The success of Taiwan Semiconductor Manufacturing Co. (TSMC), the island's biggest microchip foundry, is paradoxical.

TSMC has made a name for not putting its brand name on its products. As a foundry --in fact, the world's first, its business strategy is to manufacture advanced integrated circuits (IC) for IC design houses and other microchip producers. It is bound by its corporate statutes not to design or crank out its own brand name ICs.  Herein lies the microchip producer's primary claim to innovation. In the ten years since TSMC pioneered the pure IC foundry concept, foundry clones have mushroomed in Taiwan and all over Asia.

But with the dizzying initial growth have come other challenges. TSMC's competitors, particularly those from Korea, have flooded the world market, profit margins have halved from 50 percent in early 1996 and memory chip prices are still in a viselike squeeze. As a response to all this, TSMC is striving for economies of scale. Also, it is contemplating innovation, this time in the context of cutting-edge technology. It plans, for instance, to turn out about a tenth of its output in the high-performance 0.25 micron format by early next year. That is only within a half year after Intel launched the new technology.

Funding for such a program can come from several sources. The latest is the sale of about 130 million shares at US$25.5 apiece in early October at the New York Stock Exchange. It was only the second Taiwan company (Pacific Electric Wire and Cable was the first) and the first Asian microchip producer to get a listing on the Big Board. Other local semiconductor manufacturers are looking --once again-- at how TSMC will fare on the US capital market before following suit.

Closing the Gap

Morris Chang, the chairman and president of TSMC, stresses that his company is fast nipping at the heels of the world's best microchip developers.

"The impression is that TSMC and Taiwan semiconductor companies are followers," he said in between taking puffs at his pipe. "TSMC has been one of the biggest innovators in the past decade. We are listed among the top 20 patent owners in the US, having rights to hundreds of patents."

"Just like private courier Federal Express (FedEx) which revolutionized mail delivery, TSMC did something similar in the semiconductor industry. But FedEx doesn't invent planes. TSMC is better in this regard. We've been developing our own technologies."

TSMC's innovations even extend beyond the 0.25 micron microchip. It is developing the even smaller 0.18 micron kind. One micron, a millionth of a meter, is a unit of measurement for the distance between two IC transistors on a silicon wafer. Industry analysts give kudos for this strategy. Adam Chou, an analyst with Core Pacific, for instance, says this drive to innovate, coupled with its reputation for flexible manufacturing, may draw even the likes of Intel to source microprocessors from here within the next two years.

Silicon Island

Chang says Taiwan has all the prerequisites to reach the same level as the US and Japan in microchip manufacture. It has both local talent and business experience. But he says

The pioneering foundry's attempt at technology development could set off the entire domestic semiconductor industry on the same course for the next decade. This also has implications on the domestic computer industry much of whose revenues comes from similar outsourcing pacts with US and Japanese companies. The benefits from subcontracting for foreign firms, however, are too great for most local firms to abandon it for peddling their own brands.

This new emphasis on innovation is all the better for Taiwan which has been gripped in protracted soul-searching over competitiveness since it dipped in a worldwide competitiveness survey and Harvard don Michael Porter berated it for lacking creativity.

Just as in 1987, many industry players are likely to train their sights on TSMC and scrutinize the results of its technology development before following the same path. But by the time others start imitating it, TSMC may be starting off on yet another innovative course.