The foundry industry is turning around after its worst slump on record, with Taiwan's dominant hold on the sector unlikely to slip despite competition. Driving fundamental changes after the downturn is the escalating cost of technological advancement. For foundries, technological leadership is no longer an option or a wild schoolboy fantasy, it is the means for survival. By simply manufacturing semiconductors according to the designs of others, foundries were once able to make a comfortable living merely keeping up with mainstream technology. Taiwan Semiconductor Manufacturing Co (TSMC) and United Microelectronics Corp (UMC) enjoyed boom years with stellar growth and fat profit margins. But now it costs more to have the latest equipment and more foundries are entering the market and boosting capacity. 'I think the game has changed. The best period was when we had very little competition,' TSMC chairman Morris Chang said. Mr Chang points to the emergence of IBM as a foundry supplier as one source of competition, and low-end capacity from new mainland foundries as another. On the technological side, fewer customers can afford the high costs of developing chips under the latest process technologies. TSMC and UMC are developing chips with interconnects as small as 0.09- and 0.11-micron, compared with mainstream standards of 0.18-micron. The engineering challenges of designing and manufacturing at these levels are becoming more difficult and more expensive. 'Not only is ramp-up not as fast as before, but the number of customers has decreased dramatically,' Mr Chang said. 'For 0.13-micron, it was definitely the case that customers were wanting tape out, and it will be more so for 0.09-micron.' 'It's getting more expensive, and before [customers] spend that kind of money they want to be sure they can get the cost benefits. This situation definitely favours the leaders.' Analysts have also noticed the change. 'There's going to be a decrease in the number of leading-edge designs,' said Joe Osha, semiconductor analyst at Merrill Lynch in San Francisco. 'Not as many people can afford to design at deep sub-micron.' At the same time, the cost of building a leading-edge wafer fabrication plant (fab) has risen above the US$4 billion mark and is unlikely to slow down. That situation favours those who already have the money and the technological know-how. 'We're starting to get a feel for the relative variance. Companies that are strong are starting to pull away from the weaker ones,' said Dan Heyler, semiconductor analyst at Merrill Lynch in Hong Kong. 'Second-tier companies can raise money and hold on.' While talk in both Asia and North America continues to be about the emergence of the foundry industry in the mainland, many observers have yet to be convinced because the technology is still behind Taiwan's. '[Mainland] foundries are not a real threat yet, but they may be in the next three years. The real threat to foundries are integrated device manufacturers,' said Mario Morales, vice-president of semiconductor research at International Data Corp. Sources of foundry competition included IBM, Intel and ST Microelectronics, he said. 'I guarantee you they will get into the foundry business because they have big expensive fabs with excess capacity.' That situation doesn't bode well for the mainland industry, which has more and more capacity, but lacks the technology of big established players. 'Foundries coming up in the mainland will bring lower average sales prices and that will drive lower margins. But intellectual property protection is a key and it's a continuing issue,' said Mr Morales. Instead, foundry clients need to know their intellectual property will be safe and the foundry has the ability to fix problems and ramp-up production. 'No one goes to [Malaysian second-tier foundry] Silterra because it is the cheapest. They don't buy silicon on price,' said Mr Osha. Meanwhile, according to a report published recently by research group Gartner, the Asia-Pacific semiconductor industry will grow by more than 13 per cent this year, thanks mainly to a continued shift of global electronic equipment production to the mainland. The report said the region's semiconductor industry would grow to US$64.9 billion this year, up from US$57.3 billion last year. Growing at a rate of 12.6 per cent a year, the market will reach US$103.9 billion in 2007. Although the war in Iraq could dampen worldwide consumer demand for electronics, which in turn could hurt the Asia-Pacific and China semiconductor markets, Gartner said business spending on information technology would return later in the year. The increase would also be boosted by recoveries in the PC and mobile phone markets.