Taiwan Semiconductor Manufacturing Company Ltd.

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Taiwan Semiconductor Manufacturing Company Ltd.

121 Park Avenue III
Science-Based Industrial Park
Hsinchu 300
Taiwan
Telephone: +886-3-578-0221
Fax: +886-3-578-1546
Web site: http://www.tsmc.com.tw

Public Company
Incorporated: 1987
Employees: 14,500
Sales: $3.69 billion (2001)
Stock Exchanges: Taiwan New York
Ticker Symbol: TSM
NAIC: 334413 Semiconductor and Related Device Manufacturing

When Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) was founded in 1987, it was a novel concept to have a dedicated foundry that produced microchips for other semiconductor companies. At the time, chips typically were produced in-house by giant integrated device manufacturers (IMDs) such as Intel Corp. and NEC Corp. When those companies had excess production capacity, they produced chips for other semiconductor design houses. With the advent of dedicated semiconductor foundries to supply design houses, TSMC and other foundries have paved the way for the development of fabless semiconductor companies that are strong on design but cannot afford the investment required for fabrication facilities.

Transforming Taiwan’s Semiconductor Industry: 1987–92

Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) was formed in 1987 as a joint venture between the Taiwan government, which wanted to promote the development of the island’s semiconductor industry, and Philips Electronics NV of The Netherlands. The company was set up by Morris Chang, who had been invited by the Taiwan government in 1985 to come to the island and help grow its semiconductor industry. Chang was born in China and educated at the Massachusetts Institute of Technology (MIT) and Stanford, where he earned a doctorate in electrical engineering. He was the president of General Instrument Corp. when he left to go to Taiwan.

When TSMC was founded in 1987, it was a major catalyst in transforming Taiwan’s semiconductor industry. It provided state-of-the-art manufacturing processes that complemented Taiwan’s strength in chip design. Between 1987 and 1992 TSMC gradually added to its foundry capacity by vertically integrating into related disciplines, including wafer sort testing in 1988, mask-making in 1990, and design services utilizing technology licensed from VLSI Technology in 1991. It also improved its process technology. After starting as a six-inch, 2-micron wafer-processing fabrication facility, or fab, it broke the 1-micron barrier in 1991.

TSMC originally was intended to service Taiwan’s design houses, which were noted for their chip designs but did not want to get involved in manufacturing processes. TSMC, however, soon became an internationally oriented, profit-driven organization that supported the development of fabless semiconductor companies, that is, that did not own their own manufacturing facilities. Fabless semiconductor companies were strong on design, but they could not afford the large investment required to build their own fabrication facilities.

By 1992 TSMC was rated as the world’s top silicon foundry, producing chips for other companies. TSMC employed 250 process engineers and was on the cutting edge of process technology. TSMC accounted for 80 percent of Taiwan’s production of SRAM and also produced a variety of other semiconductor chips, including DRAM and EPROM. Revenue for 1992 was around $245 million.

Building New Facilities to Expand Capacity: 1994–96

By 1994 demand for chips was exploding with new applications in multimedia and portable computing. At the beginning of the year TSMC announced plans to build a new eight-inch wafer fabrication facility, or fab, that would double the company’s output to more than $1 billion worth of product a year. The new plant was the company’s third fabrication facility and cost about $800 million to build. At the time TSMC was running several different processes for both logic and memory chips, and the company was running out of capacity.

In September 1994 TSMC went public on the Taiwan Stock Exchange. Before the end of the year TSMC announced an agreement with Advanced Micro Devices Inc. (AMD) to provide foundry services for AMD’s AM486 processors. For 1994 TSMC reported sales of $744 million and net income of $325 million. A 60 percent increase of worldwide semiconductor sales between 1992 and 1994 resulted in a global shortage of wafer fabrication capacity. About 60 percent of TSMC’s sales were to fabless semiconductor companies, with the remaining 40 percent going to companies short of manufacturing capacity. TSMC’s gross margin of 49 percent was the highest in the semiconductor industry.

In March 1995 TSMC announced that it would build another eight-inch wafer fab at a cost of $1.2 billion. The new plant, TSMC’s fourth fab, was designed to operate at 0.4-micron initially and later at 0.25-micron, which was about one generation ahead of the eight-inch 0.5- to 0.35- micron plants proposed by other Taiwan semiconductor manufacturers. Construction on the new eight-inch fab began in November 1995. Some of the funding for the plant came from deposits that customers made to ensure long-term fab capacity, an option that TSMC began offering to customers in mid-1995.

Between 1993 and 1995 TSMC nearly doubled its capacity to produce six-inch (150mm) wafers, from 665,000 wafers in 1993 to 1.2 million in 1995. Its six-inch fabs, including Fab 1, Fab 2A, and Fab 2B, were running at full capacity, producing 100,000 wafers per month. Fab 3, which produced eight-inch wafers, was expected to ramp to full capacity of 22,000 wafers per month in 1997 and 35,000 per month in 1998. Fab 4 was expected to come online in 1997 and ramp to full capacity of 25,000 eight-inch wafers per month in 1998. The construction of Fab 5 in Hsinchu was announced before the end of 1995.

In November 1995 TSMC and Altera Corp. announced a joint venture to build a wafer fabrication plant in the United States. After considering sites in Oregon and British Columbia, TSMC selected Camas, Washington, for the $1.2 billion plant. The plant would have the capacity of producing 30,000 eight-inch wafers per month, starting with line geometries of 0.35-micron and then migrating to 0.25-micron. By mid-1996 TSMC had signed on two more joint venture partners for the plant, to be called WaferTech; they were Analog Devices and Integrated Silicon Solutions Inc. (ISSI). Altera’s $140 million investment gave it 18 percent ownership of WaferTech. Analog Devices also owned 18 percent, ISSI owned 4 percent, private investors owned 3 percent, and TSMC owned 57 percent.

At the end of April 1996 TSMC became the first Taiwanese company to be listed on the New York Stock Exchange when it raised more than $500 million through the sale of 305 million ADR (American depository receipt) shares. At the time Philips Electronics owned about 35 percent of TSMC. For 1996 TSMC reported sales of $ 1.45 billion and net income of $718.5 million.

Facing Challenges in 1997

TSMC began 1997 anticipating a sales decline and a 50 percent drop in profits. The company announced it would cut prices due to excess capacity and fierce competition. United Microelectronics Corp. (UMC) of Taiwan recently had replaced longtime competitor Chartered Semiconductor Manufacturing Pte. Ltd. of Singapore as TSMC’s primary rival by forming three independent foundry ventures in the past 18 months with several North American design houses. UMC also was aggressively cutting its prices. In March 1997 Donald Brooks, who had been TSMC’s president since 1991, resigned and was replaced by TSMC Chairman Morris Chang. Brooks subsequently joined TSMC rival United Microelectronics as president of its new International Operation unit, based in Sunnyvale, California.

Around this time TSMC announced an ambitious, ten-year expansion program that called for an investment of $14.5 billion in the construction of six eight-inch and 12-inch (300mm) fabrication facilities as well as other facilities. The company also announced a long-term commitment with the local Tainan government to establish a new Science-Based Industrial Park in Tainan in the southern portion of Taiwan. TSMC planned to construct Fab 6 there at a cost of $1.4 billion, starting in mid-1997. As the company had announced before, it had run out of space to expand at Hsinchu.

By mid-1997 TSMC was fully booked for the remainder of the year. It was experiencing strong demand from customers in the PC, consumer electronics, and communication 1C (integrated circuit) sectors. It also was ramping up production for Japan’s Fujitsu Ltd. as part of a deal signed in 1996.

In spite of the downturn in semiconductor demand in 1996, TSMC continued to be generous with its employees. Employees who worked for TSMC in 1996 received an employee-dividend distribution worth more than $100,000 per employee. TSMC transferred some 100 million shares of stock to the more than 4,000 employees who worked for the company in 1996. At the time TSMC stock was trading between $5 and $6 a share. For 1997 TSMC reported revenue of $1.37 billion as it continued to be the leader in the semiconductor foundry industry.

Company Perspectives:

TSMC created the semiconductor dedicated foundry industry when it was founded in 1987. It continues as the market leader by steadily increasing its capital spending and by outperforming all other market competitors.

Semiconductor Sales Down in 1998

Although the forecast for 1998 called for sluggish growth in the global semiconductor industry, TSMC was fully booked for the first quarter and announced that it would increase its eight-inch wafer production by 40 percent to 1.67 million units for the year. The company planned to ramp up production at two eight-inch fabs and begin construction on several more plants, including two at Taiwan’s new scientific industrial park at Tainan. WaferTech was scheduled to begin production mid-year.

In the first quarter of 1998 TSMC entered into a licensing agreement with intellectual property (IP) vendor Artisan Components of San Jose, California. Under the agreement, TSMC would license Artisan’s intellectual property and offer it directly to its foundry customers exclusively. The IP that Artisan would create for TSMC included memories, standard cells, and I/O (input/output) for its 0.25-micron process technology. The arrangements reflected the value of having foundry-ready IP available to customers to put into their own designs. TSMC began making Artisan’s IP library available to its foundry customers in the second half of the year.

By mid-1998 the semiconductor manufacturing industry was experiencing considerable weakness, with an erosion in both prices and demand. TSMC was operating at 80 percent capacity after starting the year at full capacity. As a result, the company announced that it would cut its capital spending budget for 1998 from $1.3 billion to $920 million and projected that it would spend $800-$900 million in 1999. The company named a new president, F.C. Tseng, and announced plans to offer a copper-metallization process and move to 0.18-micron process technology in 1999. According to Electronic Engineering Times, TSMC was pushing its process technology at a rate that appeared to match its larger rivals, including Intel Corp., IBM, and NEC Corp.

Following its successful strategy of building for the future, TSMC entered into an agreement with Philips Electronics and EDB Investment of Singapore to build a $1.2 billion, joint venture fabrication facility in Singapore’s Pasir Ris Wafer Fab Park in 1999.

The company realigned its international management team in October 1998. Ron Norris, president of TSMC’s U.S. subsidiary based in San Jose, was promoted to senior vice-president of worldwide sales and marketing and relocated to the company’s headquarters in Taiwan. Magnus Ryde, formerly vice-president of worldwide field operations at semiconductor manufacturing equipment maker KLA-Tencor Corp., was named the new president of TSMC-USA.

For 1998 TSMC’s revenue reached $1.56 billion, a 14.6 percent increase over 1997. Profits declined, however, from $559.5 million in 1997 to $477.9 million in 1998.

Continuing to Seek Additional Capacity in 1999

TSMC’s capital spending plans went through several revisions in 1999. Although sales declined in the second half of 1998, the company expected that results for 1999 would improve. With strong demand for its 0.25-micron wafers, TSMC’s first quarter was significantly better than the first quarter of 1998. In February the company announced an agreement with Motorola, which was in the process of outsourcing up to 35 percent of its semiconductor production. Under the agreement TSMC would use Motorola’s 0.25-micron and 0.35-micron CMOS logic processes, which typically were used for making microcontrollers, while Motorola would gain access to TSMC’s technology at similar micron levels.

With TSMC making progress on O.lS-micron process technology, the company raised its capital spending budget for 1999 to $1.26 billion. The increase was intended to support the ramp-up of O.lS-micron capacity in Taiwan and later in the year at WaferTech. The company also was moving forward with copper-interconnect technology and planned to begin volume production in 2000. With orders for semiconductor capital equipment accelerating, the semiconductor foundry industry was again pursuing additional capacity. TSMC and its affiliate Vanguard International Semiconductor Corp. formed a $2 billion joint venture to build Taiwan’s first 300mm-wafer fab. Construction began in 2000, with volume production slated for 2002.

In June TSMC invested $170 million in Acer Semiconductor Manufacturing Inc. (ASMI), about 30 percent of the company’s shares. ASMI, a subsidiary of Taiwan computer company Acer Inc., manufactured chips in its foundry for IBM Microelectronics and Fujitsu Ltd. As part of its investment in ASMI, TSMC would provide its full support to transform ASMI into a dedicated foundry. TSMC also would manage the newly formed corporation, renamed TSMC-Acer Semiconductor Corp., with TSMC President F.C. Tseng as TSMC-Acer’s chairman.

TSMC’s sales and income in the second quarter of 1999 were the best it ever had, and sales in July 1999 were more than double those of July 1998. While the company was considering building a fabrication facility in Europe, it was concentrating its capacity-building efforts on its joint venture fab with Philips in Singapore and converting Acer into a dedicated foundry.

In September 1999 Taiwan suffered an earthquake that was the largest in the island’s history. Following the quake TSMC issued status reports to its customers and formed a special task force to keep its customers informed of the status of their orders. The company also donated $7 million to relief efforts. Power on the island was fully restored within a week and almost all of the island’s fabs were fully operational. After the recovery TSMC was functioning at 90 percent capacity.

Key Dates:

1987:: Taiwan Semiconductor Manufacturing Company Ltd. (TSMC) is formed as a joint venture between the Taiwan government and Philips Electronics NV.
1994:: TSMC becomes a public company.
1996:: TSMC and joint venture partners begin construction of a wafer fabrication plant in Camas, Washington, called WaferTech.
1999:: TSMC acquires a 33 percent interest in Acer Semiconductor Manufacturing, Inc.
2000:: TSMC completes acquisition of Acer, acquires Worldwide Semiconductor Manufacturing Co. for $550 million, and takes control of WaferTech.

As 1999 drew to a close, TSMC was experiencing wafer demand about 80 percent higher than in 1998. For 2000 the company predicted greater demand than supply and would be hard pressed to maintain its goal to have 10 percent more capacity than demand. With TSMC experiencing strong demand throughout 1999, the company reported sales of $2.35 billion and net income of $792 million. The firm’s profit margin was about 33 percent.

Acquisitions Boosting Capacity in 2000

Just before the end of 1999 TSMC broke ground on the construction of its first 300mm-wafer processing plant, called Fab 12, in Taiwan. Fab 12 was scheduled to begin production in 2002. The company was planning to invest $2 billion in Fab 12, which would serve both as a fabrication base and a leading-edge research and development center.

In January 2000 TSMC completed its acquisition of TSMC-Acer, paying about $90 million for the remaining 70 percent interest in the company. The purchase gave TSMC access to more than 40,000 wafers per month of production. In the same month TSMC acquired Worldwide Semiconductor Manufacturing Co. (WSMC) for $550 million in stock. Established in 1996, WSMC was Taiwan’s third largest foundry. It operated one eight-inch fab using 0.25-micron and 0.18-micron process technologies and had a second eight-inch wafer fab that would begin production in March 2000. TSMC estimated that the acquisition of TSMC-Acer and WSMC would result in an increase in production from 2.8 million eight-inch wafers to 3.4 million in 2000.

Through alliances with more than 40 library, semiconductor intellectual property, and design service companies, TSMC was able to offer a wide array of services directly to system-on-a-chip (SOC) designers. The company created a common Design-Service-Alliance umbrella to offer original equipment manufacturers (OEMs) and integrated device manufacturers (IDMs) end-to-end solutions at a lower cost than could be achieved by internal design teams or other partners. At the time IDMs accounted for 27 percent of TSMC’s revenue, and OEMs accounted for just 3 percent.

At the end of March 2000 TSMC formally opened its Fab 6 in Tainan’s Science-Based Industrial Park. It was the first of six fabs TSMC planned to build there and was part of a $4.4 billion capacity expansion program that would help double TSMC’s sales in 2000. Fab 6 was TSMCs last eight-inch wafer facility; subsequent fabs would use 12-inch wafers.

In the second half of 2000 TSMC entered into a licensing agreement with National Semiconductor Corp. of Santa Clara, California. The deal marked the first time that a pure-play foundry licensed its process technology to a major integrated device manufacturer (IDM). Under the licensing agreement National would implement TSMCs technology at its South Portland, Maine fabrication plant only.

TSMC also completed its mergers with TSMC-Acer Semiconductor Manufacturing Co. and Worldwide Semiconductor Manufacturing Co., giving it a workforce of more than 13,000 employees. Once the company realized its customers required substantially increased capacity, TSMC moved quickly to support that demand. After reporting record sales of $2.1 billion for the first half of 2000, TSMC announced that its foundry capacity was fully booked through the end of 2001. For the year 2000 TSMC reported revenue of $5.3 billion, up 131 percent over 1999 sales, and profits of $1.9 billion.

Before the end of 2000 TSMCs joint venture fab in Singapore with Philips Electronics began producing its first silicon. The two companies also strengthened their alliance, with Philips acquiring $420 million worth of TSMCs preferred stock. In addition, the two companies renewed their cross-licensing agreements. In November TSMC announced that it would take full control of WaferTech in Camas, Washington, by buying out its joint venture partners there at a cost not to exceed $500 million. TSMC also continued to improve its process technology, developing a 0.13-micron test chip before the end of the year and becoming the first silicon foundry to begin shipping 300mm wafers. The 300mm wafers were produced at Fab 6 in Tainan, Taiwan.

Surplus of Global Capacity: 2001

During the first quarter of 2001 TSMC reduced its capital spending budget a couple of times, finally setting it at $2.1 billion for the year. Principal rival United Microelectronics Corp. also cut its capital expenditures for 2001 to $1.5 billion, down from $2.8 billion in 2000. TSMC cited lower demand for processed wafers in lowering its budget. During the first quarter TSMC was running at 70 percent of capacity, and in April the company announced that it would cut its production output to 50 percent of capacity. By mid-year both TSMC and UMC were running at about 45 percent of capacity, and TSMC announced that it would delay construction of two 300mm fabs that it had planned to build in 2001.

While production was down, TSMC continued with its efforts to improve its process technology. It appointed its first chief technology officer, Dr. Chenming Hu, a well-known scientist in the field of semiconductors. In August the first 300mm wafers for customers were produced at TSMCs Fab 12. The company also made some executive management changes, promoting Dr. F.C. Tseng to deputy chief executive officer and naming Dr. Rick Tsai as president and chief operating officer. Dr. Morris Chang remained the company’s chairman and CEO.

The outlook for semiconductor demand began to improve in the fourth quarter of 2001, and TSMC announced plans to spend $20.2 billion to build six silicon wafer plants in Taiwan. With sales up in the fourth quarter, the company was running at nearly 50 percent of capacity, compared with 41 percent during the third quarter. For the year 2001 TSMC had sales of $3.6 billion, a decline of 24 percent over 2000, and profits of $378 million. For 2002 TSMC expected the momentum to continue, with utilization rates for the first quarter around 60 percent.

Principal Subsidiaries

TSMC North America; System on Silicon Manufacturing Co. Pte. Ltd. (Singapore; 50%); Vanguard International Semiconductor Corp. (Taiwan; 25%).

Principal Competitors

Advanced Semiconductor Manufacturing Corp.; Chartered Semiconductor Manufacturing Pte. Ltd.; Intel Corp.; NEC Corp.; Newport Wafer Fabrication Ltd.; Tower Semiconductor Ltd.; United Microelectronics Corp.