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Executive Summary
Semiconductor Report - First Quarter, 2003
April 1, 2003

Taiwan's chip industry grew far faster than the world average last year, despite serious challenges and lower margins for products. The first quarter of this year has seen little change in the fortunes of the industry as it faces an uphill battle to sell more chips into a sluggish market.

A host of new challenges have presented themselves in the opening of the year. International Business Machines (IBM) has shown itself to be a potent competitor in Taiwan's crown industry, the foundry chip making business. Companies that make chips to the specifications of their customers, like Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics (UMC), have both seen some of their top customers seek foundry work from IBM.

UMC has responded to IBM, and to the threat from lower cost producers in Malaysia, China, South Korea, and Singapore, by moving to a new "partnership" model of doing business. In what may be one of the best business moves UMC has made in years, the firm is investing in companies that have strong potential, and UMC plans to take them the final yard to success. It is a plan that, in many ways, is perfect for UMC.

In the memory chip market, Infineon Technologies AG, the German giant, finally rid itself of ProMOS Technologies, a six-year joint venture project with partner Mosel Vitelic. The German chipmaker has not ended, however, its relationship with Taiwan. It has moved forward with a joint 12-inch plant with Nanya Technologies, and it has continued to work with Winbond Electronics. Significantly, however, Infineon has chosen a China partner in Semiconductor Manufacturing International Corp. (SMIC). The deal may be a sign of the future as Infineon clamors to be the first DRAM maker producing with a partner in China at the latest technology levels.

TSMC also finally saw a ray of light at the end of the tunnel for its China plans. The Taiwan government said in late February that it could go ahead with the initial phase of its investment plan. The downside is that officials will scrutinize each following development of the investment, an 8-inch plant TSMC is building in Shanghai. It will still be a long, hard road for the chipmaker.

Taiwan's chip design firms, which have been growth leaders for the past few years, also started off this year with some big developments. In a deal that could become a model for U.S. and Taiwan chip designers, Silicon Valley-based Oak Technologies and Hsinchu's Sunplus Technology inked a preliminary agreement to develop a joint venture chip design firm for the DVD market. The company's plan to leverage Sunplus' lower cost base and proximity to China with Oak's patents, products, and customer list should prove to be a powerful combination and one that other firms may soon follow.

The focus of this report is to provide analysis on some of the key issues that have cropped up during the first quarter of 2003 for Taiwan's chipmakers, including IBM's full entry into the foundry business, UMC's new partner foundry model, Infineon's new DRAM partner in China, and the government's approval of TSMC's China plans. Finally, the major portion will detail some of the differences - fair and unfair - in accounting practices between U.S. and Taiwan chip design firms, and it will highlight the product lines with the most potential this year for Taiwanese IC design shops.

Table of Contents
Letter from the President 1
About the US-Taiwan Business Council 3
Semiconductor Analysis 5
Introduction 5
State of the Industry 6
IBM Beating Taiwan's Foundry Chipmakers 6
UMC and the "Partnership Foundry Model" 7
Infineon and ProMOS Call It Quits 9
Potential Dangers of the Infineon/SMIC Deal in China 10
TSMC Finally Gets Into China, but Hurdles Remain 11
US and Taiwan Chip Design Firms Begin to Cooperate 11
Conclusions 14
Taiwan Semiconductor Industry/Government Contact Information 15
United States Semiconductor Industry/Government Contact Information 25
Suggestions of Sources for Taiwan Semiconductor Industry Information 35
Semiconductor Headlines: First Quarter, 2003 37
Appendix: Trends in Trade and Investment 45

This report is available to our members starting April, 2003. To purchase a copy of this report (US$50 for non-members), use this order form.

If you have any questions about the report, please contact Judson Payne, the Council's Director of Corporate Affairs. You can also call us at (703) 465-2930, or email us at Council@us-taiwan.org.

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