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Niche markets put Tower back in business

Posted: 12 Apr 2007 ?? ?Print Version ?Bookmark and Share

Keywords:pure play foundry? specialty foundry? niche markets?

Nave: We perceive ourselves as specialists in certain areas where we think we have better selections, better quality of products and better expertise to meet customers' needs.

The year 2006 was a good one for the foundry industry. Reported overall growth hit 16.7 percent, representing $21.5 billion in aggregate revenues for foundries worldwide. But Tower Semiconductor Ltd had more reason to celebrate than others: 2006 was the year it finally got on the highway to sustainable profitability, after years of operating in the red and hitting rock-bottom just the previous year.

"Not too many companies can show you such a graph over the last six quarters," said Rafi Nave, Tower's chief technology officer, referring to the sharp spike in the company's performance chart from Q2 2005 to end-2006.

As a tier 2 player prone to seasonal shakeouts, the Israeli foundry's turnaround story stands out because it is a testament to keen operational strategy and marketing.

After a bold move in 2001 to build a second, more modern fab, the company's finances buckled under the $800 million capital investment. Even after Fab 2 became operational in 2003, the company's cash flow still barely made it over the flat line, even dipping critically in mid-2005.

The cash hemorrhage was ongoing when Russell Ellwanger became CEO in 2005 and instituted operational changes to plug it. Under Ellwanger's steering, the company went through serious cost cutting and major strategy shifts, which, alongside the favorable market conditions in 2006, spurred Tower on the road to recovery. The company reported a twofold increase in revenue over 2005, and for the first time since Fab 2 was established, actually registered positive cash flow.

Ingredients to success
So what's the secret sauce in Tower's shape-up recipe? There are three actually: focus on specialized technologies, customization services for unique customer requirements, and emphasis on customer support.

Competing with tier 1 fabs in Asia, which holds 85 percent of the market, is not part of Tower's agenda. Rather, the foundry is bent on pursuing niche markets where it believes it can offer advantages over the bigger players. "If we compete with the big guys head-to-head, we're not going to win," Nave said. "What we're trying to do is be a specialty foundry."

Likening tier 1 fabs to large department stores where customers can buy all kinds of products, Nave said Tower differentiates itself from these foundries by offering specialized services. "If you need eyeglasses, you go to a specialty shop!to an optometrist who is an expert on eyeglasses and also has a wide selection of eyeglasses," Nave's analogy went. "We perceive ourselves as specialists in certain areas where we think we have better selections, better quality of products and better expertise to meet customers' needs."

Specialized technologies make up 40 percent of Tower's product mix as of 2006.

These specialty areas are in CMOS image sensors, mixed-signal and RF-CMOS, and embedded non-volatile memory. A fourth specialization!memory management and low power!has been in the works for the past year but is not yet available to customers.

Tower claims its CMOS image sensor technology produces 50 percent of the X-ray and non-visible light detectors used in the medical and dental fields. One customer has succeeded in developing a 5GHz WLAN device from Tower's regular RF-CMOS technology. Major customers for its embedded non-volatile technology include storage technology provider SanDisk Corp.

The focus on specialty areas is reflected in the foundry's product mix: 40 percent is dominated by specialized technologies as of 2006. For Fab 1 alone, more than 50 percent of revenues come from specialized technologies, and Fab 2 is driven to follow this trend.

Tailor-made designs
Customization is another key expertise of Tower. "If you need a dress, you can either buy it off-the-rack from one of the big stores, or go to a boutique or tailor who will take your measurements and make the dress especially for you," Nave's analogy continued. "If our customers need something unique or special to differentiate their products, we develop it for them!whether process, device or design change!we will do it for them."

Offering customization services entails working closely with customers and having intimate knowledge of their product designs and future road maps. This would be impossible without winning the customer's trust, which is the core value of Tower's customer support strategy. "Customers trust us because we have a very strong culture of keeping secrets," Nave stressed. "They feel comfortable sharing intellectual property with us that they can't share with other foundries."

Meanwhile, Tower has just invested in additional capacity for Fab 2, which will be available to customers this June. The expansion brings the foundry's 0.18?m-0.13?m output to 24,000 wafer per month (WPM), up from 15,000. Fab 1 currently yields 16,000 WPM at 1.0?m-0.35?m.

90nm road map
Nave acknowledged 90nm is in Tower's road map since the equipment required for this technology is the same as the one used in Fab 2!and "it's only a matter of gaining the knowledge for the process"!but the foundry's current technology offerings in the 180nm-130nm technologies are already sufficient for 67 percent or two-thirds of the market. "We would rather compete in these two-thirds and not in the other third," Nave said.

Still, he revealed Tower is shopping for companies that could add this new technology to its portfolio. While no decision has been made yet, Nave said the company is looking at a late-2008 possible rollout.

Buoyed by last year's bumper performance, Tower has sought out U.S. investors and announced it is in the market for existing fabrication facilities. The company recently disclosed it has issued through private placement approximately $18.8 million ordinary shares and $9.4 million warrants to U.S. institutional investors for aggregate proceeds of around $29 million. These proceeds are intended for the continued expansion of Fab 2. The fresh investment and beefed-up fab capacity are expected to keep Tower on course to full recovery.

- Christine Telesforo
EE Times-Asia

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