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IDMs' shift to foundries undermines startups

Posted: 01 Jul 2006 ?? ?Print Version ?Bookmark and Share

Keywords:David Lammers? Peter Clarke? integrated device manufacturers? IDMs? CMOS?

As foundries get better and fabs get bigger, the landscape of the IC industry is changing, spurred in part by pressure from the financial community.

Large integrated device manufacturers (IDMs) like STMicroelectronics (ST), Texas Instruments (TI) and others are keeping Wall Street happy by moving more leading-edge digital CMOS production to foundries. Mid-sized companies like Agere Systems and LSI Logic, faced with building 300mm factories, have become fabless while large fabless companies like Qualcomm and Xilinx are resisting suggestions that they build their own fabs.

One potential fallout is that small startups!already under severe financial pressure from rising costs for design tools, mask sets and verification!may get less attention from the established foundries. Dan Artusi, former CEO of Silicon Laboratories who now heads power-supply vendor ColdWatt Inc., said, "What I am hearing in Austin and around the industry is that the big foundries are paying less and less attention to the small startups, so they are turning to Chartered and Silterra and other smaller foundries."

Chuck Byers, worldwide brand manager at Taiwan Semiconductor Manufacturing Co. (TSMC), said its managers continue to help small companies. In a world where system companies like Cisco and others are paring their supplier lists, TSMC managers are "working very closely with the fabless companies. We are talking to the end customers to provide assurances to these big system companies."

Byers said the argument that IDMs are crowding out the fabless companies is not supported by TSMC's own data, which shows that fabless companies as a percentage of TSMC's customer base are now at about 73 percent, up 5 percent from a year ago.

"This isn't an IDM vs. fabless story," Byers said. "It's a story of the IDMs growing their business at foundries while the fabless companies are also growing. The thing you have to look at is who is investing in leading-edge capacity."

The fabless business model continues to outperform the IDM model, according to the Fabless Semiconductor Association (FSA). Fabless chip companies will grow revenues from $37 billion last year to an estimated $42 billion this year, or about 18 percent of total IC industry revenues. While the chip industry is expected to grow by 7 percent to 8 percent this year, the FSA estimates growth for the fabless companies will be in the 12 percent to 15 percent range.

Rob Lineback, an analyst at IC Insights, said the ratio of sales between IDMs and fabless companies is somewhat deceiving. "What is happening is that IDMs are becoming fabless, so that lowers the percentage of IDM sales at the foundries. When you have billion-dollar companies such as Agere or LSI Logic becoming fabless, that changes the ratio."

IDM share
Nevertheless, IC Insights estimates that about 31 percent of last year's sales by pure-play foundries!which had overall revenues of $16.8 billion!came from IDMs that also had their own fabs. Their share is edging up by about 1 percentage point per year, to a predicted 35 percent by 2010, Lineback said. In downturns, he said, IDMs tend to pull back and send less production out to foundries.

Large IDMs, notably Fujitsu, Samsung and Toshiba, are putting big programs in place to provide foundry services, largely to IDMs and to the established fabless companies. Xilinx, for example, switched from IBM to Toshiba as the complementary foundry to its primary vendor, United Microelectronics Corp. Samsung is aggressively pursuing foundry work for its new 300mm logic fab, S1, Lineback said, adding that "IDMs, we believe, will be the major customers for Samsung, along with the big graphics and FPGA vendors."

Wall Street and the venture capital firms are playing a major role in the trend.

At a meeting in London for financial analysts, the new management team at ST NV said it is emphasizing return on net assets, or RONA. At a similar meeting for about 150 stock analysts in Dallas in May, the management team at Texas Instruments Inc. emphasized its goal of 50 percent gross margins and 25 percent net profits.

By reducing capital investments and depreciation costs, large companies can offset the somewhat higher per-wafer fabrication prices charged by foundries. And when an IDM like TI places an order, its volumes are so large that it receives attractive wafer pricing, said Lineback.

One worry is that wafer prices may escalate sharply as the foundries fill up.

Byers said TSMC!which accounts for about half of the pure-play foundry industry!was at 96 percent of its total capacity last quarter, with the tightest supply situation at trailing-edge design rules.

"We have sufficient capacity at leading-edge design rules," he said, noting that TSMC plans to invest $2.85 billion in capital expenditures this year, much of it at its 300mm wafer fab in Tainan in southern Taiwan. When last year's $2.7 billion is factored in, TSMC will be adding capacity for another 1 million 200mm wafer-equivalents, going from 7 million wafers last year to 8 million in annual capacity later this year.

That kind of straight-ahead expansion contrasts with the situation at ST, where CEO Carlo Bozotti told analysts that the company is looking to share the cost of equipping its 300mm wafer fab in Catania, Italy.

Bozotti has closed older fabs and extended a series of manufacturing alliances with Freescale and Philips at Crolles, France, and with Hynix Semiconductor Inc. in Wuxi, China.

At the London meeting, Bozotti said that a similar fab-sharing move at Catania would allow the M6 plant to reach volumes more quickly. One analyst speculated that ST and Freescale could use the Catania fab as a multicompany research venue, similar to Crolles 2.

"Should we look at opportunities to share capacity in M6 to generate a fast ramp of M6?" Bozotti asked the audience rhetorically. "The answer is yes, similar to what we have done at Crolles. Yes, we are looking, but nothing is decided."

With memories, "the strategy is to share the risk," Bozotti said, referring to ST's partnership with Hynix Semiconductor. "With advanced logic, about 50 percent is outsourced. That's hundreds of millions of dollars of subcontract work a year, and we will continue to do so. But we want to master the IC technology road map with Philips and Freescale.

"For the mature technologies, we will do more and more in Asia," Bozotti added.

Denis Griot, Freescale's senior VP in Europe, told EE Times that Freescale may work with ST to equip the 300mm wafer fab in Catania. He said such a move is one of several options for adding manufacturing capacity that are under consideration at Freescale. Others include expanding production in Asia and North America.

Meanwhile, ST is still investing. IC Insights estimates that its 2006 capital expenditures will increase by 25 percent over last year, to $1.8 billion. That compares with the $1.3 billion in capital expenditures planned by TI this year, unchanged from 2005.

Like ST, Freescale derives the bulk of its $5.7 billion in revenue from chips that are not made in leading-edge CMOS, using gallium arsenide and BiCMOS to produce wireless devices, and employing trailing-edge quarter-micron processes for microcontrollers.

Freescale is also expanding its network of foundry partners, a spokesman said. Early this year, the company hired Chris Chi away from UMC to develop relationships at a wider network of foundries. While Chi recently quit Freescale to return to Taiwan and a vice chairman's position at a foundry there, Freescale continues to pursue the "asset lite" strategy first described nearly a decade ago by Hector Ruiz, now CEO of Advanced Micro Devices Inc.

Mask costsWhile the large IDMs try to balance internal capacity and reliance on foundries, the small fabless companies are also making adjustments. Artusi, who sits on the boards of several fabless chip companies, said the cost of a 65nm mask set is now about $1 million.

Beyond that, he said, "there have been unbelievable increases in the costs of completing a leading-edge design. If a company is doing a trailing-edge design, they can get away with cheap design tools, but a 90nm design requires tools for which the cost is tremendous.

"And startups need more people to do verification than before," Artusi said. "In my opinion, the fabless business model definitely works. Just look at how Marvell has become a $2 billion company. But I'm afraid it is getting tougher for the new startups."

A manager at fabless silicon vendor SigmaTel Inc. said his company and TSMC are working to reduce mask costs by putting multiple levels on a single reticle.

While the multiple-level reticles (MLRs), combined with the multichip "shuttles" that foundries use for prototyping, may reduce mask costs, the MLRs reduce throughput compared with a full reticle set, a TSMC manager said.

- David Lammers, Peter Clarke
EE Times

Additional reporting by Colin Holland

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