Chip makers expected to see Q4 upturn

Billy Chamberlin, The China Post

Many of the island’s wafer foundries are expected to experience a modest rebound by the end of the year, but analysts warn that United Microelectronics Corp. (UMC) may have a tougher road to hoe. Taiwan Semiconductor Manufacturing Corp. (TSMC) and UMC, the world’s No.1 and No.2 largest independent wafer foundries respectively, both experienced unprecedented losses during the second quarter due to a slowing global economy.

Analysts expect TSMC to report a second quarter net loss of NT$1.1 billion to NT$1.3 billion on July 26, compared with the NT$8.42 billion profit in the first quarter and NT$13.35 billion earned a year earlier.

UMC is expected to report a second quarter net loss of NT$430 million to NT$900 million on July 31, compared with a NT$6.47 billion profit in the previous quarter and NT$12.06 billion the year before. Christmas demand is being predicted to help drive the sector back into the black during the fourth quarter, but UMC may still be hindered in the coming months due to its heavy reliance on the communications sector, comprising 48 percent of sales compared to TSMC’s 31 percent. The communications industry, which is currently plagued by oversupply and weak market demand, is not expected to regain momentum anytime soon. Nomura Securities senior analyst Rick Hsu said TSMC is expected to report a capacity utilization rate of 46 percent in the second quarter and UMC at 45 percent. With these companies reporting capacity utilization rates of near 100 percent a year ago, the technology sector’s current pessimistic outlook becomes abundantly clear.

“The overall wafer foundry industry has fared much worse than most people had expected and its outlook is far from promising after a ferocious correction. A ‘slight’ recovery is likely to materialize in the last quarter after a largely flat third quarter,” said Hsu. He noted that UMC’s utilization rate might even drop to 44 percent in the third quarter while “TSMC is likely to enjoy a faster, but still mild, recovery than UMC thanks to company-specific factors, particularly orders from select major clients. Its capacity utilization should be able to rise slightly in the current quarter from the second.”

Semiconductor factories such as TSMC and UMC are widely seen as important indicators of the health of the broader technology industry as they produce chips on a contract basis for a wide range of global customers. Investors are hoping that any slight upturn in the semiconductor industry will mark the rebound of the entire IT sector. Yet some analysts say it remains premature to bet on a sustainable demand-led recovery at a time when inventory correction continues to weigh on the IT industry. Many have predicted that the sector has hit bottom before, only to later rescind predictions as the industry continued to sink. National Securities analyst Milton Huang said it is important to remain objective when looking at the semiconductor industry and to not get caught up in every piece of data that looks relatively optimistic. “One thing is certain — great uncertainty continues to overhang the industry outlook. I don’t think it is realistic to talk about a sustainable recovery until the second quarter of 2002.”