Inset: UMC-HeJian cooperation has been going on for years; events such as their annual technology workshop were discussed extensively in online professional communities. Above: One of HeJian Technology's dormitories for young employees in the Suzhou Industry Park. File photos

TAIPEI: United Microelectronics Corporation (UMC), the world's No 2 contract chipmaker, said yesterday it would spend $285 million buying 85 percent of mainland-based chipmaker HeJian Technology that it does not currently own.

The takeover of HeJian, a contract foundry in the Suzhou Industry Park, Jiangsu province, and now owned 15 percent by UMC, will help the group tap robust demand on the mainland, UMC Chief Executive Sun Shih-wei told an investor conference yesterday.

Expanding UMC's operations on the mainland via a takeover of HeJian will pave the way for the group's return to profitability after three consecutive quarters of losses, he said.

Since late last year, most tech customers have reduced orders due to sluggish sales of personal computers, cellphones and flat-screen TVs, but sector leader TSMC and UMC have benefited from a recent rise in orders from the mainland.

"That's a good deal," said Eddie Chen, vice president of Taiwan's National Investment Trust.

"UMC can serve more clients there and we all know that labor costs are cheaper there."

As demand gathers speed in the second quarter, UMC said its wafer shipments would more than double from the first quarter, with its capacity utilization rate shooting up to about 75 percent from the first quarter's 30 percent. Average selling prices were expected to fall by less than 5 percent.

"UMC expects Q2 revenue to grow significantly, with loss turning into profit," UMC's Sun said, without specifying whether it was net or operating profit.

Meanwhile, ASE, the world's largest chip packager and Taiwan's chip designer Mediatek also predicted a brighter second quarter.

Taipei restricts local semiconductor makers from exporting their most advanced technologies to the mainland. Currently Taiwan Semiconductor Manufacturing Co Ltd (TSMC) has one chip factory using older technology in Shanghai, while UMC's facilities are in Taiwan.

UMC, which owns 15 percent of HeJian now, said it still needs final approval from shareholders in June to allow it to acquire the remaining 85 percent stake.

UMC posted a net loss of NT$8.16 billion ($242 million) in January-March, reversing a year-earlier profit of NT$206 million.

Its first quarter loss was a substantial reduction from a record loss of NT$23.5 billion in the fourth quarter of 2008.

That was worse than analyst consensus estimates for a loss of NT$5.78 billion, according to Reuters Estimates.

And despite some signs of an uptick in demand, price competition still exists in the chip foundry market, where key players are racing to use more advanced process technologies to further cut costs and boost production of new chips.

"UMC has been a second source for customers after TSMC and the company really needs a bigger customer base," said Bevan Yeh, a fund manager at Prudential Financial Securities Investment Trust in Taiwan.

"But I don't think that can be changed any time soon," said Yeh, who owns TSMC and UMC shares in his portfolios now. On average, UMC has been selling its chips about 10-15 percent cheaper than TSMC's, he said.

Analysts say TSMC is set to report its weakest quarterly profit in nearly eight years today, but TSMC could also give an upbeat note for the current quarter as its business is bottoming out.

Singapore-based Chartered Semiconductor also said last week it expects sales and capacity utilization rates to improve in the second quarter.

Ahead of the results, UMC shares rose 3.6 percent and TSMC shares gained 1.2 percent yesterday, outperforming the main TAIEX's 0.3 percent rise.

Investors are already betting on a recovery, pushing TSMC's Taipei-listed shares to a six-month high in April. UMC shares hit their highest level in nearly eight months this month.

Reuters

(HK Edition 04/30/2009 page4)