Grace Semiconductor of China has been a rather low-profile company in the past. Nevertheless, the foundry service provider makes most of its profits in Western geographies, mostly in Europe and the U.S.
EE Times Europe: had the rare opportunity to conduct an interview with Grace's CEO and president Ulrich Schumacher. The former Infineon top manager explains how he plans to speed up Grace's growth.
EE Times Europe:Despite the high utilization rate in the Chinese foundry industry, rumours persist that a shakeout is ahead. In this context, a merger of Grace with Shanghai Hua Hong NEC Electronics Co. Ltd. (HHNEC) is said to be likely. Do you agree?
Ulrich Schumacher: The semiconductor industry as a whole is still rather young. The consolidation we saw during the past few years in a global scale are only the beginning. In the end, of all semiconductor vendors only a handful will be able to develop innovative technologies. I see three or four, with some luck perhaps five large companies to survive - but more likely they will be less, including foundries such as TSMC.
There will be a broad midfield with many specialized niche players. In this segment, you also can expect further consolidation. Compare the semiconductor industry with other industries and look what has happened there. The chip industry will be much the same.
In the foundry segment the situation is just as extreme: TSMC is generating some 60 to 65 percent of the total revenue of the entire foundry industry. And, even worse, they account for at least 80 percent of all profits earned in this industry.
All other companies combined share the remaining 20 percent. This means that the imbalance between TSMC and the rest of the foundry world is even bigger than the imbalance between, let's say, Intel and AMD. This situation calls for massive consolidation. There is a high number of companies with sales volumes of $100 million to $300 million which most likely won't survive.
Since this market is global, China is a part of it. Thus, the need to consolidate also applies to China. It is only logical that the players here are seeking ways to consolidate within the local markets, because economic policy makers here have realized that it is not promising to have ten small sub-critical foundries.
For this reason, I believe that there is also the political intention to drive this consolidation, and once China adopts a policy, it implements it very forcefully. Thus, the likelihood for a semiconductor industry consolidation in China is extremely high.
Consolidation in the semiconductor market is just about to begin, believes Grace Semiconductor CEO Ulrich Schumacher
Here are many 8” fabs launched between 1995 and today, Grace being one of them. I strongly believe that there will be a consolidation but nobody can say who will be affected and how.
Any combination is possible, including the one you mentioned. It is an open secret and everyone, including ourselves, is evaluating all possible options.
EE Times Europe:Analysts describe Grace as “struggling”. This means Grace is forced to act.
Schumacher: Let me put it this way: Grace is a rather young company. In earlier years it did not achieve profits, but now this has changed. Like any other player in the industry, we see the necessity to look for partners and allies. While our sales are now at a level that allows reasonable profits, the question remains how the growth perspectives look like.
Many other companies are in a similar situation. This makes us wonder if it would not make more sense to bundle the forces instead of trying to grow against each other: Capital requirements are simply too high, it would not be very realistic to believe that Grace could grow fast beyond our current size.
With its existing capacities Grace can reach a sales level of some $300 to $350 million. With earnings before interest and taxes (EBIT) of 20 percent or more, this would guarantee reasonable profits for us. But thus we could achieve only moderate growth.
Nevertheless I see a huge market potential for Grace, far beyond our current manufacturing capacity. This potential however can't be tapped with purely organic growth. Yes, we want to expand our profitable business as quickly as possible, and we want to grow.
But my shareholders would not accept if I buy quick growth by making losses. For this reason, we look into consolidation options. But by no means will we do anything that brings us back into the red figures. After all, we eventually plan to go public, and in order to do so you need sustained profits.