TSMC to Diversify - LEDs and Solar

Bloomberg recently reported TSMC is looking to diversify their business into the solar and LED industry. The reason to diversify is slowing sales growth. According to Bloomberg:

The chipmaker [TSMC] is considering purchasing companies in the solar and light-emitting diode industries, Chairman and Chief Executive Officer Morris Chang said in an interview at the company’s Hsinchu, Taiwan headquarters yesterday. He didn’t identify any acquisition targets or specify investment amounts.

“We can start out maybe first purchasing a small company, but use that as a nucleus for growth,” Chang, 78, said. “I think we have gotten into a situation where everybody seems to be really comfortable and not particularly hungry anymore.”

Chang, who replaced his handpicked successor as chief executive in June, pledged to boost growth by moving into new businesses after the global recession drove the company to its worst profit drop in seven years. Global sales of LEDs, or chips that light up television screens, are projected to double over the next four years and solar-cell industry revenue is estimated to climb an average of 45 percent in the four years from 2010.

Necessary Expansion

“It’s necessary for the company to expand into new businesses since sales growth in the core foundry business has slowed,” said Kenneth Lee, a semiconductor analyst at Fubon Securities Co. in Taipei. Lee upgraded the chipmaker to “add” from “neutral” and raised the stock-price estimate 12 percent to NT$65 on July 31.

Taiwan Semiconductor, whose customers include Intel Corp. and Texas Instruments Inc., on July 31 reported a third consecutive quarterly profit drop. The company forecast third- quarter sales that exceeded analyst estimates, citing a recovery in demand for computers and electronics.

The so-called chip foundry market, of which Taiwan Semiconductor controls a 49 percent share, will post a sales decline of as much as 20 percent this year and will take until 2011 to return to the same levels as 2008, Chang told investors on July 31.

Morris Chang is still kicking and ticking. Good for him. He is a five decade veteran of the semiconductor industry and he is still thinking of and searching for possibilities to expand the business and create growth for TSMC. The article later reports that Rick Tsai, Chang's successor and predecessor (odd but true) will head up the new business. But apparently some investors are not too happy with this announcement believing there is still enough room for growth in the pure-play foundry industry.

Of course I understand Chang's point. The industry has been hammered over the last year, the article says the industry will only properly recover in 2011 and yet somehow they need to lead growth in the company. The foundry industry (especially with Global Foundries thrown into the mix) is becoming a very crowded place and the competition harder and stronger. Diversification into new products and markets (classical Ansoff matrix stuff) may provide the only alternative.

What is interesting is the approach. According to Chang (see above) they may buy a small company and use that company as a "nucleus for growth," that is I am guessing they will emphasize organic growth rather than growth through aggressive merger and acquisition (M&A) activity. This might be a more sensible approach since as they grow organically they can learn about the in's and out's of the new business. Of course TSMC is in the fortunate position where they are market leaders, have enough capital to empower this organic growth and have both the leadership and technical capabilities to do so. However, this approach also feels similar to the way the technology industry was fostered and grown in Taiwan.

Another aspect to consider is that Many M&A do fail because the two companies are unable to work constructively together. One of my professors recently pointed out the failure of the Daimler Benz and Chrysler merger can in part be attributed to cross cultural clashes and misunderstandings. By purchasing a smaller company, TSMC will be able to dominate them and impose their culture on them and ensure the company grows and moves in the direction they want it to move in.

So why would investors be concerned? Well the article says the investors do like the "clean" business model TSMC currently has and that they believe this type of activity is 10 years too early. Granted the article only quoted one investor and one wonders how representative he is of the investors in general. Perhaps investors are concerned over the short term diversion of funds and resources that may stifle short term growth. They might also believe TSMC cannot succeed in this business as the industry sectors are vastly different in some way. Whatever the case may be, if the majority of shareholders are averse to this kind of activity, I am sure TSMC would not pursue it. One would imagine that this approach has also been discussed at the board level and that the board has given TSMC the go ahead. So why wouldn't they?

Comments and feedback always welcome.

Bloomberg: TSMC in Talks to Buy Solar, LED Companies, Chang Says

The Growth of Solar

The dramatic increase in oil prices over the past few years have made people increasingly aware of the need to develop alternative energy sources. As alternative energy has become more popular more and more companies have invested time and money into developing solar cells. Now iSuppli estimates solar cell production will be at the same level as semiconductor production in the next few years. According to iSuppli:

Worldwide investments in the production of Photovoltaic (PV) cells will rise to the same level as those for semiconductor manufacturing by 2010, due to booming demand for solar energy, according to iSuppli Corp.

Global production of PV cells is expected to rise to as much as 12 Gigawatts (GW) by 2010, up from 3.5GW in 2007. By 2010, as many as 400 production lines in the world that can produce at least 1 Megawatt (MW) of PV cells per year will be in place, representing a four-fold increase from about 90 to 100 production lines in 2007. Factories capable of 1GW of annual PV production also will be established in the future to ensure continued strong delivery of PV cells to the market.

“The market for PV cells is estimated to grow by 40 percent annually until 2010, and 20 percent beyond,” said Dr. Henning Wicht, senior director and principal analyst, MEMS and photovoltaics, for iSuppli. “Nearly all market participants plan to increase their sales by a Compound Annual Growth Rate (CAGR) of 40 to 50 percent during the next few years.” Wicht noted that heavy investments will be required to finance the expansion of PV cell production. Each PV factory will require an investment of $500 million and more, will employ as many as 1,000 workers per site, and will generate annual revenue of $1 billion per year or more, putting them into the size, cost and employment range of semiconductor fabs.

The prohibitive cost of solar cells is the polysilicon neccessary for the production of the cells themselves. There is a shortage of polysilicon and many companies are apparently scrambling to develop their own material production facilities or place long term orders with current suppliers to ensure availability. In April Digitimes observed "Current 6-inch solar wafer spot pricing has reached NT$10-10.5, but demand still surpasses supply due to strong demand from the end market, noted the sources." Earlier in May iSuppli outlined some of the polysilicon problems:

Booming global demand for solar energy has spurred a critical shortage of polysilicon used to make Photovoltaic (PV) cells, causing PV suppliers to realign their business structures and strategies and to seek alternative raw materials. Global revenue for PV cells is projected to increase to as much as $22.1 billion in 2012, up from $9.6 billion in 2007, according to a preliminary forecast from iSuppli Corp.

The polysilicon shortage is, according to iSuppli, forcing companies to integrate vertically and bring polysilicon production under their direct control, reduce the thickness of the cells themselves and to cut costs and become more efficient in their production processes.

The rise in the solar cell market has provided many of Taiwans tech companies with tremendous opportunities and even provided a lifeline to others. The development of this industry will be interesting to watch as will the implementation of solar cells in consumer electronics devices.

iSuppli: Solar Cell Investments to Reach Parity with Semiconductor Industry by 2010
Digitimes: Solar 6-inch wafer spot pricing expected to stay at around US$10
iSuppli: Silicon Shortage Prompts Strategy Changes for Photovoltaic Industry

Solar: The New Frontier

Solar panels have been around for a long time. How long I am not exactly sure but certainly for as long as I can remember. Many Taiwanese companies have jumped on the solar panel bandwagon. Yesterday the news from accross the Pacific was that Intel are jumping into the production of photovoltaic cells. They will do this through a spin-off with an initial investment of US$50 milllion. The Wall Street Journal says:

Intel's move is the latest in a scramble among Silicon Valley companies to jump on the clean-energy bandwagon. Applied Materials Inc., for example, is branching beyond machines for making chips to sell equipment for use in making photovoltaic cells. Chip maker Cypress Semiconductor Corp., by contrast, spun off a maker of solar cells called SunPower Corp. that now boasts a market capitalization of about $7 billion.

Intel jumping into this industry will change the landscape. They have the engineering expertise, the manufacturing expertise and the money. Taiwan's solar companies will battle to keep up.

Article: Intel Spins Off Solar-Technology Startup

Motech Forms Partnership with Solar Semiconductor

Last week we noted the increased investment in the solar cell industry with many companies ramping up production. Additional news is that Motech has apparently a significant deal to collaborate with Solar Semiconductor. China Economic News (CENS) reports:

Motech Industrial and Solar Semiconductor recently agreed to collaborate on development of thin-film solar cell technology and silicon-wafer supplies shortly after Motech received Solar`s lucrative orders for 120 megawatts of solar cells.

Industry watchers estimated the orders at over NT$10 billion (US$333 million at US$1:NT$30), given that one megawatt of solar cell now sells for around NT$100 million (US$3.3 million).

Solar Semiconductor is among the top three Indian suppliers of solar modules, specializing in polycrystalline and mono-crystalline solar modules.

Article:Motech Forms Partnership With Solar Semiconductor

Increasing Focus on Solar Cells

Shortly after Mosel Vitelic announced they will be raising capital to expand into the photo-voltaic field, China Economic News (CENS) also reports Unitech PCB, Big Sun Energy and Sintek will also focus on solar cell production. According to CENS:

Director board of chipmaker Mosel-Vitelic Inc. recently passed a motion to issue 228 million units of Global Depository Receipt (GDP) to raise capital for expansion in photovoltaic field.

The amount of the capital to be raised is estimated at NT$6.3 billion (US$210 million at US$1:NT$30) given an average NT$27 of the company`s share price in recent weeks.

Digitimes reports Mosel Vitelic is already producing solar cells and has broken ground for a new solar cell plant that will be at full capacity during 2009.

Mosel Vitelic has broken ground for a new solar cell plant, which is scheduled for completion in the first half of 2009 with a total capacity of 200 MWp.

According to the company, solar cell capacity at its existing fab will be expanded to 60MWp in July this year. Of the 200 MWp capacity at the new plant, half will be operational in the third quarter this year, with the other half to come online in the first half of next year.

Mosel Vitelic president has said they are rapidly expanding their production capactiy to reach economies of scale and increase their profit margins. CENS says:

The company (Mosel Vitelic) is running a 30-megawatt production line, which is funneling around NT$200 million (US$6.6 million) into its revenue every month.

And Digtimes notes:

The solar cell business currently accounts for 50% of the company's revenues, but the proportion is expected to increase to more than 60% by the end of this year, the company said.

CENS says this rapid expansion is currently inline with other solar cell manufacturers. According to CENS:

Industry watchers pointed out that burgeoning solar-energy market has inspired the insiders to launch bold expansions. Since early this year many Taiwanese photovoltaic manufacturers have announced aggressive capital-raising plans, with Gintech Energy Corp. scheming to raise around NT$10 billion (US$333 million) through syndicated loans and capital increasing, as well as Moteck Industries Inc. and Neo Solar Power Corp. mulling to raise capital through syndicated loans and capital increasing.

Yesterday CENS reported the Letzer Industrial Park is set to become the major supply base for Taiwan`s solar cells:

Actively engaged in production of solar cells, the Taiwan-based Unitech Printed Circuit Board Cop., Big Sun Energy Technology Inc. and Sintek Photronic Corp. all plan to continue focusing on solar cell production and development in Letzer Industrial Park of Yilan County, northeaster Taiwan, according to company sources.

Letzer Industrial Park management said that the park has successfully signed on investment valued at NT$104.5 billion by the end of the first quarter of this year, with more than NT$800 billion from solar cell makers. Optimistically, the park is expected to become Taiwan`s major supply base for solar cells soon.

Taiwan is set to become a major player in the solar cell industry worldwide. I remember reading an article in 2004 saying how Taiwan's expertise in IC chip manufacturing is transferrable to solar cell manufacturing. Since Taiwan is the clear global leader in IC chip manufacturing there is no reason why they cannot become significant competitors in this field too.

One of the biggest problems for this industry however is the shortage of polysilicon, the material used to manufacture solar cells. Digitimes noted Simon Tsuo's (Motech chairman) comments on the current supply situation:

Despite there being more than 30 new polysilicon makers in China, very few of them have actual output, Tsuo noted. Since many of these suppliers have secured contracts with solar cell makers and are scheduled to start shipments in 2009, any unexpected schedule delay will severely affect global polysilicon production value, he said. As solar cell makers have to pay a deposit for material supply, the delay will also affect their funding operations, he noted.

The solar cell industry is set for growth. The need to find alternative energy sources and to start leveraging non-intrusive energy production methods are providing an impetus to the industry and big business opportunities to many people. There is no doubt a lot of money to be made in this game. However, as Mr. Tsuo observed, there are also many risks. The strategic management of resources and raw material supply chains is increasingly important in this industry and if companies are unable to secure the polysilicon needed for production then they will face big problems.

Hopefully this industry can grow and better ways of powering our homes and day-to-day electronic applications will become increasingly evident.

Article 1: Mosel-Vitelic to Raise Capital for Photovoltaic Deployment
Article 2: Mosel breaks ground for 200MWp solar cell plant
Article 3: Unitech PCB, Big Sun Energy and Sintek Focus on Solar Cell Production
Article 4: Solar industry full of uncertainties in 2009, says Motech chairman
Article 5: Global warming sparks polysilicon crunch