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No star-spangled production plans for Taiwan chip king TSMC

CEO Chang says having a US foundry would only hurt Apple and other local clients

TSMC Chairman Morris Chang, center, said moving production to the U.S. would require "sacrifices" by his company and its local clients. Here he is flanked by co-CEOs Mark Liu, left, and C.C. Wei. (Photo by Cheng Ting-fang)

TAIPEI The head of the world's biggest contract chipmaker, Taiwan Semiconductor Manufacturing Co. (TSMC), said he "applauds" new U.S. President Donald Trump's call to create more jobs at home, but that moving more TSMC chip operations stateside would only hurt his company and its clients there, including Apple Inc., Qualcomm Technologies and Nvidia.

"I do not rule [building a U.S. foundry] out, but I see a lot of sacrifices that we and our customers will have to make if we do that," TSMC founder and Chairman Morris Chang told investors and reporters on Jan. 12. He added that he felt no pressure from his U.S. clients to do so despite Trump's aggressive pledge to bring manufacturing jobs back to the country.

Chang said his company has been able to grab a 55% share of the global market not because of cheap labor but because TSMC has created a complete ecosystem of semiconductor suppliers in Taiwan. The company's thousands of engineers and numerous vendors are able to communicate with each other quickly across its network of plants. That means greater production efficiency and faster problem solving, Chang said.

"If we lose these advantages, our customers will lose too," said Chang at the Jan. 12 briefing. He said his company has occasionally considered moving more production to the U.S., but that the potential benefits have not seemed sufficient.

Chang's remarks came after Trump asked Apple CEO Tim Cook to make the company's flagship iPhone in the U.S. Trump said the government may offer tax breaks for U.S. enterprises that produce locally.

Apple is TSMC's No. 1 client, and the Taiwanese tech giant monopolizes production of the core processor chips for the iPhone 7 and iPhone 7 Plus, among the most expensive components in the handsets. TSMC's roughly 470 global customers also include Qualcomm, Advanced Micro Devices, Intel, Nvidia, Marvell Technology Group and Xilinx. U.S. customers accounted for 66% of the company's record revenue of 947.93 billion New Taiwan dollars ($29.4 billion) in 2016.

JOB CREATOR Chang said TSMC has helped create "hundreds of thousands" of semiconductor jobs in the U.S. over the past two to three decades and will continue to create more.

The chairman said his company has helped cultivate a strong chip-design sector in the U.S., citing how TSMC's business model allows chip suppliers to use the most advanced nanotechnologies without having to spending billions of dollars to build their own facilities.

Widely viewed as a barometer of chip industry trends and electronics demand, TSMC sees its business slowing in the first half of 2017 due to weakening demand from its major mobile customers. The company has also warned of a minor inventory correction.

Demand is weaker than the company anticipated a few months ago, according to TSMC Chief Financial Officer Lora Ho. Ho said the deceleration came from the mobile sector.

In addition to Apple, other major TSMC customers in the mobile sector are HiSilicon Technologies, the chip-design arm of No. 3 smartphone maker Huawei Technologies of China, and Taiwan's MediaTek, the biggest mobile chip supplier to China.

"TSMC's conservative view about the first half of 2017 says a lot about the lukewarm sales for Apple's iPhone 7 range, and we think the American tech titan at this point would move on to new products rather than pin its hopes on the previous model," said Mark Li, an analyst at Sanford C. Bernstein.

The chipmaker will continue to dominate rival Samsung Electronics when it comes to making core processors for the iPhone, with the Taiwanese company seen monopolizing production for the next-generation model, expected to be released in September, according to Li. He added that demand for the new iPhone will probably outstrip that for the current model.

Rick Hsu, an analyst at Daiwa Capital Markets, said iPhone shipments are expected to expand by 5% to 10% this year from roughly 210 million units in 2016.

TSMC's net income for 2016 climbed 9% on the year to a record NT$334.25 billion, while revenue grew 12.4%. For 2017, the company expects sales to grow another 5% to 10% in U.S. dollar terms, and sees sales for the overall semiconductor industry rising some 4% over the same period.

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