EETimes.com – Analysis: Whats next for UMC?

EETimes.com – Analysis: Whats next for UMC?.

SAN JOSE, Calif. — At a low-key event in Taiwan this week, silicon foundry vendor United Microelectronics Corp. (UMC) celebrated its accomplishments during its 30th anniversary.

But will 2010 be UMC’s last party? Despite the current upturn and renewed growth at UMC, many wonder if the foundry vendor will survive in the long run, as the company has fallen behind the technology curve, seen a key customer in Xilinx Inc. defect to its rival and been the subject of takeover rumors.

Now, there is speculation that UMC may join IBM Corp.’s fab club or form a new R&D alliance with Texas Instruments Inc., in an effort to play catch-up–or even survive–in the foundry market. Others believe that GlobalFoundries Inc. or its big investor–Abu Dhabi’s Advanced Technology Investment Co. (ATIC)–may take a stake in UMC in return for fab capacity.

In fact, there was once a rumor that ATIC would buy UMC. Rumors aside, this could be a make-or-break year for UMC. At one time, the company sat comfortably as the world’s second largest foundry vendor, behind neighbor Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC).

But besides TSMC, UMC had little competition to speak of, that is, until recently. Now, it faces competition from a trio of strong players, including TSMC, GlobalFoundries and Samsung Electronics Co. Ltd.

Faced with a new set of rivals, UMC’s current strategy may not be viable in today’s climate. The company is a member of Sematech, but besides that, the foundry vendor is not part of a major R&D alliance and prefers to go it alone in technology.

And at one time, UMC attempted to keep up in the process-technology race with TSMC. Now, UMC is quietly shifting towards more of a ”fast follower’’ strategy. It continues to develop leading-edge processes, but it is a step or two behind the leaders.

The fast-follower strategy could keep UMC relevant for the near term, but the question is will its customers continue to believe in the company? And can it keep up in the process-technology race without partners? After several requests, UMC refused to discuss its strategy for EE Times.

Clearly, though, UMC is on a slippery slope. ”I have talked to some people, who say: ‘UMC has totally lost it,’ ” said G. Dan Hutcheson, chief executive of VLSI Research. ”UMC fell behind technically in terms of process technology.’’

On the other hand, UMC is still a viable player, perhaps by default. ”The fabless guys don’t have a lot of choices (at the high-end). If you don’t have a high-volume (product), it’s sometimes hard to deal with TSMC,’’ he said. ”In some cases, UMC’s yields are better than TSMC.’’

”UMC is still the No. 2 foundry, but they will possibly drop to number three next year,’’ added Dean Freeman, an analyst with Gartner Inc. In market share, UMC could fall behind GlobalFoundries, he said.

A more pressing question is whether UMC can keep up in the technology race. ”It’s going to be tough, because they don’t have a technology R&D partner,’’ Freeman said.

UMC recently rolled out its 45-/40-nm process and has even talked about its 28- and 20-nm developments. In reality, though, UMC ”is not as aggressive in technology’’ as TSMC and others, Freeman said. UMC remains ”six to nine months behind TSMC.’’

Simply put, UMC is down but not out. ”Bottom line: Don’t count them out just yet,’’ said Steven Pelayo, an analyst with HSBC.

UMC’s roots can be traced to the 1970s, when Taiwan started its IC industry. A government-sponsored R&D organization in Taiwan, the Industrial Technology Research Institute (ITRI), was formed in 1973. By acquiring technology from ITRI, UMC became the first chip maker in Taiwan. At the time, it owned a 4-inch wafer fab.

In the early years, UMC developed and made chips for low-tech toys and games. For years, the company was a minor integrated device manufacturer (IDM), but it finally gained some notoriety in the 1990s. In the early 1990s, UMC developed its own x86-based microprocessor.

Intel Corp. put UMC on the map by suing the Taiwan chip maker for patent infringement. Shortly after those events, UMC exited from the x86-based processor market and decided to switch from an IDM to a foundry strategy.

In doing so, it spun off its chip units into independent companies. The most notable spin off was Mediatek Inc., which has become a powerhouse in the consumer and cell-phone chip business today.

UMC’s early days in the foundry business were colorful and tumultuous. In the 1990s, two of the company fabs mysteriously caught on fire and were destroyed. And at the early part of this decade, UMC’s top executives were involved in an alleged scandal over investing in China.

At the time, the Taiwan government forbad the island’s companies from investing in chip fabs in China. UMC was allegedly involved in investing in a foundry startup in China called He Jian Technology Co. Ltd.

But following a move by the Taiwan government to relax its rules in China, UMC (Hsinchu, Taiwan) last year paid $285 million to acquire the 85 percent of He Jian that UMC did not already own. However, that deal is still pending. A recent report by the U.S.-Taiwan Business Council on the Taiwan semiconductor market stated that Taipei is standing in the way of the deal because investment regulations stipulate that there can be no more than three Taiwan chip fabs in China, and that all three are spoken for.

Despite the problems (and itself), UMC turned into a viable foundry vendor. In the early part of the decade, UMC and TSMC were neck-and-neck in terms of sales. And in 2003, UMC beat TSMC to the punch in the 90-nm market.

More recently, however, TSMC skyrocketed and its sales soared. In contrast, UMC plodded along and struggled to ship its 65-nm technology. Amid a slump in its business, Jackson Hu in 2008 suddenly resigned as chairman and CEO of UMC. UMC announced that Stan Hung was elected to the position of chairman. Shih-Wei Sun was named CEO. Hung had served as UMC’s chief financial officer. Sun was UMC’s COO.

For 2009, UMC reported sales of NT$88.6 billion ($2.8 billion), down 4 percent compared with 2008, the company said. UMC posted a net income for the year of NT$3.9 billion ($121.9 billion), compared with a net loss in 2008.

UMC recently announced it would increase its capital expenditures for 2010 to be between $1.2 billion and $1.5 billion to accommodate strong demand from customers at advanced technology nodes. The company said it spent about $551 million on capital expenditures in 2009.

In total, TSMC was in first place in the overall foundry rankings in 2009, as the company’s sales hit $8.997 billion in 2009, down 15.2 percent over 2008, according to Gartner. TSMC’s share fell from 47 percent in 2008 to 44.8 percent in 2009.

UMC was in second place again. The company’s sales hit $2.730 billion in 2009, down 7.7 percent over 2008, according to Gartner. UMC’s share jumped from 13.1 percent in 2008 to 13.6 percent in 2009.

GlobalFoundries emerged and became the No. 4 player in the foundry business in 2009, according to Gartner. GlobalFoundries, the manufacturing spinoff of Advanced Micro Devices Inc., last year also acquired Singapore’s Chartered Semiconductor Manufacturing Pte. Ltd. Chartered was in third place in 2009.

2010 started off bad for UMC, when Xilinx recently said it will use leading foundry TSMC as one of two foundry suppliers for its 28-nm FPGAs, a major strategy shift that has been the subject of industry rumors and analyst speculation for weeks.

Xilinx (San Jose, Calif.) said it is using TSMC and Samsung Electronics Co. Ltd.’s foundry division to make 28-nm parts, which are expected to begin sampling by the end of this year. Xilinx has long used a two foundry strategy at each process node. Samsung first joined Xilinx’ foundry supplier roster at the 40-nm node, supplanting Toshiba.

Xilinx’ shift to TSMC is a bitter pill for rival foundry UMC, which has been a foundry supplier to Xilinx for more than a decade. Some analysts blamed 65-nm yield issues at UMC for a supply glitch that last summer materially impacted Xilinx sales, speculation which UMC later denied.

UMC will continue to manufacture Xilinx parts at 65-nm, 40-nm and other nodes. According to an Xilinx executive, TSMC and Samsung offered Xilinx the best process technology options for high-performance, low-power process technology at 28-nm.

All is not lost for UMC. ”They have lost Xilinx’ initial 28-nm development work, but they still have majority share of 45- and 65-nm (at Xilinx),’’ said HSBC’s Pelayo. ”And by the way, the vast majority of Xilinx wafers are still done at 65-nm. The 28-nm, high-volume production crossover is at least a couple years away — and who knows what will happen until then.’’

UMC still has a plethora of customers despite the loss. ”As a reminder UMC’s strategy is to not compete on the leading-edge with TSMC and GlobalFoundries. Xilinx was the only customer where they were the primary leading-edge supplier,’’ he said. ”We have confirmed (UMC) has in fact gained some share at Mediatek, Qualcomm and Broadcom. Texas Instruments remains a robust customer too.’’

In fact, UMC is seeing huge demand. Like most foundries, UMC’s biggest problem right now is that its capacity is ”very tight,’’ he added. But the loss of Xilinx, coupled with capacity issues, may have prompted UMC to re-think its strategy.

It is planning a private placement of no more than 10 percent of its total shares or about $400 million. UMC did not elaborate. Analysts believe that UMC is gearing up for a new R&D partnership in an effort to play catch-up in the foundry market.

“In general, it sounds like they are positioning for some kind of technology alliance/licensing. The Street may speculate a new relationship with IBM (similar to the IBM tech licenses that SMIC, Chartered/GlobalFoundries and Samsung have),” said Pelayo in a recent report. ”Alternatively, this could be related to a potential stronger relationship with a key customer like Texas Instruments.”

At one time, there were rumors that UMC would join IBM’s ”fab club,” which includes IBM, GlobalFoundries and Samsung. Meanwhile, ATIC was rumored to have approached UMC in January with a view to taking a stake in UMC and securing additional production capacity. The link was denied at the time.

Meanwhile, UMC is speeding up its fab ramp. The company kicked off official operations of the phase-three and phase-four production facilities at its 300-mm Fab 12A at the Southern Taiwan Science Park (STSP).

UMC is also pushing previously-announced 40-nm process. ‘’Currently, UMC has a total of 10 fabs continuously operating around the world, in Hsinchu, Tainan, Japan, and Singapore,’’ said UMC Chairman Hung at the company’s anniversary party this week in a statement.

”Now, we offer the most advanced 40-nm volume production technologies,’’ he said. ”Independent technology development has reached the leading-edge 28-nm using gate-last high-k/metal- gate technology, with current plans to achieve silicon IP pilot capabilities by end of 2010. Early this year, UMC also began working with customers on planning and initial development of advanced 20-nm technology.’’

The company could also be cooking up a deal with GlobalFoundries. That means UMC would tweak or redo its process efforts and follow the same path as IBM’s fab club. Several years ago, UMC had a process technology effort with IBM and Infineon.

That deal was scrapped because UMC and IBM clashed over the directions of the technology. At the time, UMC didn’t need Big Blue’s technology and it could remain independent. Now, the circumstances are much different and UMC’s future could be hanging on the balance.

Now, three vendors–GlobalFoundries, Samsung and TSMC– appear to be engaged in a new capital spending race in an effort to gain share in the foundry race. The trends could be a problem for the other digital foundries, such as SMIC, UMC and others, many of which cannot keep up with the spending race and will likely fall behind the curve.

The question is clear: Who will be left standing when it’s all said and done? TSMC, GlobalFoundries and Samsung will survive, observers said. UMC and SMIC could hit the wall and/or may get acquired, they added

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