TSMC Profit Hits 2 Year High, Signals Great Year for Chips

Taiwan Semiconductor Manufacturing (TSMC) reported its best quarterly net profit in two years on Thursday, and predicted a banner year for the chip industry this year, led by strong global demand for computers and mobile phones.

TSMC is considered a technology industry bellwether for its size and the range of devices for which it makes chips, and its quarterly earnings reports are watched closely for signs of market health. TSMC is the world's largest contract chip maker, manufacturing chips for global companies such as Texas Instruments, Qualcomm and Nvidia.

"We had a fourth quarter and a year much better than one would have expected at the outset," said Morris Chang, chairman and CEO of TSMC, at an investors conference in Taipei. "The end market is strong this year," he added.

TSMC's in-house forecasters believe the PC market will lead the chip industry higher by growing 14 percent this year, followed by mobile phones at 12 percent and consumer electronics at 7 percent. The global semiconductor market will grow 18 percent this year, after contracting 9 percent last year, they say.

Currently, TSMC has more orders than its chip manufacturing lines can handle, particularly for advanced chips, Chang said. The capacity shortage, plus the company's aggressive market forecasts for this year, prompted TSMC to surprise analysts with plans to spend US$4.8 billion on new factories and production lines this year, a record high for the company and more than it spent in the two previous years combined ($2.67 billion last year and $1.89 billion the year before.) TSMC's previous capital spending peak was in 2000, when it spent $3.3 billion.

Analysts had predicted TSMC's capital spending this year to be around $4 billion.

The chip maker's sales rose 43 percent year on year to NT$92.09 billion (US$2.87 billion) and net profit soared 163 percent to NT$32.67 billion, the company's best quarterly showing since the fourth quarter of 2007, when it reached TSMC record high of NT$34.49 billion.

The company forecast first quarter sales at between NT$89 billion and NT$91 billion, and a gross profit margin as high as 48.5 percent, the same as the fourth quarter.

Demand for high-end chips is behind TSMC's drive to expand output at its factories. The company is working to improve its yields of chips made using 40-nanometer and 45nm technology, while it expects to start working on customer orders for 28nm technology around the middle of this year.

Developing smaller chip manufacturing technology is crucial to meeting user demand for ever smaller devices that can do more, such as smartphones with multiple functions like computing, snapping pictures, video and music playing. Smaller etching technologies are also important to improve the speed and efficiency of chips. The more transistors on a chip, the more powerful it is.

Analysts say TSMC is also spending heavily on new chip factories this year due to the need to compete against newcomer GlobalFoundries, a joint venture between AMD and Abu Dhabi's Advanced Technology Investment Co. (ATIC), which has already announced big spending plans.

Global demand for a range of gadgets has leaped since the middle of last year. LCD TVs, laptop computers and Blu-ray Disc players led global sales last year, according to the Consumer Electronics Association. The industry group predicts these devices will continue to lead in 2010, with the addition of other popular gadgets, including smartphones and netbooks. Global sales of consumer electronics, which includes PCs, will be flat at $681 billion this year, after declining last year, the group has said.

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