LONDON – Something has changed in the psyche of semiconductor manufacturers according to Malcolm Penn, founder and principal analyst with Future Horizons. They are no longer building wafer fabs in anticipation of demand. "Forget fab-lite, welcome to the fab-tight era," said Penn speaking at a one-day seminar on his market forecast for 2011.
Penn presented a 6 percent growth figure for the chip market in 2011 but he feels that the fundamental situation has changed. That change will drive good news for the foundries - and not such good news for everyone further down the supply chain.
In the past chip makers and pure-play foundries have tended to build wafers fabs in an attempt to be one of the first with significant manufacturing capacity at new manufacturing nodes. This has led to the risk of oversupply to the market and boom-bust cyclicality. But in the latest cycle, overlaid with the general economic crisis of 2008-2009, capital spending on semiconductor equipment has been conservative, Penn said. Thismust lead to an undersupply situation, increasing average selling prices and problems for chip companies that do not have control of their own manufacturing, he said.
"We've been running [manufacturing capacity] maxed-out for three years. We are now running in a fab-tight mode," said Penn "The chip makers are building fabs after the demand, and this changes the rules. The industry just hasn't realized yet."
Penn also described the coming years as "pay-back time" as he expects leading foundries such as Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) to use their strong positions to raise the cost of wafers. Some observers believe previously pure-play foundries may even be tempted to enter the market place and sell direct to leading OEMs.
Penn has been a long-time opponent of the so-called 'fab-lite' policy whereby established chipmakers have saved on capital expenditure by outsourcing some part of their chip manufacturing to foundries. This has usually been the leading-edge digital manufacturing leaving the chip companies to fill their older wafer fabs with less aggressive digital designs or analog, mixed-signal circuits. Penn has consistently described fab-lite as unsustainable in the long term and as just a way of describing a transition to fabless status.
This is not surprising at all to me. The cost of a new fab is more than most companies can bear and it does not make sense for the few that can afford it. Moving your wafer production to foundaries just makes sense. The problem is going to be, who gets priority when the fabs are full? The biggest customers will. The small startups and fabless companies will be at the mercy of the foundaries. But then, they always were.
I disagree with the hypothesis that fab-lite is just a transition to fabless. Companies that make a variety of products that use different technologies have diverse fab needs. The analog mixed-signal group, for example, is always going to be using larger geometries than the group that makes processors & SoCs.
As a business trying to maximize your return on capital, which fabs do you invest in? The ones that build your mixed-signal products? The ones that require the latest process node? The ones that build the products with the most sales? Maybe instead you invest in those that build products that cannot be easily moved to a foundry, and leverage the foundries to handle upsides in demand for those products that the foundry is able to build for you.
Just because you have a diverse supply chain and use a mix of internal and external fabs does not mean you are in a transition to fabless.
It is all about economy. Each company will have to honestly calculate their cost of wafer price from internal fab vs. external foundries. Product lines that can get cheaper from self-operated in-house fab line should continue to do so. All others should seek a more economical wafer source which is foundry.
Key word here is "honest cost calculation" which needs to include good and bad times when the internal fab is under utilized.
If Penn is right, such a fab-tight era would be a boon for new foundries eager for market share...
Judging from their capex plans, i bet Samsung and GlobalFoundries are doing their best to supply customers who can't get their sweets from TSMC...
But not many companies have the process R&D to get into the foundry market at the leading edge. As you highlight besides TSMC there is Samsung, GlobalFoundries, then there is Intel.
The only other companies i see able to put down a shell are Toshiba, Hynix and maybe Micron who are working on the memory front.
And that's it. Seven 'active' large-scale chip companies. The rest are milking the fabs and processes they have already developed.
I agree with Peter, at best there are maximum 7 foundries that can afford a new fab. With so much risk and such a high cost why enter that market? I bet that 7 will become 5 or maybe 3 in 10 years out. Look who builds airplanes: Boeing and Airbus. The rest is just small planes, niche markets. Semiconductor processing will be the same eventually...Kris
"Fab-tight" is great wording. SEMI's World Fab Forecast talked about exactly that end of November. See article: "Fab Capacity Back in the Black - uncertain outlook for New Fab Construction" http://www.semi.org/en/MarketInfo/ctr_042104
Some older or more specialized technologies perhaps. But in essence wafer production is about economies of scale and whoever makes on the biggest wafers in the biggest volumes has the per-chip price advantage.
The problem is you have to commit to spend $5 to $10 billion to do that. So it comes down to the cost of capital. In Taiwan TSMC was encouraged and supported has now achieved a leading position. In Abu Dhabi they are providing about $10 billion to give GlobalFoundries a chance of getting established.
That is helping to produce the GlobalFoundries' New York wafer fab but apart from that i don't see much reason for optimism about chip manufacturing "coming home."