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Executive Summary
Semiconductor Report - Second Quarter, 2003
July 1, 2003

Taiwan's semiconductor industry faced problems of near biblical proportions during the second quarter of 2003, as war, disease, and drought threatened chipmakers. The U.S.-led coalition went to war with Iraq, the deadly virus severe-acute-respiratory-syndrome (SARS) broke out in China, Hong Kong, and Taiwan, and a lack of rainfall in Taiwan had officials worried until late May that water rationing may be required to ensure stable water supplies for semiconductor firms. At the same time, competitive challenges continued to pressure Taiwan's semiconductor foundries as International Business Machines (IBM) attracted new customers for its contract chip making services to the detriment of Taiwan's United Microelectronics Corp. (UMC) and Taiwan Semiconductor Manufacturing Co. (TSMC).

It is amazing that the local industry emerged unscathed. The Iraq War ended swiftly enough to defer but not damage chip demand; SARS did not cause widespread deaths as was once feared (though the disease remains a danger); monsoon rains near the end of May and into June have mitigated the drought threat, and IBM and other competitors have not seriously hurt TSMC or UMC. In all, the second quarter actually turned out well for Taiwan's chipmakers.

TSMC and UMC are, in fact, poised to report quarterly sales in the second quarter higher than at any time over the past two years, and many industry watchers believe the two firms have strong orders going into the third quarter as well. The closing of so many chip factories in the US has finally turned into more outsourcing to Taiwan's foundry chip giants. The trend of outsourcing, however, means that the US is ever more dependent on Taiwan for chip manufacturing, and some would argue that Taiwan has become as strategic for US semiconductor production as the Middle East is for oil, which raises serious national security concerns for the US. Moreover, Taiwan's importance in chip manufacturing is only growing.

Plans are moving forward to build the island into the world's largest concentration of advanced microchip manufacturing in 12-inch wafer semiconductor fabrication plants (fabs). Taiwan's memory chipmakers are leading the charge, which one day may place Taiwan on top of the memory chip business with their low-cost production in cutting-edge 12-inch plants. For US chip equipment makers, these plants should create a nearly US$12.5 billion (NT$432.3 billion) sales opportunity.

The downside for the US is the continued loss of its domestic chip-manufacturing sector. As already noted, many US firms have shut down fabs and are outsourcing production to Taiwan, Singapore, and China. That trend can be reversed, however, with the appropriate incentives. Chip equipment is the most expensive part of a plant, but that cost will remain fixed regardless of the location. That means that with the proper land and tax incentives, a US state can attract investment in cutting-edge semiconductor facilities - as the state of New York did with IBM's latest fab in East Fishkill, New York.

This report will focus on the major events mentioned above, and provide an analysis of how these outside forces have impacted Taiwan's chip industry during the second quarter of 2003. The threat of war, disease, and drought and its impact on the industry, as well as challenges to specific segments of the chip industry, will be highlighted. In addition, opportunities and challenges for the industry will be discussed in each section. Finally, renewed national security concerns will be highlighted both in terms of the threat posed to the US, as well as in terms of the safeguard offered to Taiwan by its chip industry.

Table of Contents
Letter from the President 1
About the US-Taiwan Business Council 3
Semiconductor Analysis 5
Introduction 5
State of the Industry: War, Disease, Drought 6
Taiwan Foundries Profit from Increased Outsourcing 7
US Defense Concerns Over the Chip Industry 7
Taiwan's Silicon Shield 8
Taiwan Becomes the World's Largest 12-inch Fab Cluster 9
Taiwan DRAM Comes Into Its Own 10
Taiwan DRAM Firms Threaten Action against Hynix 11
Promos Repositions with New Partner Elpida 12
Conclusion 12
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: Second Quarter, 2003 37
Appendix: Trends in Trade and Investment 45

This report is available to our members starting July, 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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