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Executive Summary
Semiconductor Report - Third Quarter, 2003
October 1, 2003

Rising sales of personal computers and other electronics over the past three months has led to a full comeback for Taiwan's semiconductor industry. Due to rising sales and investments in new production technologies to reduce costs, nearly every chipmaker in the industry returned to profitability during the third quarter. In short, this is the healthiest the industry has been in nearly three years.

What is more, all sectors within the industry are doing well. Chip foundries Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC) both reported stellar third quarter results in their October reports. TSMC's September revenue reached a record US$560 million (NT$18.91 billion), representing a 3.2 percent increase over August's sales and a 48.3 percent overall increase from September 2002 sales. In addition, TSMC's revenue for the first nine months of 2003 totaled US$4.26 billion (NT$144.12 billion), an increase of over 20.3 percent from the same period in 2002. UMC's September revenue hit over US$220 million (NT$7.52 billion), a 7.3 percent increase from August's sales and a 25 percent jump from September 2003 results. UMC's earnings for the first 3 quarters of 2003 reached US$1.81 billion (NT$61.14 billion), signaling an overall gain of 23 percent from the same period last year. Even memory chipmakers, who had posted losses for the past two and a half years, said they had turned profitable during the July-September 2003 period.

A focal point for the third quarter of 2003 was Taiwan and China Semiconductor Industry Outlook 2003, a joint conference held by the US-Taiwan Business Council and the Fabless Semiconductor Association. TSMC chairman Morris Chang captured the spotlight at the conference by predicting that China would grow so fast over the next few years that it would cause the next global downturn in the chip business. A number of major issues were discussed at the event, including intellectual property concerns and the proliferation of banned chip making technologies to China.

To highlight how easy it is for China's chipmakers to obtain equipment despite U.S. export regulations, Grace Semiconductor of Shanghai recently announced that it had obtained the most advanced chip technology available in China, etching chips at tiny 0.15-micron sizes. European equipment makers are winning the China market by selling the better technology, and the biggest losers will likely be U.S. semiconductor equipment makers - unless the U.S. figures out how to keep European firms from selling China the equipment it wants. These issues will be a major focus of this report as well.

Looking forward, Taiwan's semiconductor firms still face hurdles to building chip factories in China. Taiwan and China's troubled history has played a major role in Taiwan's passing laws to restrict seriously the technology its chipmakers may use in China. Moreover, politicking ahead of Taiwan's presidential elections next March has already begun - with China set to be a major focus. The coming six months will likely see Taiwan-China relations hit new lows, and the impact will be felt on the semiconductor industry.

This quarterly report will examine a number of the issues brought up at the Outlook 2003 conference. It will also examine some of the dangers facing Taiwan's chip industry during the next quarter.

Table of Contents
Letter from the President 1
About the US-Taiwan Business Council 3
Semiconductor Analysis 5
Introduction 5
The State of Taiwan's Chip Industry 6
China's Chip Industry Already Impacting Taiwan's 6
China's Foundry Industry Not Seen as a Threat Commercially 8
China's Chipmakers Gaining New Technology at Much Faster Pace 9
U.S. Technology Controls Failing: China Moves Forward While U.S. Equipment Makers
Lose Out On The Biggest Market Opportunity In 30 years
11
Taiwan's Role in Chip Equipment Exports to China 13
Intellectual Property Concerns: Taiwan & China 13
China: The Next Great Chip Making Nation 15
US-Taiwan-China Semiconductor Connection 16
Outlook: Taiwan's Presidential Elections, China Relations & the Chip Industry 17
Conclusion 18
Taiwan and China Semiconductor Industry Outlook 2003 19
Taiwan Semiconductor Industry/Government Contact Information 25
United States Semiconductor Industry/Government Contact Information 35
Sources for Taiwan Semiconductor Industry Information 45
Semiconductor Headlines: Third Quarter, 2003 49
Appendix: Trends in Trade and Investment 57

This report is available to our members starting October, 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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