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Shifting trends in packaging industry favor big players

Posted: 17 Aug 2007 ?? ?Print Version ?Bookmark and Share

Keywords:packaging industry? shifting trends? larger industry players?

These are exciting times for the packaging industry. Industry titans such as Amkor racked up record revenues last year, and the healthy profits generated by companies like Advanced Semiconductor Engineering, STATS ChipPAC and United Test and Assembly Center Ltd have seen them targeted by eager private-equity buyers.

Analysts are betting the bull run will continue as more manufacturers adopt the fabless model and outsource assembly and test to lower-cost destinations. In a recent report, Frost & Sullivan said the Asian packaging market alone would nearly double to over $28 billion in 2010 from 2006 levels.

But an increasingly consumer-centric industry is presenting new hazards for packaging houses. The same Frost & Sullivan report warned a reluctance to invest in the high-end, wafer-level packaging solutions demanded by shrinking devices and new process technologies would return to haunt many companies. Industry insiders agree the business is getting increasingly expensive, a trend that naturally favors larger players.

Consumerization challenges
"There are challenges associated with consumerizationproducts ramp quickly, the models change, and they require fast time-to-market and frequent functionality changes compared to industrial products," said Scott Jewler, executive VP and chief strategy officer at Singapore-based STATS ChipPAC Ltd.

These challenges are driving "massive costs and development expenses," especially at lower technology nodes, making it harder to eke out returns on packaging designs, he said.

"There will be consolidation as a result of that," Jewler added.

"Consumerization means a huge variety of products at every segment of the value chain, so each market leader has to come to terms with the need to be able to handle a huge number of products with higher complexity and a shorter life span," agreed Ho-Ming Tong, chief R&D officer at Taiwan's ASE Group. "The big will get bigger because only the big can afford to handle the volume, to ensure their revenue grows while having sufficient margins. There will be consolidation at every level."

According to Tong, packaging firms are faced with a catch-22 of sortscustomers and designs mandate increasingly complex and tailored solutions, but at mass-market prices. "There's a contradiction," he said. "You have to put a lot of R&D dollars [into packaging design] and order to recoup those you want to charge people more... [but] high-end R&D should also be low cost."

Jagadeeth Sampath, a research associate with Frost & Sullivan's semiconductor group, also believes some small and mid-sized firms will be squeezed out of the packaging business. But he said there would always be room for underweight players that can "handle the pressure [through] specialization."

Freddie Canlas, head of marketing at Philippines-based PSi Technologies, would agree. The firm, which focuses on power packages, saw revenues hit an all-time high of just under $92 million last year, compared to $80.3 million in 2005.

"We do see the competition getting tougher every year because of the price competition from larger players in places like China," Canlas admitted. "The only way for us to move forward is to not compete on price alone. We have [to] differentiate ourselves by being a quality house... because there are customers that give a premium to quality and service."

Canlas said the rising cost of R&D was "a real concern" but could be countered somewhat by "being sensitive to the needs of the market and close to our customers, so we're spending our money on the right areas."

Shift to 45nm
The sector is also bracing for what Jewler calls a "fundamental shift" as the industry transitions to the 45nm technology node, which will see some fabs move to ultralow-K dielectrics and packaging firms forced to contend with more fragile materials.

"These problems can be overcome with time; the issue is really if it's done serially," said Jewler. "If the assembly house doesn't start until a product needs to go to market then you're going to see problems."

He said STATS has been careful to obtain 45nm materials from major foundries as they move through the engineering and sampling stages, and is investing heavily in upgrading its own tools and processes to match.

"The work on 45nm is going on now and has been for almost half a year," he says. "There will be some changes required, but we'll be ready."

William Chen, ASE's senior technical advisor, says following foundries into lower nodes has always presented a "significant set of challenges," but those posed by the 45nm transition are particularly acute. "The stakes are much highercosts have been increasing, and we're moving into a period in which a lot of the users are consumer-driven, so missing a even few months could be disastrous," he said.

But he is confident ASE will find the change relatively smooth. He says the group has been in constant communication with its foundry partners and is "several years ahead" of the curve, having already completed a "basic set of databases" for 45nm packaging solutions.

Another problem?
Another trouble spot looming over packaging houses is the consolidation permeating other segments of the electronics industry, which could present backend providers with a dwindling list of customers. ASE COO Tien Wu remarked at a recent conference in Singapore that firms like his may soon be slugging it out for the business of a mere handful of companies with a tight grip on the entire consumer device market.

To compound the problem, many of the largest potential sources of business for packaging firms insist on the do-it-yourself approach. At Texas Instruments, only one-third of assembly and test is farmed out to subcontractors, a figure that's unlikely to rise in the foreseeable future.

"Although the protection of IP is always a concern, our primary reason for keeping the majority of packaging in-house is that, in general, many years of analysis has consistently shown it to be more cost-effective," said TI spokesman Gary Silcott.

Intel also handles much of its own assembly and test as this represents "a critical phase before products are delivered to customers" and is "vital" to the company's platform strategy, a spokesman told EE Times.

Frost & Sullivan's Sampath said the desire to protect IP, quality concerns and competition from other low-cost regions like Eastern Europe could all start to weigh on the growth enjoyed by Asian packaging firms by 2012.

Still, companies in the region claim not to be breaking a sweat just yet. Jewler said that with consumer devices proliferating at an unprecedented rate, manufacturers can ill afford to invest in developing all the different packages they need.

He also pointed out that while lower technology nodes result in greater economies of scale and cost savings on the wafer side, system-level boards aren't shrinking at the same rate, resulting in a pitch translation that only packaging experts can bridge.

And with assembly and test increasingly pricey and research-intensive practices, manufacturers "won't want to drive down their wafer costs but increase their packaging costs, and get no net gain," he said.

"There are a lot of mid-range [manufacturers] that have internal assembly and test factors, and they'll increasingly find that more difficult and less desirable," Jewler says. "We continue to see them dropping out of the packaging and test business, and even the big companies that do a lot of packaging internally can't do everything in house."

Looks and size
ASE's Chen said its "very, very true" some of the industry's larger players may be reluctant to outsource more, but pointed out that in a device market where looks and size are everything, packaging represented an increasingly vital and specialized segment of the value chain.

Many of the solutions revolutionizing device design, such as system-in-package and wafer-level packing, "have come from assembly and test companies," he says. "We're investing a lot of our resources into new innovations, new packages, and that has created some new factors. People will come to [assembly and test houses] not just to take advantage of efficiencies or economies of scale, or overflow, but because it gives them a competitive edge."

- Jonathan Hopfner
EE Times

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