market and by the destabilizing impact of bank failures in the nation,” said Nam Hyung Kim, director and chief analyst for iSuppli. “Even with the expected intervention by the U.S. government, this crisis means the cost of capital will rise because cash-strapped banks will be reluctant to take on big, risky ventures. This is a particular challenge for the capital-intensive DRAM manufacturing business. DRAM suppliers that already are facing cash issues soon may not be able to service debts that are coming due soon. Furthermore, DRAM suppliers may encounter problems in trying to finance their capital expenditures.”

Kim warned that some DRAM firms will face serious liquidity issues in the near future, based on the pace of their cash burn and the maturation of their short-term debt.

“Amid weak market conditions and the credit crunch, cash management has become the most critical issue facing DRAM suppliers,” Kim observed. “This will have the impact of reduced capital expenditures among DRAM suppliers in early 2009.”

While some observers have identified DRAM supplier Qimonda AG as being the company most at risk due to the current conditions, iSuppli believes the German firm is on more solid ground than many of its competitors.

“Qimonda actually has a relatively good cash balance and a low debt ratio for potential leverage in the future compared to many other DRAM suppliers,” Kim observed.

The news of the credit crunch is becoming bleaker for everyone and there is not much anyone can do except ride it out.

Forbes: Taipei shares close at four-year low as bad US data overshadows bailout - UPDATE
Bloomberg: Treasurers Try to Keep Credit With `Hardball' Banks
iSuppli: Credit Crisis Crunches DRAM Suppliers

Medical Equipment Industry a Growth Industry

The China Economic News (CENS) writes that many Taiwanese companies involved in the manufacture of medical equipment are reaping rich rewards. According to CENS:

Impressed by the lucrative market for medical electronics, many Taiwanese IT manufacturers are gearing up to make foray into this field.

A study recently released by the government-backed Industrial Technology Research Institute (ITRI) shows that the island`s medical-equipment industry generated revenue of NT$74.9 billion (US$2.3 billion at US$1:NT$32) last year, accounting for less than 1% of global market. Also, the institute`s study shows that the Taiwan industry has posted average revenue growth rate of 16.5% in each of the past few years.

Y.W. Shau, General Director of ITRI`s Medical Electronics and Device Technology Center, noted that medical electronics still has ample room for growth as this segment now accounts for 35% to 38% of the annual global market demand of US$196 billion.

Taiwanese IT manufacturers including Hon Hai Precision Industry Co., Ltd., Quanta Computer Inc., Tatung Corp., Compal Electronics Inc., Kinpo Electronics Inc., Ritek Corp., and Johnson Health Technology Co., Ltd. have mapped out their medical-electronics schemes.

Shau noted that although Taiwan`s medial-equipment industry has developed excellent medical-electronics technologies, the industry is short of international marketing specialists. On top of that, the Taiwan industry is completely dominated by small- and mid-size manufacturers, making it hard to compete against international players.

Another disadvantage of the Taiwan industry is the extremely cautious attitude of the manufacturers towards technology cross-licensing with international players, eroding their competitiveness in international market.

The article is spot on. As many computer products have become increasingly commoditized more and more tech companies have been searching for growth sectors within the industry. Many (including my company) have jumped into developing medical computers and monitors. These are high-end products that have very demanding performance parameters. Especially targeting the medical PC industry has reaped rewards and the premium charged on these products is fairly high. However, as the article quite rightly states, there are still some issues including marketing, that need to be resolved.

CENS: Taiwanese IT Makers Seek Pay Dirt in Medical Electronics Market

Will WiMAX Come to Taiwan

The Telecom yesterday suggested the future of WiMAX in Taiwan maybe in doubt. Oh dear! The Telecom writes:

Last week, Taiwan’s six WiMax service providers considered teaming up to buy WiMax equipment in bulk as a way of reducing costs.

The six providers - Vastart Cable TV Network Co, First International Telecom Corp, Global Mobile Corp, Tatung InfoComm, Far EasTone Telecommunications, and VMAX Telecom - met to talk about the possibility of jointly procuring base station equipment.

Together the companies hoped to increase their bargaining power and secure volume discounts - potentially halving the costs of base stations.

However, this week doubt has been cast over the whole future of WiMax in Taiwan, with two companies warning that, even with joint procurement, the cost of installing WiMax networks is too high to be economically viable.

Far EasTone Telecommunications (FET), a WiMax network provider in southern Taiwan, has said that the costs of WiMax base stations and customer premises equipment (CPE) are much higher than expected.

FET vice president Chen Li-jen added that WiMax might not work properly in metropolitan areas because signals could be deflected by skyscraper windows.

Tatung InfoComm, who also operates in southern Taiwan, has estimated that it will take eight years to recoup the costs of installing WiMax base stations.

The company says this is too high a risk for an unproven technology that has yet to gain widespread acceptance.

WiMax may now be left wondering about its long term worldwide future, as it was initially billed as a low-cost solution to provide high speed wireless internet access in metropolitan areas.

This is big news. There has been a lot of emphasis on the development of WiMAX in Taiwan and Taiwan was trying to become a leader in the development and manufacturing of WiMAX products. Taiwan even hosted the first WiMAX exhibition at the new exhibition center in Taipei and there was a lot of optimism about the development of the new wireless protocol. However, if the price tag too high and break even point expected in eight years, perhaps the licensees will hold off on the development of the network.

The Telecom: Taiwan’s WiMax future in doubt

The Rise of Acer

Drew Cullen at Channel and Register has an interesting piece on the rise of Acer as a global brand. Cullen writes:

In recent years, sales of PCs have consolidated, big-time. The US and Japan are the only mature economies in which there are many significant ‘local’ PC makers – but they tend to have names like HP and Dell and NEC and Fujitsu.

In the US and in Europe, the national champions of yore have mostly fallen by the wayside. In due course the emerging economies will follow suit – maybe another Chinese PC maker will break out, to join Lenovo.

Acer saw that average selling prices were under price and margin pressure, that without differentiation, things could only get worse, and that raw performance was becoming an inadequate differentiator. The PC market was already becoming the survival of the biggest.

Acer’s prognosis was commonplace. The remarkable bit is that Acer decided to do something radical, over and above outsourcing the tin-bashing.

In brief, the company decided to build a brand business, to major on notebooks, and target small and medium business and consumers in particular. Also, it looked to the developing world – especially the BRIC (Brazil, Russia, India and China) economies as another growth engine.

In the process, Acer has become something of a Global Brand, for which Taiwan is not famous. Remember, the company once was called Multitech, which shows how much it had to learn.

Cullen is absolutely spot on. Taiwan is not known for its brands and the OEM/ODM business is prevalent right through the value chain of Taiwan's hi-tech industry. Acer is unique in that they developed a powerful global brand without anyone really noticing them. ASUS has now followed Acer's lead and spun off their manufacturing into two separate companies (Unihan and Pegatron) and are focusing on building the brand.

Sadly many Taiwanese companies now don't realize that OEM/ODM manufacturing and brand building are in some ways diametrically opposed strategic initiatives and that they cannot do both. ODM/OEM manufacturers are all focused on cost cutting and savings whereas branded products are more interested in creating value added through services and features. Of course they do try to create the value added cheaply but they usually get what they pay for including poor features and bad service which ultimately degrades the value of the brand being created.

At any rate, Cullen's article is a good read and Acer's strategy may be a template or other companies trying to move through to their own brands. Then again, maybe not.

Channel and Register: Acer: We’re comin’ at ya, Dell

Dell's Business Model Struggling to Survive

Dell's direc to order business model of selling customized computers seems to be approaching the end. Reports have been surfacing in recent weeks that Dell will be outsourcing their manufacturing and focusing on their core business of selling computers. The Statesmen writes:

Dell Inc. for years kept rivals at bay with a network of factories that custom built computers on the fly, but competitors have erased Dell's advantage and forced the company to reconsider its entire supply chain, a review that might include the sale of its manufacturing operations.

The Wall Street Journal reported Friday that Dell has approached various contract-manufacturing companies with offers to sell its factories. The company would rely instead on those outside firms to take over much of its computer-building operations.

If a full-scale sale occurs, it would mark yet another step away from the famous build-to-order, direct model pioneered by founder and CEO Michael Dell.

Dell spokesman David Frink declined to comment on the report, but he noted several instances in the past year in which Dell executives said they were reviewing all of the company's operations, including its supply chain and manufacturing processes. Company officials have often said they would expand partnerships with third-party manufacturers and designers.

Dell now assembles most of its desktop computers at factories in Tennessee, North Carolina, Florida, Brazil, Ireland, Poland, India, China and Malaysia. The company also uses several Asian manufacturers to build basic notebook computers, then it adds high-value parts such as processors and memory in one of its own facilities. Outsourcing its laptop manufacturing would eliminate one step of what Dell calls a "two-touch" model.

Industry analysts said the move was the natural result of declining profit margins in the mainstream computer business.

"You can say that the heyday of the direct model is over, but it is not totally finished," said analyst Roger Kay with Endpoint Technologies Associates in Wayland, Mass. "The value of customization is not what it once was."

He said: "Dell has twisted and turned and tried to find more ways to squeeze more money out of the business, but they have concluded that they have to go further."

Statesman: Dell may sell its manufacturing operations

Taiwan Top Brands 2008

China Economic News (CENS) reports the Taiwan External Trade Development Council has release a list of the top 20 brands in 2008. CENS writes:

The Taiwan External Trade Development Council (TAITRA) will officially unveil Taiwan’s top-20 international brands Sept. 30, which bear an estimated production value of US$9.141 billion, breaking the US$9 billion level the first time; and of which US$7.537 billion is generated by the top-10 brands.

The top 20 brands listed alphabetically are:

• Acer
• Advantech
• Asus
• Biostar
• Danze
• D-Link
• Depo
• Genius
• Giant
• HTC
• Johnson
• Leadtek
• MasterKong
• Maxxis
• Merida
• MSI
• Synnex
• Transcend
• TrendMicro
• Uni-President
• Zyxel

According to CENS:

TAITRA reportedly cooperates with Interbrand, a U.K.-based branding consultant, to organize the yearly event, which has been gaining increasing attention in recent years, hence drawing increasingly more Taiwan manufacturers to vie for the coveted title.

Yes, as we have discussed before, branding for Taiwan is becoming and imperative but so few companies do it well. Some heads of the giant companies in Taiwan agree. According to the Taipei Times:

The future of business in Taiwan lies in branding, no matter how difficult it is to achieve, Acer Inc (宏碁) founder Stan Shih (施振榮) said at a business seminar in Taipei on Saturday.

“The days of doing OEM [original equipment manufacturing] and ODM [original design manufacturing] are numbered,” Shih said. “Perhaps these businesses will thrive for another five to 10 years, I don’t know. But going forward, in order to elevate Taiwan to the global business scene with added value, we have to invest in branding right now. This is our social responsibility.”

Stan Shih received support from HTC head Peter Chou.

High Tech Computer Corp (HTC, 宏達電) president Peter Chou (周永明) was the other guest of honor at the seminar on Saturday. Echoing Shih’s stance on the future of Taiwan, he said: “Manufacturing is no longer a value Taiwan businesses can provide. Vietnam, China and other emerging countries are quickly catching up.”

Branding in Taiwan is very important but so few companies know how to do it well. Many companies think sticking a name on a product is equivalent to branding the product and see that as the end of the game. Taiwanese tech companies need to learn that branding is an essential part of their future and learn how to do it properly.

CENS: Top-20 Global Brands in Taiwan Worth More Than US$9 B.
Taipei Times: Acer head stresses branding at Taipei business seminar