Foundry Utilization Rates Set to Drop

The financial crisis is set to continue to depress the foundry industry into Q1 2009. According to one analyst, utilization rates in the foundries are set to drop by a significant amount. Solid State Technologies reports:

Wafer shipments at the world's top two foundries, TSMC and UMC, are set to plunge further than anticipated in 4Q, but the picture for 1Q is even uglier with "historic lows" looming for utilizations, according to an analyst report.

Wafer shipments sunk 30% in 4Q vs. 3Q vs. a historical average of 5%-8% growth, and FBR Research's Mehdi Hosseini says checks indicate they'll keep dropping another 20% in 1Q09, vs. a typical -5% decline, with weak demand seen in "all customers across the board," he writes. Foundry customers are seeing inventories decline, suggesting the sluggish shipments are due to weak end-demand. Look for some eye-popping floors in foundry capacity utilization, he warns -- "reaching 50% and below levels," which will further depress equipment spending.

It is no secret that part of Taiwan's success in the pure play foundry model has been there ability to maintain their high-utilization rates. Declining utilization will definitely affect their competitive advantage over the short term. Silicon foundry's are not cheap to run and any significant decrease in orders and production will greatly impact the cost of production and naturally effect gross margin these companies can expect to earn. This is certainly going to impact their abilities to develop and introduce new technologies into the manufacturing process and may even provide a space for other competitors to gain an edge over these foundries although one should think that the low utilization is spread accross the entire industry and not only affecting TSMC and UMC.

Wafer News: Analyst: Foundries face "historical lows" in utilization

Acer's Rapid Growth

Acer recently became the number one monitor player in India. Channel Times recently tried to understand some of Acer's growing success in India by interviewing S. Rajendran, Chief Marketing Officer, Acer India.

On gaining market share in LCD screens Mr. Rajendran said: "According to IDC, today we stand at the top of the heap as the no. 1 player in the overall LCD monitor market in India with a market share of 15.8% as of Q3 2008. We have grown almost 35% Y on Y from Q3 of 07, when our market share stood at 11.5%. Acer today, dominates the overall LCD monitor market in India with total unit sales of 220, 554 in Q3 2008 alone."

On the response of Indian consumers to Netbooks, Mr. Rajendran said: "The initial response to the offerings has been mind boggling. We are deluged with orders from our retailers and other partners across the country. As of now, how much we sell is more a question of supply rather than demand. We see a continued growth in the netbook front through the next quarter, given the current market scenario and the value add of the product - when comparing cost versus functionality and style."

And Mr. Rajendran also said: "On Notebooks, we continue to maintain the scorching pace we have set in the market world-wide and in India over the past few years. We will continue to be the fastest growing Notebook brand in the top 5 in India too. World-wide Acer is now the no.2 Notebook brand behind the market leader HP. We have also become the 3rd largest PC brand overall in the last one year, which showcases the success we have had across product categories during the last couple of years."

The interview also covers Acer's future channel partner plans and how Acer plans to continue to enhance its position in both the local Indian market and the global market. Its an interesting read. To read the whole interview follow the links below.

ChannelTimes: 'The Future Belongs to Acer' (Part I)
ChannelTimes: 'The Future Belongs to Acer' (Part II)

Financial Crisis Pounds Companies

Is there any good news out there? More depressing news about the state of Taiwan tech sector and economy in general. The China Post reports top Taiwanese companies are embarking on strict belt tightening measures including forced unpaid leave one day a week. According to the China Post:

TAIPEI, Taiwan -- An increasing number of leading local enterprises, including Formosa Plastics Group (FPG) and high-tech Taiwan Semiconductor Manufacturing Co., have resorted to severe belt-tightening measures to tide over the sharp business decline, according to industry sources.

Confronted with sharp business shrinkage, Formosa Plastics Group (FPG), Taiwan’s largest business conglomerate, has decided to reduce capital outlays for 2009 and have started to carry out de facto pay cuts.

FPG, under the instruction from its chief executive officer (CEO) Wang Wen-yuan, will slash capital outlays for the petrochemical sector by 30%, amounting to several tens of billions of NT dollars, including NT$30 billion of reduction for Formosa Plastics Corp., the flagship firm of the group, alone.

In addition, FPG is studying whether to expand the implementation of de facto pay cut, in the form of mandatory unpaid leave, inside the group. Presently, the employees of Nan Ya Technologies and Inotera Memories, the group’s two subsidiary DRAM (dynamic random access memory) makers, are already to take one day of mandatory unpaid leave after every five working days. This is the first time for the group to carry out the practice since 25 years ago, when it also embraced a similar measure amid the global oil crisis.

Meanwhile, the TSMC, the world’s leading IC foundry, announced on Wednesday the implementation of four days of mandatory unpaid leave per month, in addition to elimination of managerial allowances. This is deemed tantamount to a 15 percent pay cut for all employees.

In the mean time Computer World reports research firm IDC predicts a few small PC manufacturers will disapper. According to Computer World:

(Computerworld) With credit in a tight squeeze and the economy in free fall, the next few years should see the collapse of some small PC makers and a restructuring of the rest of the industry, according to an industry research firm.

Richard Shim, personal computing research manager at IDC, told Computerworld that he expects a consolidation of the market. However, he doesn't think that the big PC players, like Hewlett-Packard Co., Dell Inc. and Acer Inc., will gobble up smaller hardware vendors. Instead, he said those smaller players will simply fold up shop as the faltering economy keeps companies and individuals from buying new computers.

"It won't be so much about acquisition but the smaller players will just go away," said Shim, adding that he thinks the industry could lose fewer than 10 companies. "The big players are feeling the hurt as well. Right now, everybody is beating each other up in price. If some are going to die off anyway, what's the sense in buying them?"

Another company slashing forecasts is Mediatek, the largest mobile phone chipset maker in Taiwain. According to the Taipei Times:

In its filing to the stock exchange yesterday, MediaTek said revenue may plunge by more than 30 percent this quarter from NT$28.05 billion in the third quarter, rather than a decrease of between 9 percent and 16 percent estimated in October.

“The global financial storm has started to impact on demand in the emerging markets. End demand for all products is lower than expected,” the Hsinchu-based firm said in the filing.

The DRAM industry however is receiving some help from the local government. Although the government probably won't bail out all the DRAM companies, they are looking at ways to help the sector as a whole. According to the IT Examiner:

The Council of Economic Planning and Development (CEPD) now plans to actively promote a consolidation intitative for the ailing industry. According to CEPD chairman Chen Tain-jy, the government will also grant financial aid to manufacturers capable of developing indigenous and competitive technology.

"The plight of the DRAM industry is very much known to the government and we are taking effective measures to help. We will be very careful about doing the kind of capital injection the US is doing," explained Taiwan President Ma Ying-jeou.

Ma also acknowledged the importance of the DRAM industry in Tawian.

"Their (manufacturers) fall would not only affect the IT industry but also our banking system as well. We understand that very well. The premier and even the vice president, Vincent Siew, are involved in trying to figure out a plan for their survival," said Ma.

There is a lot of other bad news out there. Foxconn will reporterdly lay off as much as 40,000 people in China and other companies in Taiwan are laying off a significant amount of their work force. It is sad that there is nothing these companies can actually do to help themselves. Taiwan's tech sector is export dependent with most of their money coming from sales in the US, China, Japan and Europe. With the US, Japan and Europe in (or almost in) a recession, and slowing growth in China, the tech sector here wills struggle to kick itself out. All they can do is cut costs, improve efficiencies, cut back on excessive CAPEX and continue to develop and consolidate their competitive advantage. If they do this, when the slump is over they will be ready for the new fight.

Once again I believe the world economic order will be drastically readjusted after this crisis comes to pass and I am very interested to see how it affects the tech sector in Taiwan. Of course I have many friends working in and around this industry in Taiwan and so I am hoping for their sake and the sake of Taiwan's economy these companies can survive and endure. But the short-mid term will be tough.

The China Post: Top businesses adopt belt-tightening measures
Computer World: IDC: Economic crisis will kill off some PC makers
Taipei Times: MediaTek slashes fourth-quarter sales estimatesMediaTek slashes fourth-quarter sales estimates
IT Examiner: Taiwan nixes wide-scale DRAM bailout

Financial Crisis Affects Semiconductor Industry

Yesterday in Financial Crisis Pushing Taiwan's Tech Sector Down we noted how the financial crisis is affecting Taiwan's tech sector. Of course the financial crisis is not only wreaking havoc with the tech sector in Taiwan but with the global hi-tech value chain. Yesterday Reuters noted the president of SEMI as saying there will be a significant decline in global sales of semiconductor equipment. According to Reuters:

Global sales of semiconductor equipment are expected to fall 28 percent to $30.9 billion this year as deteriorating world economies prolong a slump in the chip sector, industry association SEMI said on Tuesday.

SEMI said sales had declined to levels last seen in 2003. Earlier this month, it said North American chip-equipment orders fell 28 percent in October, while in Japan they plunged 68 percent as chipmakers slashed or even froze spending.

"We anticipate a second year of double-digit decline in 2009," SEMI's President and Chief Executive Stanley T. Myers said in a statement.

SEMI said it expected a 21 percent decline in 2009 followed by 31 percent growth in 2010, although it was relying on history repeating itself as it had little else to go on.

"Impaired or non-existent business trend visibility is pervasive amidst the deteriorating global economy. Therefore our outlook for 2010 is based on patterns of previous industry recoveries," Myers said.

In related news, yesterday Kaohsiung based Applied Semiconductor Engineering (ASE), the world's largest chip packager, has cut is Q4 revenue outlook by between 25% and 28%. According to the Taipei Times:

Advanced Semiconductor Engineering Inc (ASE, 日月光半導體), the world’s biggest chip packager, yesterday slashed its fourth-quarter target, blaming accelerating contraction in demand amid a global economic slowdown.

ASE said fourth-quarter revenue could decline by between 25 percent and 28 percent quarter-on-quarter, rather than its forecast of a drop of between 15 percent and 20 percent a month ago, following in the steps of semiconductor heavyweight Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), which recently trimmed its outlook.“As end demand is shrinking faster amid deteriorating global economic prospects, the company’s fourth-quarter revenues will be lower than the forecast it made on Oct. 31,” ASE said in a filing to the Taiwan Stock Exchange.

The current financial crisis and associated slowing of demand and in the semiconductor industry is continuing to wreak havoc with the entire hi-tech value chain.

Reuters: Chip equipment sales seen down 28 pct in 2008-SEMI
Taipei Times: ASE cuts fourth-quarter sales forecast

Comments on Back in the Saddle

In Back in the Saddle we note Chinese President Hu Jin Tao as saying China's competitive advantage is being eroded in the current economic climate. I have long argued on this blog that for China to remain competitive they have to be innovators and not copiers. Anyway, one of our regular blog readers Dr. Bob Vaas (my MBA supervisor) commented on Back in the Saddle via email and gave us permission to publish his thoughts which I thought are insightful. His comments are below:

The Chinese are in real trouble - the constant expansion and growth model the government relied on is already foundering, and having chucked out all Communist ideals a couple of decades ago, the Party has a major problem. The powerbase is being eroded rapidly - no basic faith other than wealth creation and higher living standards has been promoted, and these are dropping rapidly. I saw something in our paper here today reporting Chinese wages as now being only 45% of GDP cf 52% a year ago, so the average worker is going backwards, and as output slows ....... There were riots last month in various places, and these will heighten. I just hope the Party does not decide to channel frustrations into anti-foreigner and expansionist moves - against Tiwan and Japan, for example. If I were the Chinese I'd move inot Siberia, I think, although most Russians seem to think that their Far East is actually a Chinese country with Russian troops stabilising it !

In a later email Dr. Vaas observes:

The Party has painted itself into a corner - back in Mao's time there was a moral compass (distorted, abused and cynically manipulated) with espoused societal values that, I guess, harked back to Confucian times and the co-operation of the hutongs. Despite the immorality and gross corruption of Mao's regime there were values and standards, I thought, but good ole Deng threw those out a long time ago. You end up in an Enron position very quickly going down that route, and really the Party has embarked on a Ponzi promotion for the whole country. When this sort of scheme collapses, it does so very quickly, and civil unrest will not be far behind. If the Party promises just one thing - better individual wealth and living standards - as soon as it fails to deliver on this measure, it has no other goals or objectives which it can point to as counterbalances to the lack of cash today. Unlike African countries like Zimbabwe where a completely corrupt government can beggar the nation, but the individual can revert to subsistence farming as there are no very big city populations, China cannot rely on the masses heading back to the paddy fields as the city's masses were never there. An urban population the size of Shanghai's will not suddenly take up agriculture and feed themselves - especially if they have large monetary debts overhanging them.

So far, I have been very impressed by the Party's management of growth - they have maintained civil order in most areas, delivered inproved living standards for a large chunk of society, and avoided inflation and monetary and fiscal problems. Their investment in infrastructure is in stark contrast to Russia, where all the novel wealth has disappeared into the Kremlin and the oligarchs offshore accounts, and nothing has been invested at home. Not a new high speed railway line between St Petersburg and Moscow, even ! This was planned 15 years ago, work started about a decade ago, and was abandoned 5 years later - compare that to the Lhasa railway ! I know, the Lhasa railway is there to get the PLA into a hotspot quickly, but it is a mind blowing piece of infrastructural development.

Insightful food for thought! Many people refuse to see the underlying issues that are related to China's economy. Many of these issues have been covered in the press in a very small way but there is the potential for massive strife in China. A declining population will eventually put a dent in the growth of the economy and gender imbalances in the male/female ratio have the potetential to cause civil strife are just a few concerns. Since China is so firmly established in the global supply chain, any strife or disruptions in that economy have the potential to rapidly ripple accross the globe.

Financial Crisis Pushing Taiwan's Tech Sector Down

Well the Dow Jones plummeted 7% yesterday. Did anybody expect anything better? I didn't and I am not holding my breath either. How is Taiwan doing? As I said yesterday I had dropped out of the loop for a little. While I have been away Foxconn has decided to layoff 1,500 workers in Hungary, more than half of their workforce in that country (Reuters article).

On the foundry side, both TSMC and UMC are looking to cut costs by as much as 20%. UMC are forcing employees to take one day a week of unpaid leave. TSMC is apparently looking to initiate a series of layoffs and also ask some employees to take a unpaid vacations (Softpedia article). The Guardian also reports TSMC has "slashed its fourth-quarter consolidated sales forecast to between T$63 billion ($1.9 billion) and T$65 billion from a previous forecast of T$69 billion to T$71 billion made in late October." (Guardian article)

Digitimes reports: "Due to falling demand of white-box handsets in China, market observers have lowered the expectations of MediaTek's November sales from NT$7.5 billion (US$225 million) to NT$7 billion. China handset customers cut orders unexpectedly in the second half of November, crippling MediaTek's sales last month, the company indicated." (Digitime article)

In the personal computing arena, a JP Morgan analyst said on Business Week PC sales are expected to decline by 5% over the next year. He also expects the average selling price of PC's to decline over the same period adding further pressure to the industry (Business Week article). Since some of the biggest PC companies are in Taiwan (ACER and ASUS), some of the biggest contract manufacturers for notebooks (Quanta, Compal, Inventec) and some of the biggest EMS/contract manufacturers are Taiwanese (Hon Hai), any decrease in the PC demand and any weakening in the PC supply chain will have a negative impact on the Taiwanese economy.

I must admit with every new news report I am increasingly pessimistic about the short-to-medium term future. A lot of companies are suffering now and even if they may survive the current crisis, they may have to spend a long time rebuilding their competitive advantage. However, the most compelling question is once this crisis is over, what will the new world order be? Things will change. Will countries like Taiwan start to realize that depending so heavily on a single market is fraught with danger and a diversified customer base reduces risk inherent in a single market? If they do wish to diversify what other markets are open to them? How can they penetrate those markets? Are those markets sustainable in and of themself? Are the risks of investing in those markets and building those markets lesser or greater than the current economic risk currently in the states?

The biggest sadness is the effect this is having on the average person in the street. I myself hope the companies can recover and jobs made available to many people. But until companies can justify the staff expenditure they will probably not be willing to hire new people and will more likely get rid of staff.

As I said, the short term future is a little scary.