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Spend on product innovation, not on fabs

Posted: 03 Dec 2007 ?? ?Print Version ?Bookmark and Share

Keywords:analog IDM? outsourcing? product innovation?

Straub: It's time for analog IDMs to consider outsourcing before fabless companies steal their markets.

The writing's on the wall for analog IDMs. Outsourcing, the manufacturing trend pioneered by IDMs in the field of digital technology for clear economic and efficiency advantages, will become the manufacturing method of choice for all but a small minority of analog IDMs. Although this outsourcing trend will take longer in the analog space, it's something analog IDMs should actively investigate now, before it's too late.

Despite the obvious differences that distinguish analog from digital manufacturing processes, several factors mandate outsourcing for analog IDMs. The phrase "Real analog IDMs have fabs" is viable only if an IDM's products are competitive that it can command hefty prices and margins to fund its own fab. Otherwise, the cost of fabs is prohibitive.

Logical option
Several factors point to outsourcing as the logical alternative. With increasing pressure from new fabless competitors, analog IDMs face a growing need for expensive upgrades or renewals of their aging fab base. They must solve the conflict of allocating scarce resources to fab upgrades rather than to product portfolio innovationor suboptimally supporting both. Thus, they remain vulnerable to fabless companies that are faster and more cost-effective at product innovation.

Those factors are transforming the market structure for digital technologies, where, according to industry analysts, further increases in IDM production capacity will be limited to memory and micro products. For all other digital products, foundries are already the logical choice.

Analog IDMs should focus on product innovation rather than process innovation. Short-term savings on direct wafer costs by using written-off internal fabs are detrimental if they lead to non-competitive products that are adapted to fit fabs rather than meet market requirements.

Analog IDM startups already are consolidating internally, via fab closure, or externally, by adapting fab-lite models and outsourcing to foundries with state-of-the-art technology and bigger pockets to invest in future technology nodes.

Striving to offer process technologies as good asor better thanthe in-house capabilities of leading IDMs, foundries can achieve the process innovation and leadership that allow their customers to excel in product innovation. Looking ahead, foundries will support standardization of leading-edge analog/mixed-signal processes, enabling large-scale outsourcing from IDMs and thereby freeing those companies to compete with their fabless counterparts in innovation.

More and more analog IDMs that wish to innovate and effectively allocate their resources will struggle to afford their own fabs. It's time for them to consider outsourcing before fabless companies steal their markets.

- Hans-Jurgen Straub
CEO, X-Fab Group

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