The worst is over for analog and mixed-signal IC suppliers that have survived several years of double-digit price erosion and weak demand from the computing and communications sectors. In preparation for the next upcycle, vendors are developing high-performance and integrated devices based on next-generation process technologies, while converting fabs from 4- to 6in. wafers.
As in other component sectors, new-product development continues to provide revenue lifeblood. In fact, at the dawn of recovery, suppliers expect sales of high-performance analog products to outpace commodity chips, which should help with financial regeneration by yielding higher average selling prices (ASPs) and easing price pressure.
Vendors are also taking a page from digital design by looking at their analog technologies as building blocks that can be reused or sold separately to help deliver a better return on R&D.
"What is changing is that we need to have more standardized analog blocks offered in the new technologies and to make good reuse of them," said Claude Giraud, product line manager for data converters at Philips Semiconductors, Eindhoven, the Netherlands.
The analog IC market consists of standard devices such as amplifiers, comparators, voltage regulators, data converters, and interface and power management ICs, as well as application-specific analog chips. The latter hold the lion's share of the market, nearly 70% in 2002.
Most voltage regulators, with the exception of the low-dropout variety, are mixed-signal devices, as are interface ICs, switching regulators, supervisory circuits, and data converters. The bulk of the market today is mixed-signal with a small percentage of pure analog devices, said Gary Grandbois, principal analyst for iSuppli Corp., who is based in Santa Clara, Calif.
iSuppli forecasts that worldwide analog IC sales this year, including sales of mixed-signal devices, will reach $30.1 billion, up from $27.7 billion in 2002.
Historically, prices for specialty analog devices fall about 4% to 6% annually, while those for commodity products drop 8% to 12%. While most suppliers were loathe to discuss price erosion in detail, some said ASPs for standard analog chips fell as much as 30% a year during the industry downturn, notably in areas like consumer electronics.
In some cases, OEMs even chose to sacrifice a few decibels of performance to get lower prices, particularly for converters, according to David Robertson, product line director for high-speed converters at Analog Devices Inc., Norwood, Mass.
But that is changing as demand begins to improve and price erosion shows signs of easing. Even standard analog tags should firm by the fourth quarter, according to iSuppli.
"Price stabilization means the rapid erosion over the past two years is gone and we've returned to a more normal price erosion curve," Grandbois said. "The market has started to turn around and everybody is a little bit more optimistic."
Longer lead times?
Supplier optimism, however, means that buyers need to watch for signs of expanding lead times. While most analog and mixed-signal devices are available in four to eight weeks, lead times for newer and more complex parts could stretch to 16 to 18 weeks given the limited availability of advanced fab capacity, according to industry observers.
Indeed, analog IC suppliers said most fabs are running at about 80% of capacity. While that leaves some room to accommodate new orders, idle production lines are becoming fewer. That means OEMs and EMS providers that have enjoyed the luxury of oversupply will soon have to recalibrate their expectations.
"A lot of companies had excess inventory as a result of the downcycle," ADI's Robertson said. "[Customers] called to request parts for next week, and many of the suppliers were able to ship them because they had big inventories. But a lot of that has started to run down and there will be a bit of an adjustment when the lead times get back from zero to something a little healthier."
Madhu Rayabhari, marketing director for power management at Fairchild Semiconductor International Inc. in San Jose, agreed that market conditions are beginning to stabilize. "One of the things that's happened over the past six to eight months is that there is no longer surplus or excess product available on the shelves.
"Clearly a lot of semiconductor companies, including Fairchild, are requiring solid forecasts from our customers before we can start to service some of these orders, and that has finally been accepted as a mode of business again," Rayabhari said.
Having grown accustomed to several years of excess capacity, however, it remains to be seen how willing customers will be to assume inventory risk. Motorola Inc., for one, has invested in inventory programs such as just-in-time warehouses and works closely with its distributors to provide value-added solutions like logistics, design and technical support, and strategic stocking, said Dan Leih, marketing manager for the analog products division at Motorola Semiconductor Products Sector, Phoenix.
While leaner inventories are a welcome sight for suppliers, they don't want a repeat of the booming '90s when "horrendous" lead times stretched deliveries to many months, Robertson said. "Buyers panic and need to double and triple order, and that creates its own set of problems," he said. "We went from obscenely long lead times to zero lead times, and neither one of those represents a very stable and sustainable pace."
Appetite for integration
What is driving demand? Analog and mixed-signal IC vendors report that industrial, automotive, and consumer electronics--the latter consisting of digital cameras and cellular handsets--all represent growth sectors this year. Wireline communications, however, is still a laggard, while the PC sector, particularly notebooks, is showing signs of life.
Medical applications are also demanding increased mixed-signal content, specifically digital hearing aids and portable measurement equipment like heart rate monitors and glucometers, said Gregg Lowe, senior vice president for the high-performance analog division at Texas Instruments Inc., Dallas.
The overriding technology trend in the analog market is integration, although how much integration is an area of debate among suppliers. In many cases, it's a matter of application and function.
In some areas, suppliers are wrestling with new power management designs, which are not always friendly to integration, for example power MOSFETs, said iSuppli's Grandbois. In addition, new products such as flat-panel displays are demanding some level of analog-to-digital converter integration, in addition to the partitioning of power, logic, and control functions.
The process of integration also leads to standardization and design for specific applications, Grandbois noted.
For instance, more than half of STMicroelectronics N.V.'s analog products are application-specific. Many of these are SoC solutions that contain a great deal of digital processing as well as analog functions, said Bernard Fontan, group vice president of strategic planning and business development at ST, in Milan, Italy.
There has been a lot of discussion in the industry about the trade-offs associated with SoC integration. ADI's Robertson said some integrated analog functions are becoming increasingly difficult and more expensive to design as chipmakers convert to 0.18-micron CMOS process technology and below.
This is starting to challenge one of the semiconductor industry's fundamental rules: that integration yields cheaper, faster, lower-power systems. While integration achieves these goals in gross terms, the notion of "complete" integration may actually add to production costs and compromise time-to-market advantage, Robertson said.
For example, many systems will retain a discrete power amplifier, line driver, or analog front end separately from a very large digital chip, which is an easier and less expensive design solution.
"Customers want evolutionary products," said Motorola's Leih. "They want to add an op amp, a serial interface, a few protection features, and a little more power. But when you jump them all the way to a complete SoC, many customers aren't comfortable with that."
Yet it depends on the market. In the minidisk-player market, integration is king, Leih said. "Sony is trying to make a minidisk that is 1.5 times the size of the disk itself and in terms of width and length is basically the size of the disk. You win based on your technology and your ability to integrate," he said.
China still trails
Unlike other component sectors, most notably passives, pure analog and mixed-signal IC production is not expected to rapidly migrate to Asian manufacturers. Although companies are cropping up in China, for example, most are focused on low-end, low-priced commodity devices such as voltage regulators and amplifiers.
That hasn't kept U.S. analog and mixed-signal suppliers from setting up in China. Fairchild recently bought a new factory there, which the company said has added significantly to its packaging capacity. Infineon Technologies A.G. also is turning to China as a manufacturing location, with initial investments in back-end assembly facilities and a design center, according to Subodh Toprani, vice president and general manager of communications in North America for Infineon, San Jose.
However, because the analog market is so fragmented, product design is difficult to master, and specialized manufacturing process technologies are required, few expect domestic China to take a commanding market lead within the next decade.
In fact, those analog and mixed-signal vendors that have maintained a focus on higher-performance products tend to have protected their margins better than others.
"We've see price reductions but it hasn't been as brutal as the low-end microcontroller business," Leih said.
Pricing hasn't been the prevailing theme in the high-end analog market, agreed TI's Lowe. What have been important are specifications and performance characteristics like signal-to-noise ratio, bandwidth, and conversion speed--all of which remained important during the downturn.
"If you're doing something that anybody can do and it's a volume market, you will have competition, so you try to stay in spaces where performance matters and where there are some barriers to entry," ADI's Robertson said.