| TAIPEI, Taiwan — The number of chips rolling out of Taiwan's foundries will continue to decline this quarter, as the demand picture turns cloudy and fabless customers continue to eat through excess inventory. There are signs, according to local analysts, that manufacturing capacity utilization could dip as low as 55 percent at United Microelectronics Corp. (UMC) and 75 percent at Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) as the foundry industry slumps prior to a recovery that is expected to start in the second quarter. One hopeful source of higher selling prices, the relatively advanced 0.13-micron manufacturing node, is also at risk of taking a hit as UMC and Chartered Semiconductor Manufacturing lower prices to try and grab more wafer starts from market leader TSMC, some analysts said. "We are getting more conservative about [average selling prices] as we see pricing pressure across the board, not just in mature geometries," said Rick Hsu, semiconductor analyst at Nomura Securities here. Yet, smaller companies looking to switch horses for their 0.13-micron products will find it harder to do so, locked in by the high cost of mask sets. Taiwan's top foundries also use different low-k materials, making a change more challenging. Pricing pressure is greatest at 0.25- and 0.18-micron, as a host of foundries across the region scramble to win orders in the traditional low season. Singapore's Chartered Semiconductor may also emerge as a source of price erosion for 0.13-micron, as it looks to increase its own volumes. At the end of last year, the Singapore foundry secured more than $1 billion in loan commitments to finance equipment purchases for its Fab 7, which will use 300-mm diameter wafers to make chips based on 0.13-micron, 0.11-micron and next-generation 90-nanometer process technologies. Analysts do not see China's Semiconductor Manufacturing International Corp., the fourth member of the foundry Fab Four, as a significant source of price competition for 0.13-micron logic chips. "SMIC is trying to undercut but they don't have the volume to do so," Hsu said. Nor do they have the comparable yields, other analysts noted. However, UMC is likely to turn more aggressive. Analysts estimate first-quarter capacity utilization at UMC could drop into the 55 to 65 percent range, with its 300-mm wafer utilization dipping below that. First-quarter estimates for utilization at TSMC range between 75 to 80 percent. That contrasts with a little over 90 percent for TSMC last quarter and 70 to 75 percent for UMC, according to analyst estimates. In November, TSMC chairman Morris Chang said first-quarter wafer shipments would "not be very strong" because he expects customers to wrestle with inventory reduction during the quarter, and possibly for longer. He also noted his belief that the industry wasn't headed for a major downturn. "Visibility is short," said Hsu "But we take the view that recovery should start to kick in during the second quarter." Some analysts expect the first quarter of 2005 to be the low point for TSMC, but believe UMC may take another quarter until it starts to feel a moderate recovery. "TSMC is doing better because of good execution. This year the gap will widen between the two companies," said Warren Lau, semiconductor analyst at Macquarie Securities in Hong Kong. UMC is being weighed down by a high concentration of customers on its advanced technology, namely Xilinx and Texas Instruments. Xilinx will probably hand over some orders to Toshiba starting this quarter. And TI is reportedly seeing better yields at TSMC, sources said. | 
