Benefits for TSMC gaining operational control of Global UniChip Corp.: Wafer Foundry + IC Design, 1+1>2

March 15, 2003 - Following UNITED MICROELECTRONICS CORP. investing FARADAY TECHNOLY,  TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY LIMITED (TSMC) gained operational control of Global UniChip Corp. recently. The integrative collaboration between wafer foundry and IC design set up a new variable to the entire market. What are the advantages TSMC can obtain from Global UniChip Corp.? Will the main business in SOC design service become mainstream in the market?

Mr. Robert, Tsao, Chairman of UNITED MICROELECTRONICS CORP. (UMC), indicated in a news conference in January that there would be a great change in traditional wafer foundry service and UMC would become a strategic partner with many customers in the aspects of manufacturing, ordering, management and strategy. For example, FARADAY TECHNOLOGY CORP., which is an IC design service company invested by UMC, is an important partner.

In the meantime, before Chinese New Year, TSMC officially gained the operational control of Global UniChip Corp. (UniChip), a prominent company specialized in SOC design service, by taking 54% of the company stock. To some degree, both semiconductor giants adopted the same strategy for future development.

The partnership between foundry and IC design service not only maintains the competitive advantage by the advanced technology owned by IC design service company, but also increases the number of orders from IC design service company by providing downstream customers with a complete line of services using abundant database of intellectual property (IP).

Mr. KC Shih, Vice Chairman and CEO of UniChip, said that:" The cooperation between UniChip and TSMC means 1 plus 1 is greater than 2. TSMC has wafer manufacturing capability. We are leading in SOC design service. The partnership not only assures the individual strength from TSMC and UniChip, but also helps obtain international order that UMC and Faraday would never obtain."

TSMC aggressively looking for customers

What can TSMC benefit from the partnership with UniChip? KC Shih thought that in the past when foundry had high utilization rate salespersons at wafer foundry did not need to go out and look for customers, but wait for customers to negotiate the price; however, they now have to aggressively seek new customers.

In general, TSMC has higher average wafer price than UMC by 10%. Besides process advantage, other added value is provided to keep such a price difference. Design service is one key factor. UniChip has complete IP database, control ability for Electronic Design Automation (EDA) tools and an expert team for IC design service (11 doctors, 36 masters and 18 bachelors). All these will help TSMC obtain international customers.

On the other hand, UniChip also benefits from the partnership. To IC design service companies, big customers demand not only complete line of services from product specifications to design, but also final chip product price and delivery schedule. UniChip is merely a design service company, which is not able to fully control back-end processes like wafer manufacturing, packaging and testing. Although UniChip can design IC for customers and help arrange the manufacturing for finished chip products, it is very unlikely to offer an attractive price for the back-end processes. The leading role of TSMC in wafer foundry industry and support for TSMC's existing customers and partners contribute the significant increase of competitiveness for UniChip. Mr. Zhi-Ming Lin, Vice President of Faraday believed that since TSMC joined the company, there would be a tremendous improvement in the available resources that used to be lacking.

Joining of TSMC Doubled UniChip revenue

In fact, Faraday, a company invested by UMC, is the largest IC design service company. In 2002, the company had revenue of US$ 96M, capital of US$ 48.6M and employee number over 300. According to ITRI, there are about 20 IC design service companies with capital ranging between US$ 2.9 million and 8.6 million, employee number below 50 and annual revenue less than US$ 2.9 million. Their company sizes are not comparable to Faraday.

Nevertheless, since TSMC joined the company, UniChip has achieved a comparable status with Faraday. In January, people from TSMC took important positions at UniChip after reelection to the board of trustees: Dr. F.C. Tseng, Deputy Chief Executive Officer at TSMC, elected as Chairman of UniChip; Mr. Jim Lai, US West Region Sales Manager at TSMC, elected as General Manager and COO; Mr. KC Shih, formerly General Manager of UniChip, elected as Vice Chairman and CEO of the company.

With revenues in 2001 and 2002 to be US$ 3.4 million and 20 million respectively, it is estimated UNICHIP will double 2002's revenue to US$ 40M this year after TSMC joined the company.

TSMC has had partnership with seven domestic IC design service companies and formed Design Center Alliance (DCA). Including DCA members, TSMC has 29 partners globally for design service. Why did TSMC choose to invest UniChip? KC Shih firmly indicated that this was because UniChip would provide the most complete line of services.

KC Shih self-confidence came from complete IP database and a strong team for UniChip, which took time and money to build up. About three years ago, UniChip invested US$ 10.6 million in the R&D for SOC. The company did not make profit until 2001. KC Shih said "SOC design service industry has high entry barrier. The investment by UniChip could create three IC design companies, which might have been listed in the stock market now." He further said that what UniChip sticked to is for Taiwan's IC design service industry to set up a foundation and for Taiwan's semiconductor industry to build up competitiveness for the next generation.

Why can UniChip attract so many talents? KC Shih indicated that this was because the business model was set right in the beginning. He said, "Although the company had a tough time in the first three years, the shareholders gave a great deal of support. Employees were given incentive bonus stock or stock option. Even the stock price was low, we were all confident in the company and believed the company would succeed."

What is IC design service?

IC design service company is to offer a complete line of IC design services based on customers (IC design companies or system companies) needs and provide services through foundry manufacturing. It includes design, wafer manufacturing, packaging and testing, a very labor and time consuming process. Thus, customers can focus their technical capability on specialty area and utilize increased amount of company resources for market development. Especially, design service companies like Faraday and UniChip can provide a complete service process, so the connection between IC design and manufacturing process for chip products like ASIC and SOC can be so smooth to save customer investment.

What is SOC?

In the post-PC era, many things are in favor of lightweight, thinness, shortness and small size. It is not a set of chips anymore, but a single chip. This is the concept of SOC System on a chip).

Two competing rivals?

In fact, Faraday, an IC design service company specialized in ASIC, and UniChip, a company specialized in SOC design service, were both founded by KC Shih., who has a Ph.D. degree in Electrical Engineering from MIT and 20 years of experience in IC design. In ten years ago when he came back from United States, with the support of Robert Tsao, Chairman of UMC, he founded Faraday. He thought that Taiwan's semiconductor industry has most investment in manufacturing, but the real high added value lies in design.

Later KC Shih left Faraday and founded UniChip to focus on SOC design service. KC Shih explained that Faraday was a listed company and had pressure to make profit. In the aspect of SOC R&D, Faraday is not as aggressive as UniChip. Thus, Faraday started SOC a little late and fell behind UniChip in team capability ad resources.

Would the dominating role of Faraday be changed after TSMC joined UniChip?Mr. Zhi-Ming Lin, VP at Faraday, indicated that Faraday was expecting competition and interested to observe the partnership status between TSMC and UniChip.

Speaking of competition with Faraday, KC Shih indicated that the partnership between TSMC and UniChip may affect the business of Faraday in a short term. But the real purpose of the partnership is to seek orders lost to global IDM companies. The partnership will certainly be a positive impact to the overall development of Taiwan's semiconductor industry. KC Shih said " It is not enough for Taiwan's IC design service industry to have only Faraday and UniChip. Hopefully, other companies in the industry will continue to grow and become strong players. That will need more efforts and investment in R&D."

Is SOC dead?

However, in February Jay Hebb, design manager responsible in Intel for the core design in Xscale processor, announced in ISSCC that SOC development is dead because of the high cost incurred in additional photomask process for integrating digital logic, memory and analog into a chip.

To this statement, Zhi-Ming Lin, VP at Faraday, agreed to say that to make SOC profitable is not easy, but he could not agree on the opinion that SOC is dead. Under a broad definition, he believes several types of SOC will not be realized (for example, extremely high circuit complexity, high IC power consumption and heat dissipation problem). But under a strict definition of SOC (including high level processors, possibly 8/16/32 bit or digital signal micro-processor; or 16/24/32 bit; even micro-controller, memory and analog IC), there are manufacturers for such products, which have already had the market.

Besides, Zhi-Ming Lin also said there is no consistent opinion on SOC among different companies. Some companies believe that SOC is " a big IC containing DRAM". Some believe that SOC should include 16/32 bit CPU. Therefore, definition of SOC varies. In this situation, it makes no sense to say it is dead or not dead.

Zhi-Ming Lin further indicated that the future development for SOC depends on the application. It is very likely for high-tech products requiring lightweight, thinness, shortness and small size or high-performance applications to use SOC.

KC Shih admitted that he is person of idealism. He seriously said that in the first decade of Taiwan's semiconductor industry development Dr. Morris Chang transformed Taiwan into a foundry service center. In the second decade, he hoped to transform Taiwan into a global SOC design service center. To achieve this goal, it is impossible with only Faraday and UniChip. He said " I really like to see further development on the model of cooperation between TSMC and UniChip, and more companies to partner with UMC and TSMC to enlarge the scale. Some day, people will come to Taiwan for IC design service. Which company in Taiwan will be picked up is the next I like to see."

TechVantage March 2003
Drafted by - xiang-wen Liu