The outlook for continued growth in outsourcing of semiconductor manufacturing couldn't be any brighter despite the worst downturn ever in 2001. Foundries are not only expected to manufacture a larger percentage of the total wafers produced, but dedicated foundry companies are positioning themselves to supply an increasing share of the products processed on leading-edge technologies in the next several years.

In 2001, foundry shipments declined as a percent of total wafer demand (see chart below). Much of the decline was due to reduced demand by fabless chip companies hit by the downturn in communications markets and from integrated device manufacturers (IDMs) pulling back from outsourcing. But over the next five years, foundry production will continue to grow and become a larger share of the overall semiconductor market.

First off, there will be a recovery in 2002, with total industry wafer demand growing above average at 16.6%. Topping that off, foundry demand is expected to grow by 35-to-38% in 2002. Over the next five years, foundry wafer demand will increase at a compound annual growth rate of almost 25%, which will be much higher than the 14% CAGR expected for the overall industry.

In 2001, wafer demand declined in mature processes--0.25-micron and above design rules. But at the foundries, wafers processed at 0.18- and 0.13-micron geometries increased last year when compared to 2000. Faster migration to 0.18- and 0.13-micron IC designs will occur in the next few years. Chip companies are being encouraged to shift new products to foundries that can produce designs with smaller and smaller line widths.

Last year, 18% of all wafers in the semiconductor industry were processed at 0.18-micron or below feature sizes. The output of foundries showed approximately the same percentage in leading-edge technologies last year as well. By 2004, 38% of all semiconductor wafers will be processed with 0.18-micron or below feature sizes. The foundries are expected to process 50% of all wafers with 0.18-micron or below feature sizes (see chart at end of this column).

Dedicated foundry suppliers are serious about their emphasis on leading-edge technology. Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) reported that it took the company two years to develop all the modules for its 0.18-micron technology and about 13 months for its 0.13-micron process. TSMC expected to make all the 0.10-micron modules available within about nine months.

TSMC's focus is to provide advanced technology modules for production of ASIC system-on-a-chip products. TSMC plans to accelerate the development of its 0.10-micron (100-nm) process technology. The Taiwan foundry giant now expects to start offering initial 0.10-micron services in the second quarter of 2002.

Semico believes that the move to 0.10-micron process technologies will boost foundry use by the middle of this decade. Leading-edge technologies help facilitate the successful introduction of new products at fabless companies, but in addition, there are changes occurring at fab-operating IDMs. The ramp of 0.13-micron and, even more so, 0.10-micron capacity is best performed with state-of-the-art lithography equipment and on 300-mm wafers.

IDMs with older wafer fabs will be faced with major capital investment decisions when trying to move down to 0.13-micron and below processes. Many of the existing fabs were originally built in the 1994-95 and 1996-97 timeframes, and many have already been upgraded a few times. By 2003, the foundries will be able to offer very competitive wafer prices in advanced technologies, making it more attractive for IDMs to outsource ICs rather than build new plants or retrofit old fabs.

Advanced Micro Devices Inc.'s recently announcement to partner with United Microelectronics Corp. (UMC) on a 0.10-micron fab for 300-mm wafers is a perfect example of how IDMs will use foundries as sources for leading-edge technologies (see Jan. 31 story). Foundry suppliers are no longer viewed mainly as providers of lagging technology.

The downturn has accelerated the move to more advanced technologies. Not only are fabless companies preparing new complex products, but the silicon foundries are qualifying and offering smaller and smaller linewidth processes.

Semico believes the move to new technologies will enable the ramp of new products, which will drive the foundry buildup over the next two years.

(See last month's commentary on foundry trends.)