VZCZCXRO6474
RR RUEHCN RUEHGH
DE RUEHGH #0221/01 1380452
ZNR UUUUU ZZH
R 180452Z MAY 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7940
INFO RUEHBJ/AMEMBASSY BEIJING 2785
RUEHCN/AMCONSUL CHENGDU 1976
RUEHGZ/AMCONSUL GUANGZHOU 0433
RUEHSH/AMCONSUL SHENYANG 1967
RUEHHK/AMCONSUL HONG KONG 2145
RUEHIN/AIT TAIPEI 1764
RUEHGP/AMEMBASSY SINGAPORE 0258
RUEHKO/AMEMBASSY TOKYO 0651
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHUL/AMEMBASSY SEOUL 0445
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8585

UNCLAS SECTION 01 OF 03 SHANGHAI 000221 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, DAS DAVIES 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR LOI, SHRIER 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
STATE PASS CFTC FOR OIA/GORLICK 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EFIN ELAB TNGD CH TW
SUBJECT: TSMC AND SMIC: TWO SEMICONDUCTOR RIVALS IN SHANGHAI FACE OFF 
AMID ECONOMIC DOWNTURN 
 
REF: SHANGHAI 145 
 
¶1.  (SBU) Summary: TSMC and SMIC, two large semiconductor 
manufacturers with foundries in Shanghai, saw a "freefall" in 
orders in late 2008.  The firms hit bottom in December 2008 and 
January 2009, but orders started to pick up again in Q1 2009. 
Shanghai-based executives at these firms are cautiously 
optimistic about the firms' prospects in China in 2009, citing 
the impact of the Chinese Government's economic stimulus 
measures.  Neither firm has laid-off employees amid the 
downturn, instead adopting cost cutting measures like unpaid 
leave, salary cuts, and hiring freezes, despite local government 
encouragement to hire new university graduates.  The warming of 
cross-Strait relations helped SMIC double its market share in 
Taiwan but has had minimal impact for TSMC, they said.  The two 
companies have been engaged in litigation battles over the past 
several years.  End summary. 
 
¶2.  (U) Congenoffs spoke with Shanghai-based executives of 
Semiconductor Manufacturing International Corporation (SMIC) and 
Taiwan Semiconductor Manufacturing Company China (TSMC) in April 
about the impact of the economic downturn on Shanghai's 
semiconductor industry.  Interlocutors included William Wang, 
Vice President, TSMC (China); David Liu, Deputy Director of 
Finance, TSMC (China); Richard Chang, Founder, President and 
CEO, SMIC; and J. Matthew Szymanski, Vice President, Corporate 
Relations, SMIC.  TSMC China is a semiconductor foundry 
established in Shanghai in 2003 (its headquarters are in 
Taiwan).  The Shanghai foundry manufactures 8 inch wafers, which 
are sold to IC (integrated circuit) design companies in China 
for use in mobile phones, PCs, and consumer electronics.  SMIC 
is incorporated in the Cayman Islands but is headquartered in 
Shanghai with facilities in Beijing, Tianjin, Chengdu, Wuhan, 
and Shenzhen.  SMIC makes 8 inch and 12 inch wafers for IC 
design companies.  Its chips are used in mobile phones, PDAs, 
and consumer electronics. 
 
"Freefall" in Orders 
------------------------ 
¶3.  (SBU) William Wang of TSMC said his company's worldwide 
sales in 2008 grew by 3.9 percent year-on-year (YOY) with total 
revenue reaching USD 10.2 billion.  However, much of the growth 
was in the first half of 2008.  A downturn in orders began in 
July 2008, leading to a "freefall" in November 2008 when orders 
plummeted by 80 percent, said Wang.  Orders have declined since 
and were "the lowest ever" in January 2009.  Wang estimates a 
20-25 percent YOY global revenue decline in 2009.  TSMC was hard 
hit by the global economic downturn because of its large 
exposure to the U.S. market (accounting for 60-70 percent of 
total sales).  TSMC's Shanghai foundry has also dramatically cut 
production, manufacturing 30,000 wafers per month in Q4 2007, 
43,000 by the end of 2008, and now only 15,000 per month. 
(Note: At full utilization, the Shanghai foundry can manufacture 
100,000 wafers per month.  End note.)  Capacity utilization, 
which was at 80 percent in Q3 2008 and 60 percent in Q4 2008, is 
now only at 25 percent.  Wang acknowledged that the foundry may 
have expanded too quickly in early 2008. 
 
¶4.  (SBU) SMIC's sales were down 12.6 percent in 2008 compared 
with 2007, with revenues declining progressively each quarter 
from USD 362 million in Q1 2008 to USD 272 million in Q4 2008. 
SMIC also saw a sharp decline in orders in Q4 2008 and Q1 2009, 
said Richard Chang, with an 85 percent YOY drop in orders in 
December 2008, the company's "worst month."  The global economic 
downturn has had a large impact as the company is heavily 
dependent on exports, which account for 70 percent of its sales. 
 Capacity utilization declined sharply from 90 percent in Q3 
2008 to 67 percent in Q4 2008 and 34.9 percent in Q1 2009. Chang 
thinks the company hit bottom in December 2008. 
 
China Market Still Doing Okay 
 
SHANGHAI 00000221  002 OF 003 
 
 
----------------------------- 
¶5.  (SBU) Despite the sharp global downturn in 2008, our 
interlocutors said the China market is still doing "okay." 
According to Wang of TSMC, sales growth for TSMC in China in Q1 
2009 was "the best" of all the regions, and the number of 
customers in China (currently 100 IC design companies) is still 
growing.  Although mainland China only accounted for USD 200 
million in revenue (2 percent of total worldwide sales) in 2008, 
Wang expects revenue in China to continue its double-digit 
growth (sales in China has doubled every year since 2004).  Wang 
anticipates a "tilted L shaped recovery" globally for TSMC over 
the next 2-3 years.  "Hopefully we hit bottom in January 2009," 
he said. 
 
¶6.  (SBU) Chang of SMIC expects the semiconductor industry to 
continue its recovery in Q2 2009.  He believes the China market 
has the potential for fastest growth of all regions in the 
world, as orders picked up 35 percent in Q1 2009 from the 
previous quarter and is expected to grow 70 percent from Q4 2008 
by the end of Q2 2009.  The domestic IC supply in mainland China 
now only meets 20 percent of total IC demand in China, according 
to SMIC's internal documents, as China continues to churn out 
products with ICs, such as household appliances, PCs, and mobile 
phones. 
 
Helped by Chinese Stimulus Measures 
------------------------------------- 
¶7.  (SBU) Both TSMC's Wang and SMIC's Chang partly attributed 
their optimistic outlook for the China market to the stimulus 
measures recently implemented by the Chinese Government. 
Although semiconductor manufacturers will not receive anything 
direct through the stimulus measures, SMIC's large customers, 
like TV manufacturers Pixelworks and Haier, are likely to 
benefit from a boost in domestic consumption, said Chang.  Wang 
similarly expects the government's "household appliances to the 
countryside" policy to boost rural consumption of household 
electronics, mobile phones, and PCs, thereby boosting demand for 
ICs used in these products.  The domestic demand for telecom 
products should also rise after the deployment of 3G technology 
in China, said Wang. 
 
No Plans to Layoff Workers 
-------------------------- 
¶8.  (SBU) SMIC has 6000 employees in its Shanghai headquarters. 
According to Szymanski, SMIC has not laid-off any employees amid 
the downturn but has frozen all new hiring, despite local 
government encouragement to hire new university graduates. 
According to Chang, the Shanghai Government has offered to 
subsidize 20-25 percent of the salary for new university 
graduate hires for at least one year.  The company has 
implemented a 15 percent pay cut across the board, with a bigger 
cut for upper management.  SMIC's labor union has supported 
these cuts, added Chang, in preference to any layoffs. 
 
¶9.  (SBU) TSMC currently has 1200 employees in its Shanghai 
foundry (70 of whom are from Taiwan).  Although two-thirds of 
its machines are currently shut down, TSMC Shanghai does not 
plan to layoff any employees, said Wang.  Instead, the company 
is taking other cost cutting measures, such as having employees 
take 4 days of unpaid leave every month, a policy which Wang 
projected would be discontinued by the end of May 2009.  The 
company also relies on natural attrition.  Wang said TSMC does 
not want to layoff workers since they receive 1-2 years of 
on-the-job training, a significant investment for the company. 
(Comment: A bigger concern is likely that laid-off employees 
would be picked up by rival firms, such as SMIC.  End comment.) 
 
Hoping for More Level Playing Field 
----------------------------------- 
¶10.  (SBU) As a Taiwan-based company, TSMC's Shanghai foundry 
 
SHANGHAI 00000221  003 OF 003 
 
 
has to "walk a fine line" between Taiwan, Chinese, and U.S. 
regulations, said Wang.  For example, TSMC has the technology to 
produce 45nm (nanometer) chips in Taiwan, but is prevented under 
Taiwan law from deploying technology more advanced than 0.18um 
(microns) in mainland China.  This places TSMC at a disadvantage 
in the mainland, said Wang, since some of its competitors face 
no such restrictions.  Szymanski of SMIC corroborated this, 
stating that "SMIC exists" because U.S. and Taiwan regulations 
restrict U.S. and Taiwan firms from deploying its most advanced 
technology in the mainland.  One other disadvantage for TSMC, 
according to Wang, is that government-funded projects are often 
awarded to domestic firms instead of "foreign" firms like TSMC. 
"Although the Chinese Government wants us to invest more in 
China, there is some discrimination against us because we are a 
Taiwan company," said Wang.  He hopes TSMC will be able to 
compete on a more "level playing field" eventually.  Wang said 
the recent warming of relations between mainland China and 
Taiwan has not had a big impact on TSMC's business in the 
mainland.  The biggest benefit has been that it is now easier to 
send the company's 300 local employees to Taiwan every year for 
training.  On the other hand, SMIC has been able to double its 
market share in Taiwan over the past year, according to Chang, 
who said that this was due to improved cross-Strait relations 
under Taiwan President Ma Ying-jeou. 
 
No Love Lost Between Rivals 
---------------------------- 
¶11.  (SBU) TSMC's Wang listed SMIC, Huahong NEC, and Grace 
Semiconductor, all located in Shanghai, as his company's main 
rivals.  TSMC and SMIC have been engaged in litigation for 
years, with TSMC suing SMIC for allegedly pilfering its 
technology.  "They are always trying to steal our technology," 
said Wang.  According to Szymanski of SMIC, however, TSMC 
"cannot compete with SMIC in the China market, so it attempts to 
block SMIC through litigation."  When asked about the current 
pending lawsuit against SMIC, TSMC's Wang only commented that 
the case is "still ongoing." 
 
Comment 
-------- 
¶12.  (SBU) Like other export-dependent industries in East China, 
the semiconductor industry in Shanghai was hard hit by the 
global economic downturn.  Although our interlocutors believe 
the Chinese Government's economic stimulus measures will have a 
measurable impact on domestic consumption of consumer 
electronics, a sentiment heard among other industry and 
government interlocutors in East China, TSMC and SMIC still 
remain heavily exposed to overseas markets.  Our interlocutors' 
cautious optimism for 2009 appears to hinge on the hope that 
U.S. and other developed economies will bounce back from the 
"bottom" of a few months ago.  As Wang of TSMC said, although 
the China market is picking up and his company is trying to 
diversify its overseas markets, without a recovery in the United 
States, 2009 could yet turn into another financially challenging 
year for the industry. 
SCHUCHAT