Brian Bandsma

Taiwan Semiconductor Thinking Too Far Ahead

They want to upgrade to 16" wafers for the same reason they are going from 8" to 12". The per chip costs goes down by 30%. Just like most Taiwanese hardware manufacturers the business model is to bring costs down. As mentioned very few companies are willing or able to make that kind of investment, especially US based ones. Hence more IDM outsourcing to foundries, even more so if you can no longer compete with the cost structure. Although TSMC is 40-50% of the foundry business, depending on how you measure it, it is only 7% of total global semiconductor manufacturing.

I would also not be too quick to criticize Morris as his past investment decisions have built a company that is unmatched in the industry. As I recall, TSMC has an R&D budget equal to the next three largest foundries combined. So pushing the technology curve forward is a critical competitive advantage for the company.

Even in this seasonally weak quarter the company still generates an annualized ROE of 24%, ex-cash. And it is the only foundry that is consistantly profitable. Even when the tech bubble burst and orders dropped off a cliff they still generated a 10% operating margin.

Investing In China's Online Gaming Sector

A couple of clarifications:

1) The Netease game you are referring to is called Fantasy Westward Journey. It is around 60% of total revenues and the other game Westward Journey 2 is around 22% of total.

2) The life span of the games are obviously more than 1-2 years as Westward Journey 2 is now well into its fifth year and Fantasy just completed 3 years. As a comparison the Lineage franchise is close to 8 years old and still going strong with the upgrade in 2003. Westward Journey 2 is supposed to have a full upgrade this year.

3) According to the Netease Kingsoft hired 1 senior developer from the company not the whole team.

4) Netease is the #1 email provider in China and has another potential blockbuster game in beta right now called Tian Xia which should go commercial second half of this year.

6) The9 has Guild Wars, Hellgate: London and Granada Espada plus others in the pipeline this year as well as the WoW upgrade, Burning Crusades. The obvious benefit of The9’s business model vs. Netease is though you give up a big chunk of the revenue to the content owner there is significantly less title risk as you just pick and choose the more successful titles and introduce them to Chinese consumers.