TSM: We Agree With TSMC Founder on Semi Industry

By William Trent, CFA of Stock Market Beat

We’ve pointed out the difficulties facing the semiconductor industry many times. One of our points has been that the industry growth rate has slowed dramatically, and many in the industry don’t seem to realize it.

Not so for TSMC (TSM) founder Maurice Chang. It’s gloom and doom for the chip industry, says TSMC founder | News.blog | CNET News.com

“The design cost basically has been doubling with each generation,” Chang said. “Prototyping is up as well.”Meanwhile, the cost of building manufacturing facilities continues to oscillate like crazy as well. It will cost 12 times as much to build a 45-nanometer facility, which companies will open in 2007, as it took to build a 250-nanometer facility in 1997. (The nanometer numbers refer to the average size of features on the chip. A nanometer is a billionth of a meter; a human hair is about 60,000 nanometers wide.)

Unfortunately, the rewards are shrinking. Revenue for the chip industry grew about 16 percent a year from 1960 to 2000. From 2000 to 2010, revenue will grow about 6 percent a year.

So, we see eye to eye on the slowdown issue. But given that TSMC appears to understand the slowdown, why is it that they have added so darned much capacity lately?

Well, at least they are admitting they have a problem, and that is the first step toward fixing it.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Starbucks (SBUX) call options; Landstar (LSTR) put options; Plantronics (PLT) put options

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