By Clare Jim
TAINAN, Taiwan (Reuters) - Top contract chip maker TSMC may have outsmarted rivals Samsung Electronics Co and Intel Corp in the race to build the tiniest and most powerful chips for smartphones and tablets by building big.
As mobile devices get slimmer and demand increases for more data-processing and power-saving features, chip companies are trying to cram more power into tinier chips and are building futuristic factories, or fabs, to meet global demand.
At a new site the size of about 20 soccer fields in southern Taiwan, Taiwan Semiconductor Manufacturing Co Ltd is building foundry facilities to manufacture chips smaller than 1/5,000th the size of a human hair. Dozens are embedded into smartphones.
TSMC plans to invest T$500 billion ($17 billion) and hire 7,000 workers for the new facilities, where the first 20 nanometer (nm) chips are expected to start rolling off the mass production line sometime early next year.
Rivals Intel and Samsung, the world's No.1 and No.2 chipmaker respectively, are also building capacity, and spending billions of dollars on new fabs to crack into the lucrative business that the Taiwanese firm dominates.
"It's a business (foundry) that will continue to grow solidly on the back of a booming mobile industry, and TSMC will see more players in the market as many are envious of its nearly 50 percent profit margin," said Doh Hyun-woo, an analyst at Mirae Asset Securities in Seoul.
"TSMC remains by far the biggest player in the foundry and it'll continue to dominate as it's got the biggest capacity and best foundry technology. But margins are set to come under pressure as it will see more competition from the likes of Samsung."
To keep its position as the world's top foundry business, Hong Kong-based analyst of Maybank Kim Eng Securities, Warren Lau, says TSMC must invest even more on research and development to boost profitability.
Unlike the South Korean and U.S. companies which design and make their own chips, TSMC makes chips for designers who do not have a production factory.
Samsung's major system chip clients are Apple and Qualcomm Inc. TSMC's clients also include Qualcomm, and other chip designers such as Texas Instruments Inc and Nvidia Corp.
In turn, the firms then sell chips to smartphone makers like Samsung, Apple, Taiwan's HTC Corp, and China's Huawei Technologies.
Intel is new to the foundry business, but has already poached programmable microchip leader Altera from TSMC, winning their contract with 14-nm technology.
The California-based company is set to open fabs in Oregon and in Arizona this year to produce microprocessors. However, in July it cut its overall 2013 capital spending plan for the second time to $11 billion from $13 billion at the start of the year as PC demand has slowed.
TSMC appears to have staged the biggest coup. Media reports, analysts and industry sources say the company has snatched the Apple contract from Samsung, and that its new 20-nm chips will be used in future iPhones and iPads.
In the secretive world of high-tech, there has been no official word on Apple parting company with Samsung.
But Apple has made no secret it wants to diversify from Samsung as the two rivals battle for leadership in the smartphone market and contest a rash of patent disputes.
TSMC's sales have shot up 19.3 percent in the first eight months of 2013 compared to a year ago thanks to increased chip sales, and the company will announce September sales on Wednesday.
ROBOTS AND BUNNY SUITS
Reporters were given a look rare look inside the high-tech world of nano chip production last week during a visit to a TSMC foundry in southern Taiwan. For security reasons, no photographs or video were allowed.
Standing on a site that was a sugar cane field about two decades ago, the fab is the world's largest logic chip factory and produces 40- and 65-nm chips for low-end smartphones and tablets.
In a dimly lit, climate-controlled room, masked engineers dressed in 'bunny suits' work with robots assembling wafers. Machines currently outnumber workers 20 to one. By the end of the year, the company envisages that will spread to 75 to one.
Before entering the fab, the jumpsuited visitors pass through a "dust-blowing" corridor.
"The suits are for protecting the wafer, not you," TSMC spokesman said ahead of the tour. "Even a single hair or a sneeze will damage our wafer."
Nearby, TSMC's latest fab will mainly produce 20-nm chips and 3-dimensional 16-nm FinFET chips. The Taiwanese company declined to give details of its new capacity, citing confidentiality reasons.
Intel started 22-nm FinFET production two years ago and it will begin small production on 14-nm by the end of this year, while Samsung is expected to also start the same process from late next year.
Intel dominates the PC industry, but has been slow to adapt its chips to be suitable for smartphones and tablets.
Samsung, the world's biggest memory chip maker, is renovating its Austin, Texas chip plant with $4 billion investment to boost production of mobile processor chips since last year. It is also building a new system chips plant in South Korea with 2.25 trillion won ($2.10 billion) investment.
HSBC analyst Steven Pelayo, who is based in Hong Kong, says that as well outsmarting its rivals by planning large capacity expansion, the company is getting better margin on return.
"We just have to acknowledge that the risk is increasing - trying to get the next step of technology out, it's getting more and more difficult, and competitors are pretty well funded this time," he said. ($1 = 29.3645 Taiwan dollars) ($1 = 1071.5250 Korean won)
(Additional reporting by Noel Randewich in SAN FRANCISCO and Miyoung Kim in SEOUL; Editing by Jeremy Laurence)