Taiwan Semiconductor Manufacturing Company
[Type the company name] Taiwan Semiconductor Manufacturing Co. , The Semiconductor Services Company | | | | | | | | | | | | [Type the company name] Taiwan Semiconductor Manufacturing Co. , The Semiconductor Services Company | | | | | | | | | | | | STUDY QUESTIONS Taiwan Semiconductor Manufacturing Company 1. Explain the “foundry model” that TSMC carved out in the semiconductor industry. How does it differ from the conventional business model? A typical semiconductor manufacturing company can be categorized into one of these two groups and they are as follows :
IDMs – Prior to the emergence of foundries, all IC manufacturers in the IC industry were Integrated Device Manufacturers. These fully integrated manufacturers had the ability to design, fabricate and market their own products while some even had the abilities to build their own production equipment. Included in the group of IDMs are both systems companies such as Hitachi, IBM and chip companies such as Amtel and Microchip. These IDMS were reluctant outsource their chip production because they viewed fabs as providing leverage in acquiring ideas for new chip designs.
However, rising production costs in countries such as the United Stated forced these IDMs to start outsourcing their products to more efficient manufacturers such as Toshiba in Japan and Samsung in Korea. Foundries : Entrepreneurs started fabless companies in the late 1980’s when they realized that they can utilize these production facilities in other countries. These firms generally have high profit margin and strong cash flows, reflecting the relative lack of capital intensity in their business model.
It opened the door for the foundation of foundries and in 1987, Taiwan Semiconductor Manufacturing Company was founded. TSMC was the first pure “foundry,” a pure chip manufacturer without a product of its own. It produced a win-win situation for both the fabless companies as well as the foundries as each were able to locate and concentrate their resources to the area of expertise. 2. How should TSMC respond to large-scale entries by new foundries in the mainland China? China is one of the biggest markets for semiconductor. One study suggests that China consumes 33% of the global market for semiconductors.
However, Chinese have been unable to achieve success in the lucrative segments of semiconductor design and front-end manufacturing for the following reasons. “First, China exerts little influence on semiconductor design and selection in major production categories such as mobile phones and laptop computers. The majority of design decisions for these goods are made by global champions—such as Nokia, Acer, and Apple—in their home countries, at the headquarters level. Second, the home countries of major semiconductor companies ban the export of leading-edge manufacturing technologies to China.
Both the United States and the island of Taiwan prohibit the export of equipment used to manufacture sub-65-nanometer process technologies, which leaves mainland Chinese foundries two generations behind the current 32-nanometer standard. Third, concentrated clusters of semiconductor excellence failed to fully develop in China. Instead of focusing investments on one location, as did the island of Taiwan with Hsinchu Science Park, the Chinese government made investments in multiple provinces, setting up semiconductor fabrication plants as far north as Jilin and Dalian, as far south as Shenzhen, and as far west as Chengdu.
In all, fabs capable of producing more than 1,000 wafers per month are spread across 19 cities. Because the industry was so fragmented, government support did not lead to the formation of a vibrant semiconductor ecosystem in any single location. Fourth, and perhaps most important, foreign players own most of the intellectual property throughout the semiconductor value chain. Applied Materials, for instance, dominates manufacturing equipment, while Intel, Nvidia, and Qualcomm control key parts of integrated-chip design for microprocessors, video cards, and mobile handsets, respectively.
Owning the intellectual property means these foreign players also garner the lion’s share of revenues. In the front-end-manufacturing segment, non-Chinese players (for example, Samsung, Intel, and Hynix) earn 96. 3 percent of all revenues. In design, foreign players earn 96. 1 percent of revenues. Even in the silicon segment, 93. 0 percent of revenues go to nonmainland-Chinese companies. China has a decent share in only two areas, back-end manufacturing and assembly and test, where Chinese companies earn 28. 6 percent of total segment revenues. ” (McKinsey, Aug. 2011)
From the passage mentioned above, TSMC can respond to the challenges brought on by Chinese foundries by doing the following : First, TSMC can appeal to the fabless companies globally of the leading edge manufacturing equipment that it possesses. As the manufacturing industry is heavily reliant on equipment technology, TSMC will always have the upper hand against competition from Chinese manufacturers about a generation or two behind them. Secondly, TSMC can also appeal to the fabless companies that they’re interested in the production of the chips alone and that they don’t intend on stealing the design experience and know-how from them.
As was the case when the Chinese government launched a major policy initiative to promote the highspeed-rail industry and all the foreign companies ended up transferring significant amount of intellectual property over to their Chinese counterparts, there are growing concerns over Chinese negligence for intellectual properties. Thirdly, TSMC can build up on the outstanding relationship that it maintains with its current customers. TSMC has been actively involved in the chip design phases, helping optimize chip designs for production at TSMC facilities.
Not only does it enhance productivity, it helps sustain a positive and constructive relationship with its customers while making it harder for its customers to take its design and production to other foundries. Lastly, TSMC can utilize its production plant in Shanghai to match the Chinese competition in the local market by providing competitive price, while utilizing its plants in Taiwan to its customers elsewhere who would be more service-oriented. 3. Can it offer differentiated value to its customers by focusing on superior customer service? Do you believe this strategy will be sustainable?
TSMC can offer differentiated value to its customers by focusing on superior customer services such as, but not limited to 1) Providing its customers maximum flexibility in its orders in terms of production volume and supply date. 2) Helping customers optimize the design to run effectively in TSMC’s fabs thus improving productivity while also helping build a better relationship between the two parties that are involved. 3) Providing its customers with its internal set of libraries to help save development time. 4) Validating intellectual properties for production on behalf of its customers. ) Developing web-based solutions to support its customers such as eFoundry (a virtual fab) and Enterprise Supply Chain Management(ESCM) to help customers in planning for production as well as following up on its orders. 6) Organizing periodical Technology Symposiums to introduce customers to the latest technologies and services as well as to its future strategies and partners. These services provided by TSMC will help its customers save cost through inventory management and accurate production planning while helping maintain a constructive relationship between the two parties. Reference McKinsey. “The Challenge of China. ” (Aug, 2011)
