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Last updated: January 3, 2006 9:53 pm

TSMC’s chief rises to the new challenges

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On the surface, it is hard to see how Rick Tsai could leave his mark on Taiwan Semiconductor Manufacturing. While many new chief executives choose to focus on addressing problems and formulating a new vision, Mr Tsai is doing the opposite. He wants to reassure investors that there will be continuity.

Under the steady hand of Morris Chang, founder and chairman, TSMC has created the foundry model and grown into the global leader. The silver-haired, soft-spoken Mr Chang enjoys legendary status among his employees and investors.

Little wonder then that Mr Tsai has kept a low profile during his first few months at the top. “I often think about him,” he says about Mr Chang. “How our chairman would think or act – that is a very important reference. My experience shows me that he has been right a lot more than wrong, so it would be stupid not to leverage his experience.”

Mr Tsai, who at 54 is 20 years younger than his predecessor, is a TSMC veteran. In 1989, the engineer joined TSMC from Hewlett-Packard, and he has been running the business as president and chief operating officer since 2001.

Mr Tsai, who became chief executive in July, admits his style differs from Mr Chang’s. “I do mingle more with people. I am in the same age group as most of my staff and colleagues,” observes Mr Tsai. He laughingly admits: “They don’t revere me as they do the chairman.”

But when he starts to talk business, the tone becomes much less humorous.

“I am very fortunate that I started with a company in such good shape. But of course that also raises the pressure. Earnings growth is not an easy thing because the industry is slowing down. It is no more 15 per cent a year, but 10 per cent and less.”

Simultaneously, the cost for new fabrication plants is rising rapidly. For setting up a 65 nanometer fab of the size TSMC uses “we are talking about a US$5bn plus investment”, says Mr Tsai.

Given TSMC’s unrivalled leadership position in the foundry industry, few analysts worry about the company’s future. But it is the overall changes in the semiconductor industry that could limit future growth.

“TSMC’s US$8bn in revenues represent almost US$20bn in end-product revenue, that is almost 10 per cent of the world semiconductor industry, and this industry is not exactly expanding fast any more,” says Ming-kai Cheng, head of technology research at CLSA. “How much more can you get?”

For Mr Tsai, the answer is clear: TSMC needs to simultaneously push for new, higher-yield technology and to try to increase the returns of more mature technology. “First and foremost, [we need to] maintain and enhance our technology leadership,” he says. Unlike in its early years, when the company was a laggard offering cheap manufacturing in mature technology, it is now competing head-to-head with global leaders such as Intel and IBM at the cutting edge of advances in the industry.

But the challenge for TSMC is to enable its customers to benefit from these advances. TSMC has more than 400 customers. But except for a few big ones, such as Texas Instruments or Qualcomm, most are too small to be able to keep pace with every new generation of process technology.

The newer the process technology, the harder it is to manufacture these designs with reasonable yields. This gap needs to be filled by the foundry, forcing TSMC to take a larger role in design, spend more and share key intellectual property with its customers.

To complement this costly and engineering-intensive push, the company is trying to broaden its potential customer pool. “We are enlarging our total addressable market by searching for applications that do not need to move to cutting-edge technology nodes and can fill our more mature capacity,” says Mr Tsai, citing automotive electronics as an example.

With the emergence of many new entrants a few years ago, the foundry industry has heard warning calls before. So far, though, the increased competition has only strengthened TSMC’s lead, with the gap in market share and profitability between the company and its closest rivals growing.

Mr Tsai is hoping it will remain that way. “I have a very high level of paranoia about new competitors,” he says.

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