Morris Chang was celebrated Monday as the doyen of the contract chipmaking industry as Taiwan Semiconductor Manufacturing, the company he helped establish and has chaired since, marked its 20th anniversary.

When he began in 1987, few could have predicted that Mr Chang's start-up would become a highly profitable $10bn business.

But rather than sit back and trumpet his successes, Mr Chang told the Financial Times he remains cautious about the future.

In its first 15 years, TSMC used to outgrow the wider semiconductor industry by an average of 10 percentage points. But more recently this gap has narrowed to 2 to 4 percentage points.

"The reason we outpaced industry growth considerably in the first 15 years was that the fabless sector grew from almost zero to about 15 per cent," Mr Chang says. "And then it seemed to have stopped there."

The company was set up in 1987 to manufacture chips to the designs of others - for large chipmakers in times of capacity constraints and also specialised chip design houses that could or would not invest in capacity of their own.

This was a new model at a time when chipmakers typically had their own fabrication plants, or fabs.

Intel and Texas Instruments, whom Mr Chang approached for a potential investment in the new company, told him his idea was not viable.

But after a 25-year career at Texas Instruments, he knew that an increasing number of engineers aspired to open their own chip design houses, an ambition often stopped by the forbidding cost of building fabs. But with a dedicated manufacturing partner, these new ventures would face lower hurdles and could keep the manufacturer alive with their orders.

This is what happened. At the side of the traditional big chipmakers, scores of specialised chip design houses popped up - they now account for about 75 per cent of TSMC's business. But the momentum behind this growth has slowed.

Richard Gordon, head of Gartner's Semiconductor Group, says that, as ever-more electronic components are consolidated into one chip, the space for the niche specialists that account for 75 per cent of TSMC's business is shrinking.

"While you'd have many different processors on one system board in the past, they are now increasingly being combined, and the casualties of that will be fabless companies," he says. "We expect that 40 per cent of the existing fabless companies will disappear by 2010."

Some niche players may be acquired by integrated device makers, or IDMs - those that design as well as manufacture their own chips. Others could adjust their business models to stop selling chips and instead sell their designs to other manufacturers. "They will be out-licensing their intellectual property to IDMs or the foundries," Mr Gordon says. This also requires TSMC to tweak its business model.

There is, however, another trend. Although annual semiconductor industry growth is slowing to single-digit levels, the investment required is going up. That trend is expected to convince more integrated chipmakers to let go of their own fabs and outsource to foundries such as TSMC.

The Fabless Semiconductor Association believes that eventually all but Intel, AMD and the big memory companies will go fabless because building new capacity is becoming too expensive for everyone else.

NXP, Philips' former semiconductor unit, and Freescale, the former Motorola chip unit, both exited production after takeovers by private equity funds.

But Mr Chang says there are still hurdles to overcome as companies such as these shift their strategy. "The reason that the fabless growth stopped at 15 per cent is that the big guys realised how dangerous the fabless-TSMC combination is," he says. "They have now started to hit back."

The biggest chipmakers are tightening co-ordination between their design and production technology staff.

TSMC is responding. "For the past few years, our model has been that you, the customer, should treat our fab as though it's your own, except that it's better than your own," says Mr Chang.

Rick Tsai, Mr Chang's successor as chief executive, has been driving the build-up of more services to assist chip designers in migrating to more advanced technology generations, as would be done within one integrated chip company.

While some customers have picked up the offer for a closer partnership, others have been "shopping around", Mr Chang says. "From the beginning, I have said that the best relationship is monogamy. But not everybody believes in that."