Taiwan Semiconductor Manufacturing

(TSM) - Get Report

, the world's biggest foundry, said it has cut in half its 2002 forecast for production of the most up-to-date type of semiconductor wafers.

TSMC reduced its production target to 5,000 of its 12-inch wafers per month by the end of 2002, instead of the 10,000 originally planned. It also will delay by up to six months plans to add new equipment to a 12-inch wafer plant.

Twelve-inch wafers, which represent a technological advance over the more standard eight-inch size, are estimated to reduce manufacturing costs 30% by allowing more chips to be cut from the same wafer. They currently account for about 10% of TSMC's total capacity.

On a day when most tech stocks were firmly in the black, Taiwan Semi shares were off 6 cents in afternoon trading, down 0.7% to $8.42. Rival foundry

United Microelectronics

(UMC) - Get Report

was down 4 cents, or 0.9%, to $4.48.

In related news, Bear Stearns cut its calendar-year fourth-quarter revenue and earnings estimates for TSMC, saying it now expects the foundry's fourth-quarter revenues to stay flat, at around NT$39.8 billion. That's well below its previous expectation for 12% sequential growth.

In guidance issued in July, Tawian Semi predicted revenue will be flat for the quarter now under way.

The Bear Stearns note predicted wafer prices would likely remain under pressure at the end of the year, despite the potential for a mild pickup in wafer shipments to Nvidia.

Analyst Gurinder Kalra, who explained in the note that he'd recently spoken with TSMC's chief financial officer, described the executive's tone as "cautious." He added, "We believe TSMC is still working off inventories resulting from overbuilding in the first half. We also sensed a change in TSMC's tone on the outlook for wireless from 'good' to 'OK.'"

Still, Michael McConnell, a senior research analyst at Pacific Crest, said the wafer cutbacks announced today were largely expected, based on previous comments from the company. "We did infer that the customer was peeling back in terms of demand for 300-millimeter wafers. This is just a refresh that things haven't improved." In the meantime, TSMC hasn't cut capacity for the more standard eight-inch wafers, he noted.

The reduced production of 12-inch wafers may simply mean that customers aren't willing to pay extra for the more advanced technology, despite the eventual cost savings, said McConnell. "It's not necessarily that demand has ebbed. Maybe customers are just looking at their cash flows, and given the tough environment, they don't want to pay the upfront cost" for 12-inch wafer, he speculated. "Until we get economies of scale to drive down costs, whoever takes the first step towards 12-inch is going to pay higher upfront costs. They're

all waiting for everyone else to get on board."

The latest news also means Taiwan Semi is likely to reduce its capital expenditures further, below already-reduced levels. In July, Taiwan Semi cut its capital spending budget by nearly 25%, to less than $2 billion. At the time, Kalra thought spending of $1.7 billion was more likely, but he said he has now reduced that capex estimate further to $1.5 billion.

Shrugging off the news, leading semiconductor equipment stocks were all gaining in afternoon trading.

Applied Materials

(AMAT) - Get Report

was up 40 cents, or 3%, to $13.87,

Novellus

(NVLS)

was up 46 cents, or 1.8%, to $25.34, and

Lam Research

(LRCX) - Get Report

was up 20 cents, or 1.7%, to $11.76.