TSE: 2330 NYSE: TSM Taiwan Semiconductor Manufacturing Company, Ltd. Semiconductor Manufacturing Company, Taiwan Annual Report 2006 (I) (I) l Report 2006 TSMC Annua Taiwan Semiconductor Manufacturing Company, Ltd. Morris Chang, Chairman 8, Li-Hsin Rd. 6, Hsinchu Science Park, Hsinchu, Taiwan 300-77, R. O. C. Tel: 886-3-5636688 Fax: 886-3-5637000 http://www.tsmc.com œ Taiwan Stock Exchange Market Observation Post System: http://newmops.tse.com.tw œ TSMC annual report is available at http://www.tsmc.com/english/e_investor/e02_annual/e02_annual.htm Printed on March 12, 2007 TSMC Vision & Core Values TSMC’s Vision Our vision is to be the most advanced and largest technology and foundry services provider to fabless companies and IDMs, and in partnership with them, to forge a powerful competitive force in the semiconductor industry. To realize our vision, we must have a trinity of strengths: (1) be a technology leader, competitive with the leading IDMs (2) be the lowest-cost manufacturer, and (3) be the most reputable, service-oriented and maximum-total-benefits silicon foundry. TSMC Core Values Integrity – Integrity is our most basic and most important core value. We tell the truth. We believe the record of our accomplishments is the best proof of our merit. Hence, we do not brag. We do not make commitments lightly. Once we make a commitment, we devote ourselves completely to meeting that commitment. We compete to our fullest within the law, but we do not slander our competitors and we respect the intellectual property rights of others. With vendors, we maintain an objective, consistent, and impartial attitude. We do not tolerate any form of corrupt behavior or politicking. When selecting new employees, we place emphasis on the candidates’ qualifications and character, not connections or access. Customer Partnership – At TSMC, customers come first. Their success is our success, and we value their ability to compete as we value our own. We strive to build deep and enduring relationships with our customers, who trust and rely on us to be part of their success over the long term. Innovation – Innovation is the wellspring of TSMC’s growth, and is a part of all aspects of our business, from strategic planning, marketing and management, to technology and manufacturing. At TSMC, innovation means more than new ideas, it means putting ideas into practice. Commitment – TSMC is committed to the welfare of customers, suppliers, employees, shareholders, and society. These stakeholders all contribute to TSMC’s success, and TSMC is dedicated to serving their best interests. In return, TSMC hopes all these stakeholders will make a mutual commitment to the Company. TSMC 20 th Anniversary Celebration TSMC was founded on February 21, 1987. In these past 20 years, TSMC has grown to TSMC Parent Company become the world’s largest provider of semiconductor foundry services and a technology TSMC Subsidiaries and Affiliates leader in the semiconductor industry. Awards and Recognition 1987 1988 19901991 1993 1994 1995 1997 1998 1999 2000 2001 2002 2003 2004 2006 TSMC founded TSMC North America Fab 2 TSMC begins TSMC Europe TSMC lists shares Fab 3 TSMC lists ADSs on New WaferTech TSMC wins Ministry of Economic Fab 6 Fab 12 Fab 4 TSMC (Shanghai) Fab 14 TSMC wins Ministry of TSMC establishes Fab 2 completed mask manufacturing TSMC establishes on Taiwan Stock Fab 3, TSMC’s first eight-inch York Stock Exchange WaferTech fab completed and Affairs highest honor for industrial Fab 6, located in the Fab 12, TSMC’s first full-scale Fab 4 merged into Fab 3 TSMC establishes fully-owned Fab 14, located in the South Economic Affairs’ “Outstanding Fab 1 North American and begins European subsidiary Exchange fab, completed and begins begins operations technology development, the South Taiwan Science Park, 12-inch fab, completed and Shanghai subsidiary Taiwan Science Park, completed Innovation Achievement Award” Fab 1, a six-inch fab, subsidiary operations operations Fab 4 “Outstanding Achievement Award” completed and begins operations begins operations TSMC wins IEEE and begins operations is leased from ITRI Fab 4 completed and SSMC “Corporate Innovation Award” Far Eastern Economic Review Commonwealth Magazine poll WaferTech begins operations TSMC, Philips Semiconductor, Fab 7 SSMC ranks TSMC as top company in TSMC (Shanghai) selects TSMC as “Most Admired TSMC establishes subsidiary and EDBI found SSMC, a joint TSMC completes merger of SSMC’s first fab is completed and Far Eastern Economic Review Taiwan for the fifth consecutive Shanghai fab completed and Company in Taiwan” for 10th WaferTech LLC in Washington Fab 5 venture fab in Singapore TI-Acer and renames its begins operations selects TSMC as number one in year in its “Review 200: Asia’s begins operations consecutive year State, USA Fab 5 completed and manufacturing facility Fab 7 Taiwan in its ranking of “Asia’s Leading Companies” begins operations Ministry of Economic Affairs FinanceAsia selects TSMC as Benchmark Companies” TSMC wins Ministry of Economic TSMC tops Asian Wall Street BusinessWeek ranks TSMC Bureau of Standards, Metrology Fab 8 Taiwan’s best-managed Affairs’ “Gold Medal for Journal ranking of “Top 10 Most among “Taiwan’s New Asian TSMC Japan and Inspection awards TSMC the TSMC completes merger of company of 2001 Contribution to Invention Respected Companies in Taiwan” Giants” as a representative of Fully-owned subsidiary TSMC seventh “National Gold Medal Worldwide Semiconductor and and Creation” “Professional Management” Japan established for Invention” renames its manufacturing TSMC enters the Forbes TSMC wins IR Magazine Grand facility Fab 8 Global 500 Prix for “Best Overall Investor Asian Business readers’ poll Relations-large cap”, “Best ● 20 Years of Technology Innovation selects TSMC as company BusinessWeek ranks TSMC Annual Report and Other When TSMC was first established, our technology lagged the international semiconductor industry. with “Most Growth Potential”, number 5 in its “Global Top 100 Corporate Literature”, “Best ● Revenue Growth With hard work and innovation, TSMC began to catch up with the global semiconductor leaders at “Most Long-term Profit Potential”, Technology Companies” for the Investor Relations Officer”, “Best TSMC ‘s revenues have grown steadily in the past 20 years, reaching a record high NT$317.41billion in 2006. the 0.13 micron generation, and has joined the front rank of the industry. “Best Employer”, year 2000 Corporate Governance”, “Best “Best Taiwan Company”, Web Site”, and “Best Investor Unit: NT$ billion and other honors BusinessWeek ranks TSMC Relations by a CEO or Chairman” 317.4 number 2 in its “Global Top 200 for second consecutive year 300 Emerging Market Companies” 255.9 264.6 250 for the year 2000 200 TSMC wins the first “Industrial Elite Award” 150 Employees Worldwide 100 20,202 50 as of the End of 2006 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Rick Tsai President and CEO F.C. Tseng Vice Chairman Morris Chang Chairman 01 Letter to Shareholders Dear Shareholders, design complexity and utilize the same manufacturing data independent of the design tools that they select. Therefore, we will be able to assist As TSMC enters its 20th year as a public company, we take great pride in our customers to improve effi ciencies, shorten the design cycle, and continuing our focus on growing shareholder value while maintaining accelerate time-to-volume and time-to-market. market leadership in the dedicated semiconductor foundry segment that ● Early in 2006, TSMC’s immersion lithography program produced we created in 1987. During 2006, TSMC registered double-digit growth nearly defect-free test wafers with acceptable parameters for volume in full-year revenues and earnings from a year earlier. Nevertheless, an manufacturing, using our proprietary techniques in 65-nanometer inventory correction that began in the third quarter in 2006 persisted process. Ongoing efforts to further develop this technology to through the fi rst quarter of 2007. But, we expect demand to improve commercialize it are underway. steadily through the remainder of the year. A Vision for Continued Growth Financial Results The foundry segment, driven by TSMC’s successes, is of vital importance Revenue for 2006 totaled NT$317.41 billion, an increase of 19.1% to the ongoing viability and growth of the semiconductor industry. Today, compared with NT$266.57 billion in 2005. Net income increased 35.7% foundry segment revenues are approximately 10% of total semiconductor to NT$127.01 billion in 2006 compared with NT$93.58 billion in 2005. revenue, while the revenue generated by foundry customers accounts for Diluted earnings per share in 2006 increased 35.5% to NT$4.92 compared nearly 25% of overall semiconductor revenues. with NT$3.63 the previous year. In US dollars, TSMC in 2006 generated revenue of US$9.76 billion, an increase of 17.7%, and net income of While there is every reason to anticipate that foundries will increase their US$3.91 billion, an increase of 34.2%. Among other highlights in 2006, importance in the semiconductor supply chain, it is equally clear that TSMC achieved: growth of the overall IC market has slowed since the beginning of the 21st Century. In order to sustain growth, we intend to expand into new CMOS ● Total average billing utilization of 102% logic IC product markets by providing an increasingly broad portfolio of CMOS logic and derivative technologies to address memory, analog, high ● Average gross profi t margin of 49.1% performance logic or image sensor applications. Concurrently, we will ● Average operating profi t margin of 40.1% continue our efforts in strengthening our ability to create a much deeper and broader relationship with each of our customers. This integrated During the year, TSMC provided 7.06 million eight-inch equivalent wafer relationship with customers will require a much greater information fl ow capacities, representing about 7% of worldwide IC wafer supply, and it between the design and foundry teams, and optimization of both design shipped more than 7.2 million eight-inch equivalent wafers, representing and process technology to meet product requirements.