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Foundry shakeout looms, analysts say

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

Keywords:silicon foundry? vendors? IC sales? market? IC?

Silicon foundry vendors were once star performers in a booming sector shielded from the topsy-turvy cycles of the larger semiconductor industry. But those days are gone. Buffeted by a slowdown in IC sales, the foundries now face lower-than-expected growth heading into 2007 and perhaps beyond!a trend that could accelerate a long-awaited shakeout, analysts and vendors warned at October's FSA Suppliers Expo in California.

And just as the business slows, new competition has arisen as several big integrated device manufacturers (IDMs)!Fujitsu Ltd, Infineon Technologies AG and Samsung Electronics Co. Ltd!have separately expanded their own foundry efforts. Over the years, the IDMs have come and gone in this arena. They tend to expand their foundry offerings when business is soft and they are desperate to fill their empty fabs, then pull back when business improves. However, one vendor!chip giant Samsung!appears to be a more serious player and could change the landscape for the pure-play foundries.

On top of these stresses come signs of a shakeout. For years, analysts have predicted a major consolidation in the foundry business, where too many vendors compete in a cluttered arena. And it's a little-known fact, but only a handful of foundries are actually making money, analysts said. Most vendors have never made a dime and continue to spill red ink, leaving some to wonder about the future of the weaker players. Soaring fab costs, mounting losses, and the difficulty of finding and holding on to customers are among the challenges for weaker vendors.

The beginning of the foundry shakeout started earlier this year, when Germany's X-Fab Semiconductor Foundries AG acquired Malaysia's 1st Silicon Sdn Bhd. Then, in September, Acquicor Technology Inc., a "blank check" equity firm run by three former executives from Apple Computer Inc., acquired specialty foundry provider Jazz Semiconductor Inc. for $260 million in cash.

Who's next on the list? Analysts point to some of the weak, loss-ridden vendors in the foundry market!such as China's Grace Semiconductor Manufacturing Corp., Silterra Malaysia Sdn Bhd and Israel's Tower Semiconductor Ltd, among others!as likely targets.

Still, there is a place in the market for both big and small vendors. Many of the smaller players have sought niches in order to avoid competing against the bigger fish!mammoth foundries like Chartered, IBM, Semiconductor Manufacturing International (SMIC), Taiwan Semiconductor Manufacturing (TSMC) and United Microelectronics.

In fact, the foundry market has divided itself into several complex segments over the years. In one corner are the big vendors with bleeding-edge digital CMOS processes: Chartered, IBM, SMIC, TSMC and now, possibly, Samsung. Then there are several others that claim to be the "followers" in the digital CMOS world, along with a slew of smaller players focusing on specialty markets.

There is room for "specialty foundries," especially those with analog and mixed-signal expertise, said Hans-Juergen Straub, chief executive for X-Fab. "We have proven that the analog and mixed-signal foundry business is viable," he said.

Economic woes
It's still uncertain which vendor will become the next victim in the shakeout, but the economic indicators remain painfully clear: The soft business climate in the foundry sector is expected to extend into 2007 and perhaps even the beginning of 2008, analysts warned.

After experiencing a boom in the first half of this year, silicon foundries began to feel a ripple effect in the summer, when their customers started to cut back on wafer orders amid what was then perceived as a minor and unforeseen IC inventory correction.

The warning siren first sounded in August, when Singaporean foundry specialist Chartered Semiconductor Manufacturing Pte. Ltd, which had posted strong Q2 results, gave a disappointing forecast for Q3, due in part to soft sales of game-machine chips. Sources believe that Microsoft Corp. pulled back its orders for the Xbox 360, which had a ripple effect on Chartered and others.

At that point, the foundries were hoping for a short-term correction and a rebound in the second half. But the IC glut has lasted much longer than many expected. Continuing to feel the inventory pinch from their cautious customers, foundry vendors experienced a disappointing Q3, and analysts expect Q4 to be a bust.

Sector is divided between leaders and niche players.

But, as usual, the forecasts are all over the map, and the experts tend to disagree about the market size and growth. All agree on one point, however: The overall foundry sector will continue to grow faster than the maturing semiconductor industry, said James Hines, analyst at Gartner Dataquest Inc.

But recently, Gartner lowered its foundry growth forecasts for both 2006 and 2007, due in part to the inventory correction. The foundry industry is projected to grow 16.6 percent in 2006, down from 18.8 percent in the original forecast. Business is expected to slow to 12.8 percent growth in 2007, down from an original projection of 15.5 percent. In comparison, the overall IC industry is expected to grow 10.9 percent in 2006 and 9.4 percent in 2007.

Hines sees the phenomenon as merely a "lull," however. "I don't view this as a major slowdown or downturn in the foundry business," he said. "My view is that the current inventory correction will play out in the next two to three quarters."

In other words, the foundries will begin to see the end of the inventory glut, and of slowing growth, starting in Q3 2007. But by this year's end, average fab utilization rates among the foundries are projected to fall from the low-90 percent range right now to mid- to high-80 percent levels.

Most other analysts also expect a slow Q4, but some have a slightly different viewpoint about 2007. "We are going to see a dip in the first quarter," said Joanne Itow, analyst at Semico Research Corp. "It will be a prolonged slowdown, but we expect to see things pick up by the end of '07."

The overall foundry market is expected to grow by 30 percent in 2006 and 17 percent in 2007, according to Semico Research. Foundry wafer demand is projected to grow by 26 percent in 2006, slowing to 17 percent in 2007, according to the firm.

Friedman Billings Ramsey and Co. Inc. (FBR) analyst Mehdi Hosseini is similarly bearish about 2006, but optimistic for 2007. In typical seasonal patterns, the overall foundry market normally grows 5 percent to 10 percent in Q3 and 3 percent to 5 percent in Q4. This year, "the third quarter was actually flat," Hosseini said. "Q4 could decline by as much as 5 percent."

Q1 2007 was originally expected to fall by 8 percent, but now the analyst suggests that the market could be "flat to up," thanks in part to demand for MP3 chips and broadband devices. Microsoft's Vista OS software is expected to jump-start the industry by early 2007, he added.

- Mark LaPedus
EE Times

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