* Contract chip makers Q2 sales meet expectations
* Foundries may see high-end segment inventory correction in Q3
* Demand for low-cost gadgets squeezes margins
By Clare Jim
TAIPEI, July 10 Taiwan's top foundries may need to rein in expectations for the second half of the year as high-end smartphone sales growth cools and chip buyers look to ship more low-cost, low-margin gadgets to emerging markets like China.
The world's largest contract chip maker, Taiwan Semiconductor Manufacturing Co Ltd, and its smaller cross-town rival, United Microelectronics Corp, both reported strong June sales on Wednesday, indicating second-quarter business had lived up to high expectations.
But the second half of the year looks tougher.
Contract chip makers which have been riding the explosive growth of mobile demand will have to depend more on mid- to low-end phones which use cheaper semiconductors, rather than high-end models like Apple Inc's iPhone, placing greater pressure on margins.
Analysts warned that some chip buyers may start cutting back orders and working through existing stockpiles of semiconductors this quarter, which is traditionally a high season, slowing the momentum seen in the beginning of the year even though demand from China is expected to stay strong.
"Samsung's Galaxy S4 and HTC One were both selling worse than expected so we may see an inventory correction in Q3. Chipmakers are cautious about placing orders now," said Hong Yi Chen, an analyst at Taipei-based IBTS Investment Consultation Co.
Last Friday, both the Korean and Taiwanese smartphone vendors posted second-quarter earnings that lagged forecasts, deepening worries that the high-end smartphone market may have peaked.
TSMC Chairman Morris Chang said in April that the first and second quarters were stronger than usual due to solid mobile-related sales and surprisingly robust orders from China.
He was still confident last month, telling reporters he expected record earnings per share this year and a better second-half. Certain clients and markets like China were making up for softness elsewhere in the industry, he added.
The company's clients include Qualcomm Inc, Texas Instruments Inc and Nvidia Corp. In turn, these firms sell chips to consumer electronics companies like South Korea's Samsung Electronics Co Ltd and Taiwan's HTC Corp as well as Apple.
"Individual vendors have some corrections - it's not industry-wide," said KGI Securities analyst Michael Liu in Taipei, adding that mid- to low-end markets remained healthy.
"The uptrend is still the same, just softer than previously expected."
TSMC has enjoyed solid sales of chips made with 28-nanometre process technology, which cram more computing power into smaller micro-circuits. This is essential as consumers place greater demands on their tablets and smartphones, such as the ability to rapidly download videos and take higher-quality photographs.
But as competitors vie to catch up, TSMC is investing to expedite the development of smaller, faster, more energy-efficient 20-nanometre, and a new technology called FinFET that may provide even better speed and performance.
TSMC is the top contract chipmaker with 50 percent of the market, followed by Global Foundries with 12 percent and UMC with 10 percent, according to U.S. IT research company Gartner. Contract chipmakers manufacture chips for chip design companies.
Gartner said rising demand for mobile applications would ensure that the foundries' revenue growth continued to outpace the broader semiconductor industry.
Hong Yi Chen at IBTS said that while TSMC's sales in the remainder of the year could fall short of high expectations, UMC and the world's second-largest chip maker, GlobalFoundries, could be more resilient as they refined their technology and received more orders from clients keen to diversify suppliers.
"Second-tier foundries' results may not be necessarily worse as they started from a low base. Their orders should jump next year as soon as they secure the more advanced processes like 28nm technology, and as clients resort to second sources," Chen said.