聯華電子 (UMC) 2002 Q4 法說會逐字稿

Welcome to this UMC fourth quarter and full year 2002 earnings conference call. Please be aware that each of your lines is in a listen-only mode. At the conclusion of the presentation there will be time for a question and answer session. At that time, instructions will be given as to the procedure to follow if you would like to ask a question.

For your information, this conference call is being broadcast live over the Internet. A replay of the call is available at www.umc.com under Investor Relations/Investor Events section until March 31, 2003. A telephone replay will be available from 11:00 a.m. Eastern time on Wednesday, January 29th until January 30th, midnight Eastern time. To access the replay, please call 888-203-1112 or 719-457-0820 international with the access code 230065 any time during this period. I would like to turn the conference over to Mr. Liu. Please go ahead, sir.

Thank you. Welcome and thank you very much for attending our fourth quarter earnings conference call. We are hosting this conference call from Taipei. Here to help report our results are Mr. Chris Chi, Senior Vice President of UMC and President of UMCI. Also, Mr. [INAUDIBLE] Hong, CFO of UMC.

Before beginning this presentation, I would like to remind everyone of our Safe Harbor policy. This is that certain statements made during the course of our conference today may constitute forward-looking statements which are based on management current expectations and belief which are subject to a number of recent uncertainties which also could cause actual results to differ materially, including a risks that may be beyond company's control. For this risk, please refer to UMC's filing the U.S. SEC and also [INAUDIBLE] authorities. I would like to turn the conference call now to today's key speaker, Mr. Chris Chi, senior vice president of UMC.

Thank you. Good day, everyone. Thank you again for joining us today. As always, we appreciate your interest in UMC. I am going to start with a brief summary of our operating results for the fourth quarter. Since you have all seen our press release by now, I am going to keep these remarks short. Following the summary, I am going to go into great details about enhancements that we have made to our strategy and how we believe that these changes will drive growth and profitability in the coming quarters and coming years. Following this, we will leave the rest of the time for your questions.

For the fourth quarter full and fiscal year that just ended, despite an extremely challenging contraction of the global semiconductor market, we were able to return UMC to profitability. This was ultimately accomplished by our ability to constantly adapt to the changing market. Our flexibility allowed us to fine tune our foundry and marketing strategy and optimize our resource allocation. The end result has been a more competitive UMC.

In summary, UMC realized the following in the fourth quarter. First, a 25.8% year to year increase in revenue to nt dollar, 17.54 billion or U.S. $504 million. This represented an 8.4% quarter-over-quarter decrease. Operating income of nt 331 million or U.S. $10 million. Third, nt net income of nt 986 million or U.S. $41 million. Plus wafer shipment of 441,000 equivalent wafers which had an 8% decrease in blended average selling price in nt dollar terms. Earnings per share of nt, .07 or EPADS of U.S., 0.01.

Going forward, we remain optimistic for the long-term outlook of our business. Our outlook for Q1, 2003 is as follows. First, wafer ASP to be flat from Q4, '02. Second, wafer shipment to be flat from Q4, '02. Third, capacity utilization rate to be approximately 50%. Fourth, operating profit margin to be approximately breakeven. Fifth, percentage of revenue from 0.18 micron and below technology to increase to around 40%. Sixth, 2003 CAPEX is tentatively budget around U.S. $500 million.

In the afternoon, the investor conference, our Chairman spend a fair amount of time going through UMC enhancement strategy. I would like to go over the key messages here again. This is very important for the future development of UMC.

In terms of our strategy, we have taken the following steps to improve the company's competitiveness. Let me take you through the presentation, the chart is available on our website.

First message, from the first chart, the title say the era of high margins for current foundry model is gone forever. That several observations to support this point. First is the number of foundry capacity suppliers multiplying in the U.S., Japan, Europe, Korea, China, Singapore, Malaysia as well as for the DRAM players in Taiwan. Then the unprecedented restructure and consolidation leads to a shrinking number of IBM customers, while a fierce competition among [INAUDIBLE] customers continue to exert higher pricing pressure on foundry. The thin margin therefore, has become the industry norm.

On the second chart, we mentioned about two points on the conventional wisdom that won't work. One, building capacity to pursue economies of scales. Is this still valid? No. The answer is no. Size and CAPEX can no longer guarantee future success. You will only worsen the capacity oversupply.

Second point, racing to develop a leading edge, quote, unquote technology. Is this still good? No, I'll answer. Costs of such a technology cannot generate adequate return and possible leaders' gain no more than six months. On the other hand, close follower can avoid a cost of premature equipment purchase and offer mass produceable cost competitive technology.

This background leads to our UMC's new strategy. Our new strategy is that to create a network of partnership among [INAUDIBLE] and IBM companies. IP and design houses, that's where its foundry companies where its images is generated through long-term partnership and added value can be shared among the partner companies.

In this strategy, there are several key words worth noting. First was creation. Second synergy, third, add values, fourth partnership. And therefore we call this new model called Partnership Foundry Model. And foundry become in this partner, foundry becomes the foundation of this model, not the means -- I'm sorry, becomes the foundation, the means of this model, not the whole purpose nor the end.

There's a recent event in Taiwan where we took control of a popularly traded company called SiS. We'd like to use that as an example. I'll move that serve the following purpose. One, SiS business is to fill UMC's void in the chip set application, and therefore, would significantly improve UMC's capacity utilization rate.

Second, UMC's in a position to help relay the customer to personalized IP solutions with SiS and therefore enhance their competitiveness. Third, UMC can now help to speed up SiS's growth by removing its bottleneck in capacity and constraint in technology.

Fourth, UMC will be able to share the benefit from SiS's growth to equity participation. Now, you may ask why we are so open with our strategy and aren't we afraid of being -- that strategy being copied by others? We would like you to show you that we are the only ones who can successfully execute partnership foundry model because of the following reasons. One, we have the experience. UMC started as an IBN early in its life. And we moved from an IBN to foundry with the successful established spin-off.

Second, because our heritage as IBN before, we have the connections. We have acquaintance and friendship with major systems companies and OEM's because those companies used to be our customers. Third, the culture. We have a very innovative, cooperative, proactive culture with a strong global vision.

Fourth, organization. We have a strongly bonded management with a great level of ability. We can say a lot of words about our ability to execute the Partnership Foundry Model. It's important to show you that there are several successful creations by UMC in the past. One, we have successfully spin off several companies such as Media Tech, [INAUDIBLE] Novatec, and [INAUDIBLE] et cetera.

And in the past, we have formed joint ventures with our customers in several foundry companies. For example, UMC Japan, UMCI and UMC USIC which later merged into the same company.

And third category is optical electronics industry. We started our company called [UNIPAC] earlier and eventually merged into AU Optical Electronics, Optronics. Excuse me.

We also have a very good [PCB] company called UniMicron. All of these companies are our creations so that the key word creation has been successfully demonstrated in the past.

I would like to end my presentation with the last page, which is the three circles from the book called [INAUDIBLE] by Jim Collins. We ask ourselves with the same three questions. What you are deeply passionate about?

What you can be the best in the world at? And we say, we can create a partnership, successful partnership. What drives your economic engine? We traced the cash flow. And we are passionate about the foundry and working with other companies to generate synergism and value added.

So this will end my presentation. Now I turn it back to Chi Tung.

Thank you. Now operator, we are now ready to take questions.

Thank you, Mr. Liu. The question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touch tone phone. If you are on a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. We will proceed in the order as you signal us. And we'll take asa many questions at time permits. Once again, that is star one to ask a question. We'll pause just a moment to assemble our roster. And we'll take our first question from Tim McCurry, Deutsche Bank.

Hi, guys. Can you talk a little bit about the linearity of your capital spending plan next year? And in the past, I think that you've indicated that that kind of capital spending levels is more of a maintenance level. Is that still your belief?

In our opinion there is no such thing as the linearity of capital expenditures. Our capital expenditures based on demands. We have some upgrades in the first quarter and the second quarter we have expansion plans, and so it's pretty much based on the market demand.

Okay. And I guess what about the maintenance nature of CAPEX?

I am not sure what you mean by maintenance nature of the CAPEX.

Well, in the past in discussions with the company, it's been suggested that a maintenance capital spending level, so in other words, just what's necessary to keep the existing fabs up and running and to kind of keep them in line with leading edge technology would be a number somewhere around $500 million. So what I'm trying to ascertain is, it sounds like that number is, if it were going to move one way or the other, it sounds like it's's more likely to be revised up versus down given that that is the maintenance capital spending level.

I don't know how to describe the maintenance levels. In the past, obviously, when we answered a question, there is a certain belief on how fast the technology migrates and therefore you needed to spend the capital to keep up the -- to upgrade your fab. That's an upgrade portion of my answer. And as I mentioned to you that we don't think the numbers we mentioned earlier is merely a maintenance portion. We have a certain upgrade as well as we have some expansion.

Okay, so maybe could you give us an idea of what just the maintenance portion is?

I would say less than $300 million of the maintenance portion.

Okay, great, thanks.

Our next question comes from Shikar Parmanik, Prudential Securities.

Hi, good evening. A couple of questions. Clearly you are going through a fair amount of change in your business model. Have you give us a little bit of what kind of target model you were thinking about? And I have a couple of other questions.

Are you referring to financial ratios or --

We're basically thinking with, you know, basically what you are really suggesting as not to chase the so-called leading edge technology but, you know, focus with the cooperation of a group of companies and cooperation. Would the target model change? What kind of gross margins, what kind of operating margins, kind of numbers you are kind of thinking of?

Let me take a crack at this question and we think the in the past few years a certain operation mode does not work, did not work. For example, as I mentioned, being at the leading edge of technology, does that guarantee business and profitability? The answer is no. And the, how would I describe it, is high investment in capacity expansion, would that give us a competitive advantage in the shrinking market? The answer's no, either. So we are setting the shifting into this model where we form a closely knitted partnership with our customers and therefore we can time our technology deployment and time our capacity investment closely with our partner's needs instead of a general belief of what is required.

Great. So basically, less risk on the capital but you are expecting margin-wise things not to change? With would that be a fair conclusion?

In our experience, the margin's been eroded by unused capacity. And obviously we tried to avoid that.

Right. A couple of other questions. The SiS, what level of revenue contribution are we going to see SiS to add in Q1 and also would SiS be soon coming in at a 0.13 level?

At this moment, we cannot speculate how much upside the SiS will bring to us. SiS is an IBN company who owns an aged fab, and they continue to own and operate the aged fab, which is completely full at this moment. And they have a unfilled demand from their customer base, which we can help easily by loading our factory. And this is what we believe that the upside. By combining the two companies, I would say alliance we will be able to generate additional loading as a result.

Great. And what would the joint venture, the JV portion of CAPEX in '03 and also status of 0.13 for you? That's all.

The CAPEX that you are referring to, 2003?

Yeah.

The UMC j's, the Japan, is under $50 million. UMCI in Singapore is $200 million.

And the status in 200 in 0.13 for you?

The 0.13 micron of SiS currently is in total typing stage so it's premature to predict what volume would be.

Thanks.

We'll take our next question from Matt Gable, Calypso Capital.

Hi. Could you give me some color on what percent of revenues .3 will be in the first quarter?

.3?

Yes.

Or 0.13?

Oh, I'm sorry, 0.13.

It would be a high single digit.

Okay. Thank you very much.

We'll go next to Shilish Jalei [INAUDIBLE] Securities.

Hi. I had a couple of questions mainly on your strategy. As I see it, you are saying that you would not be getting into the leading edge or leading the technology envelope, and yet you are facilitating your 300mm fab in Singapore moving into [KIPLINGER]. So I was wondering how does that reconcile with your new strategy?

Okay. First of all, I must correct your misconception about not being in the leading edge. What we are saying is that we will have the technology for our partners and not the other way around, namely, having the technology and go look for partners. So that's the first comment.

The second, in terms of our play in Singapore, UMCI, there are several characteristics of this project. One, the 300 millimeter is our competitive advantage. We have experience ahead of many other players. And in our current Thailand facility, we have demonstrated a good deal of overage. So we think that's our competitive advantage.

The other factor is that UMCI is a joint venture where we have our partners in [INAUDIBLE] in Germany, and therefore, this, how to say, is consistent with our new models, namely, when we build capacities and we have partners already in mind.

So would it be right to assume that this facilitation in Singapore is based on the demand which you see from [INAUDIBLE]?

I think it's based on demand from both sides. It's a joint decision from [INAUDIBLE] side as well as from our side.

When do you expect the mass production of this fab to start?

We mentioned that the start that we expected the start to be in 2004 sometime.

Okay. Lastly, if you could just clarify the $56.2 million in investments which are carried in your balance sheet. What proportion of that is in the form of equity investments in other related companies? And do you expect this to go in line with your new strategies?

We don't have the breakdown right now handy. We will get back to you on this with detailed numbers, but we should be able to get a number early tomorrow.

Okay, so would you expect this proportion on equity investments to increase significantly this year giving your new relationship and your strategy that you would be investing in your partner companies?

Not exactly. We expect the amount of the capital in the investment world remains at the current level.

Thank you.

Our next question comes from Michael McConnell, Pacific Crest Security.

Thank you. Was just wondering on your new strategy, there's also been -- are you going to be looking, I guess, for more and more equity investments in different types of companies as part of this partnership? There's been some talk about Acer. And also my second question is more I'd like to hear just your side of what happened with the relationship with AMD and where that stands in terms of your relationship with that company due to the fact of the new partnership with IBM. I want to hear your side of of things, thanks.

I believe the equity investment question's been answered just now. Regarding our relationship with AMD, we have discovered that we have a difference in terms of technology timing. Obviously AMD is pushing forward in technology in order to compete in the microprocessor arena. And our technology pretty much determined by the overall partnership requirement.

So at this moment, we are not proceeding forward with the technology joint development, but we still maintain the foundry relationship with AMD. Whenever they have a need for foundry volumes that we have a mutual understanding that they will utilize our capacity.

Do you plan in 2003 to be making both the Opteron as well as the [INAUDIBLE] appointment with micron for AMD and what percentage of sales do you think they will be at the 0.13 micron note in 2003?

I think this question is better to address to AMD because whether there is a requirement, our customer knows the best.

Okay, but can you just at least say if you think you will be doing some production for AMD in 2003?

I don't think I can comment on that because whether there is a requirement is our customer's proprietary information.

Okay. Thank you.

Our next question comes from Mr. Kamar, Credit Suisse First Boston.

Thank you. My first question is, if you could tell us your sense of semi industry growth trade '03 and one I think sometimes I asked somebody from UMC was quoted that they do expect for UMC a sequential pickup from third quarter of '03. Does that still stand? That's the first question.

You know, your voice is very faint. And we couldn't capture your question. Could you repeat again?

Yes, of course. I was asking that your outlook on semi conductor industry growth rate in 2003 and when do you expect sequential revenue growth to move into quality [INAUDIBLE] for UMC?

I think the visibility of this industry is very poor, and we are no better than others in terms of predicting what will happen for the balance of the year.

Okay. And, you know, sometime back in the Taiwan newspaper it was quoted that UMC management with someone's name, I believe, expecting that pickup to start only from third quarter. Is that who you think of something you believe or is that local humor?

Let me clarify on that. That's from our Vice Chairman Mr. Peter Chang. He was [INAUDIBLE] by our competitor and made a comment saying quoted to the recovery and what's UMC's view on that? And I think Mr. Chang's answer was, he can now [INAUDIBLE] but personal belief. Even this industry-wise recovery, he probably won't be quoted so it will have to be until. That's his answer. He's now saying that we'll definitely see industry recovery in quarter three of this year.

Thank you. Could you give us some sense on the book to bill for the last few months and how this is trending at UMC?

In our system, we do not use the BB ratio as indicated, so as a matter of fact, we don't have that number.

Okay.

And we have given you the guidance that Q1 would be flat.

Yes. And can you throw something of how the three months in Q1? Are they like sort of flatish? Or is there any dip and then a pick up?

At this moment, we see March is the strongest of the three months in the first quarter.

Thank you very much. Thank you.

We'll take our next question from Dan Hiler, Merrill Lynch. Hi, guys.

I had a few follow-up questions. First, in terms of your Com IC business, could you give me a percentage that is wireless fir the fourth quarter and the first quarter?

You're talking about communication business, we have two-third in wireless and one-third in wire line.

That's the fourth quarter number?

Yes. And there's no significant change from fourth quarter to first quarter.

Okay. And in terms of the flat growth rates that you're seeing for the first quarter, what particular areas are strong? Are you seeing growth in the wireless space continue?

Yes. We see a strong presence of the wireless business.

All right. Because I understand when you in the fourth quarter visibility wasn't great, your outlook was flatish and now it's looking up. Is it improving or is it the expectations pretty much stable at this point or do you see continued raised expectations on wireless?

We see on averages, it's about the same. So obviously there are some companies stronger, some company weaker.

Right, okay. And are there any parts currently in production on 0.13 in the wireless phase?

Yes, absolutely.

Okay. And where do you see the mix of wireless roughly in terms of 0.18 versus 0.13? What portion of wireless do you think will be 0.13 by the second quarter? Is it a fairly steep ramp, in other words? I know you have a number of customers and it may be tough.

Yeah, I'm hesitating in answering the question because it's more related to not in terms of migration within a customer's portfolio but more of a 0.13 micron users category.

Right. That would be a function of how well they do. Okay. And then I guess from a strategy standpoint just to play a little bit devil's advocate, UMC successfully did use a partnership strategy in the early days in getting started foundry through its JV strategy and it got you to a certain scale that facilitated you to take your business model to the next level. And at that point, you had gone away from the JV strategy and consolidated everything. Is this kind of a reversion to previous strategy of JV's and if not, how is it different?

Okay, let's go back to the history. We had a couple JV's, and I must remind you that all our JV partners enjoyed a very good capital gain as a result of their participation. So it's not something that would benefit only us, but now the partners.

The second one is when we did the consolidation, that was a result of, how to say, the markets order. In order to maintain the market order because the several JV companies are competing in the marketplace for the same customer, so creating an internal pricing pressure. But that is the history.

At this moment, our strategy forthgoing is, we created partners not only for among foundry companies. Actually, we have a larger presence by UMC, so the partnership we are referring to now is mainly with the system and IBM company, IP and design houses. So that's the difference between the partnership then and the partnership now.

And how will you prevent that internal, you know, competition from reemerging?

We are not going to create a group of equal sized foundry companies. We have UMC as a, how to say, a main foundry companies. And we maintain the -- even we have UMCJ and UMCI, we maintain the same marketing sales channel so that the order can be maintained. The market order can be maintained.

Right. Okay. Thanks a lot. That's all I have. Thank you.

We'll go name to Reyna Sherma, [INAUDIBLE].

Good afternoon, gentlemen. I have a little bit of a question on the 0.13 micron technologies, out of those 6% revenue, how many percentages are on copper and Low Kay?

That's an easy question, 100% because the 0.13 micron is the copper.

On Low Kay?

Oh, the question is Low Kay?

Low Kay as well. Or mainly [INAUDIBLE]

I would say the majority is on FSG and a minority on Low Kay.

And for Low Kay, are you mainly using the silk technology or other technology as well?

Other than silk.

Other than silk, okay. The next would probably on your 19 nanometer development like how it looks like and what time frame you think that you will be doing a commercial productions. Any update on that?

We are proceeding the 19 nanometer development on two fronts, both in 200 and 300 millimeter. In terms of when it will be in production, I think it's gauged by the partners requirement. At this moment, I don't have a prediction. Because as you know, the availability of the technology actually determined by when this will be developed and the second when it will be needed.

What type of R&D budget you are keeping for 2003?

What kind of R&D budget?

Yeah, the amount roughly for modeling purposes?

It's about Q4 level times four if you annualize. It should be around that level.

Okay. And my last question is mainly on your strategy, the new strategy you have for [INAUDIBLE]. Historically, some of your joint venture was not that successful compared to what you have done probably in say Taiwan. How do you think like what type of changes do you think that you need to do within your organization to make this type of strategy more successful internationally?

Which joint venture are you referring to that's not very successful?

Say, for example, the [INAUDIBLE] Plan which I bought that in some time. And basically what we are hearing with the AMD joint venture and now you say you have two different intentions so it's going a little slow.

Oh, okay. You're referring to [TRANCENTI] That's a long story. I don't think I can comment. That has nothing to do with the success or failure.

The AMD is also a premature discussion because a joint venture company was never formed, and never in operation. It was a -- we announced that the joint manufacturing facility would be available in 2005, and that's both sides agreed to that schedule. It is still premature to talk about whether there will be a joint manufacturing facility in 2005. Obviously, that is still time to go and with our poor visibility in this industry, it's hard to say it will never happen.

Okay. That means you think that given globally you can implement whatever your strategy which was probably was successfully in Taiwan?

We believe so. We have -- if we are talking about the upcoming companys, then UMCI will be an example. And we have UMCJ as you -- there's some -- if you will keep track of the history of UMCJ, you will find some equity investments made by our customers. So that itself is an example of partnership foundry.

Okay, thank you very much, gentlemen.

We'll go next to Mr. Shaw, JP Morgan. Mr. Shaw, your line is open, sir. We'll go next to Kevin Vasili, Thomas Weisel Partners.

Yeah, good evening. Quick question on 300 millimeter. Can you quantify the amount of output you'll have in Q1 coming from 300 millimeter? And then also could you provide an estimate of what that output would be as a total percentage of your wafer output by the end of this calendar year? Thank you.

Let me answer your first question. During the first quarter, we have several thousand 12 inch wafers scheduled.

Okay.

In terms of percentage, we never calculated that. We never look at that way.

Well, you can perhaps maybe it would be easier if you can estimate then wafer output by the end of the year at 300 millimeter.

By the end of this year or last year?

By the end of this year, by the end of 2003.

We do not have a target. As a nation, we are very much of a customer-driven, so we have some flexibility in our 300 millimeter output. So it's up to the market demands. We make a target and the market does not come true, I think it would be a disappointment.

Okay, thank you.

We'll go next to Pieric Mignon of Deutsche Bank.

Yes. I'm very, very simple questions. On your net nonoperating income, could you just let me know how much is from disposal of any assets and what is there to dispose?

You are referring to physical assets --

All in the shares or anything. It can be investments.

In the Q4, it's around $300 million U.S.dollar.

And just one more question is, I remember in one of the earlier conference calls, you indicated your target long term ROE's 20%. We are now operating in the low to mid single digits kind of area. What kind of thing do you think will stay clear for UMC to do or this industry to do for it to kind of being able to sustain that kind of ROE?.

That's exactly why we have a new strategy.

Okay, sir. Okay. Just to elaborate a little bit, I mean, part of [INAUDIBLE] the strategy. Could you just let me know approximately what kind of impact and how it will really change the business environment for UMC to take more of this kind of operation? I mean, how is it really if you want to quantify the benefit, could you just help me with that?

Well, we are in the very initial stage of the new strategy and some details we are unlikely to discuss here, and we probably don't have enough time. But certainly, our spending, our R&D will be a lot more efficient and we will not only be building capacity for potential customers but rather we will view capacity for target partners.

So as far as we can see, in terms of returning invest for either capacity or R&D in the future, we're going to see a much better return. That's also why we're seeing this new strategy as necessity to achieve our long term, 20% ROE target. For the time being, it's very difficult to show the number to you as we are in the very early stage of the new strategy.

Okay. Just one more question, if I may. [INAUDIBLE] indicated in the conference call that they were not seeing pricing pressure only in the lagging edge as they used to, but now they are seeing a lot of pricing pressure in the leading edge kind of thing. Are you seeing some other kind of pattern? Did you get the question?

We --

What I mean is are you finding the pricing pressure uniform across all of the technologies, simply put?

The pricing pressure mainly is on the older technology, legacy technology as a result of the new entrance from China and southeast Asia. We do not feel any pressure on the advanced technology area.

Okay, sir. Thank you so much.

We'll go next to Marcus Kwong, Goldman Sachs. Good evening, gentlemen. Happy Chinese New Year.

Excuse me. My first question relates to a question asked earlier in terms of ROE. Now that the era of high margins for the foundry industry is over, what is your target ROE? Is it still 20% and the new strategy that you are implementing? Is that used to achieve that target or have you ratcheted it down to target ROE going forward?

I would believe it takes the new strategy and our partnership foundry model to achieve this 20% ROE target. 20% for the time being remains our target.

Okay. Great. And the second question is on TI. You mentioned several quarters ago that the company was qualifying 0.13 technology at your fab. Could you give us an update on that and comment on whether or not they have entered commercial production at 0.13?

We normally do not comment on customer specific.

Okay. I just recall in the second quarter you guys during the local analyst meeting, you guys had a slide that went into great detail about your what your relationship with TI at that point. I believe you said they were in the process of qualifying one fab in the third quarter. Are you able to provide a brief update on that at all?

Allow me to confirm that. We are in production.

Okay. Thanks. And the last question is just regarding 65 and 45 nanometer technology. Now that your technology agreement with AMD has been canceled, are you looking at other partners aside from Infinion to develop these notes?

The answer is no.

Okay. Thanks a lot.

We'll take our next question from Ted Berg, Lehman Brothers.

I had two questions. I was wondering first on the 90 nanometer production. Is that scheduled to begin in the pilot stage in the second quarter '03?

Second quarter '03 would be too early for us.

Okay. And then my second question is on mask costs. I was wondering if you could comment on the general trend and mask production costs for the 130 nanometer and below node. How do you view, you know, your costs which I think you outsource mostly to, you know, the JV with DuPont photo mask? How do you view those costs relative to your competitor TSMC which of course manufacturers mask internally?

We observed two trends. The one obviously is the increasing mask costs as the technology gets more advanced. On the other hand, we also observe a quick, how to say that, erosion rate on the mask costs on the 0.13 micron and above mask. So we do not think there is any cost advantage by having an inhouse mask out. That's the comment that I have in response to your question.

Okay. So, one final question is how much of the production then is handled with the agreement that you had with DuPont photo mask roughly for your leading edge mask if you define that 0.18 micron and below, and how much of that goes to other mask suppliers where you have your customers specify a certain mask supplier other than the DuPont agreement?

Currently, we are using several mask suppliers not limited to [INAUDIBLE]. And our mask, how to say that, procuring strategy obviously is based on their quality, turn around time as well as the cost. So whether they are affiliated with us is not a predominant factor.

Okay, thanks.

We'll go next to Ginardin Minoltin, Dresner.

Hi. I have two questions. I'll probably wind up as said before. Which is you made a comment in your result statement that the drop in revenue from Europe, which is quite significant during the fourth quarter was because of inventory rationalization by a handful of European customers. I was just wondering, it the DRKW is the same as revenue? Yeah. I was wondering whether that inventory situation was mainly on the wireless side? And secondly, has that inventory rationalization been already completed as of now and have orders resumed as normal?

The second question is on your new strategy where you say you want to increase partnerships. And the first type of company you mentioned as a potential partner in your presentation is system vendors. I was just wondering how exactly your partnership with system vendors is likely to proceed? Is there an example of that you can give? And would the new strategy involve UMC getting more into design services, a system that came to you and asked for a back end design or something for a trich? Would UMC be providing that going forward?

Let me answer the first question. The reduced percentage on the European business is result of -- it's consistent with the IBM company's percentages are being reduced. And we believe it's related to the year end inventory adjustment. Your question regarding whether that adjustment has been -- it's over, I am afraid I don't have the number with me right now. But we do feel that that is some encouraging sign.

Would that be mainly on the wireless side or it that across the board?

It's across the board. It's not limited to wireless. The second question related to the system companies as partners. As we mentioned, we like to form a network partnership, which include IP and design houses and therefore we will be able to serve the system houses at a requirement.

On the other end, the system companies are interested in taking some control over their IP's that are going into their systems. And this is a trend. And we have seen quite a bit interest from that direction as well.

Does that mean that UMC might be using your design partners, you might take a turnkey contract which includes some design? Is that possible?

Yes.

Okay, thank you very much.

We'll go next to Ivan [INAUDIBLE] DRKW.

Hi. I got some questions. The first one probably you covered in the afternoon, but can you just run through, what is the revenue trend into the first quarter by application segments?

The trend is that we have a quite solid wireless in the wireless area. And we have a pretty good consumer's area as well.

So you're saying that these two areas will grow into the first quarter sequentially?

Yes. In the wireless, yes. And in the consumer area, I think it will experience a seasonal adjustment from quarter to quarter.

So it would be down?

Correct.

The second question I have is in regards to -- in regards to your guidance for revenue from 0.18 micron, given that you think it's going to go from 36% in the fourth quarter to 40% in the first quarter and that your 0.13 micron percentage will go up to the high single digits from 6%, does that mean that all that increase and that advanced technology revenues is going to come from 0.13 micron and 0.18 micron? And 0.15 micron, were you basically flatish into the first quarter?

Yes.

Okay. And the last question I have is that, can you talk about the kind of -- you know in your new strategy, you mentioned having partners. Now, can you identify your current crop of major customers such as [AZILING] and all that? Are they also included in what you think as possible partners? Would you have enough sufficient influence on such large companies to have an influence over what they do for you?

We have currently several large partners in our customer base. And as our new technologies kick in, we'll develop more partners. And for example, the recent -- our recent move at SiS is a good example. You can expect more to come in the future.

Okay. Thank you very much.

Operator, we probably have time to take last two questions.

Very good. We'll take our next question from Nida [INAUDIBLE] from J P Morgan.

Yes, I just had a question on the strategy side again. It looks like your competitors, the ones who are behind you in terms of technology are in worst shape than you are. So can I understand, you know, the hesitation in rushing leading edge technology in that it doesn't give you enough returns for a long period of time, but it doesn't look like, you know, not investing in it would make you better off.

Okay. I made the comment a few minutes back that our new strategy does not mean that we will not do any new technology development. Instead, we will be more efficient in technology development in terms of the requirement from the partners so where we can define the technology to the customer's requirement rather than following a somewhat technology road map, which to us is like a planned economy where you do something according to a particular plan. So that sounds odd to us.

Great.

So that's the difference, but indeed, we also made the observation that earlier when UMC and our competitors view as a technology follower and we were very successful in growth and margins, profit margins, but when we are sitting at a leading edge of technology, it doesn't seem to guarantee the financial return. So there's something wrong with this picture, and we are re-examining this picture and fine tuning.

Great. Now, when you are talking about closer partnerships with your key customers, does that mean that you will be working with just one company for product?

We're looking at more at the market application. Although, we do not say that we will only work with one company, but obviously, we -- if they are two companies that are fierce competing with each other and there's no reason for us to work with both of them and the end result is to producing a fierce pricing pressure and we will be suffering from that as a result.

Okay. So you will be letting one of them go, your competitors?

That's correct. That's correct.

As a result of this, I understand that you are still in the early stages of formulating this, would you be more willing to take over all fabs in general?

I don't think so. By deriving from this strategy, having capacity is not -- does not guarantee the success. So taking over older fab is not necessarily the right move in the new strategy.

Great.

So we should be looking at more of an IP portfolio and the potential business as the criteria for taking over or having interest in.

All right. So would we see your chip design divisions again from UMC like you mentioned some of your big success stories have been some of your own design divisions which have been spun off. Are you thinking along those lines?

No. The answer's no.

Thank you.

And gentlemen, we'll take our last question, which is a follow-up from Dan Hiler, Merrill Lynch.

Hi, guys. On the strategy, since we're on the subject, how do you think you can link your partners in? Obviously it's important for to you have their IP in [INAUDIBLE]. But from their standpoint, they would like flexibility to be able to shop between foundries and get lowest cost and best technology, so how can you go about linking in those partners?

I don't quite understand your question related to shopping around for lowest prices versus IP. Could you elaborate that?

Sure. From a fabless company's standpoint, [INAUDIBLE] is the fabless company is interested in lowest cost manufacturing, highest quality fastest cycle time, best delivering service. From your perspective, you would like to lower risk and ensure that your capital that you invest in that particular customer is returned. So again that's what the foundry model's all about, right?

So what you are saying is your existing model hasn't worked too well at tying in those people over a long period of time and you've lost share potentially in the higher quality customers. So what you are saying is you'd like to go in and think of a way of linking them in and partnering with them. So I'm thinking you are putting yourself in their shoes. How will you incentify them? You use SiS as an example, but SiS you actually had a lawsuit against them and that enabled you to go in and take over that operation. So aside from SiS, could you give me just a more concrete example?

Well, I think the partnership is not necessary to have equity participation. And however, the SiS. indeed we do have equity participation. And the other example is Xilinx where the cooperation between Xilinx and UMC has produced enormous success for Xilinx and it's the marketplace.

And the very important thing in the partnership is being able to be open to each other both in terms of technology requirement, in terms of support, and in terms of forecasting into the future. And so many things go into the partnerships where the two sides can enjoy success when the -- when both are successful. So this spirit can take a different form. Obviously SiS is the model through the equity participation, we'll be able to gain and on the other side is through the mutual dedication to the other side.

Right. And how would that be different than what the activity that takes place currently by leading foundries in Silicon Valley to make investments in fabless companies anyway, you know, both you and TSMC in particularly have been investing in small fabless companies for some time, Narvall and others. There are many so this partnering has been taking place already, has it not?

That is only a small side of the, how to say, small percentage of forming a partners. The other part of what we should mention is really be able to identify customers who does not fall into the category of a partnership. Namely, if a customer's interest in working with UMC is merely to be able to leverage in terms of pricing when they have the majority of business is with TSMC. And we should not waste our time in such kind of customers.

So the new strategy will guide us to work with those who we should be working with. It also guides us to discontinue some of the customers who would never treat us as partners. So there are two sides of the coin.

I see. Okay. So you also view this as a division as well as a strategy?

Right.

Okay great. Thanks.

Again, I would like to remind everyone that you may listen to the rebroadcast of this conference at 11:00 a.m. Eastern time today through January 30th at midnight by dialing 888-203-1112 or international, 719-457-0820 and enter pass code 230065 on your telephone. Gentlemen, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, and thank you again for your interest in UMC. Please feel free to contact us directly either through e-mail or telephone if you have additional questions. Good day, everyone and happy Chinese New Year.

That does conclude this UMC conference call. We thank you for your participation. You may disconnect at this time.