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Analysis: What's in store for IBM's chip unit?

Posted: 04 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:IBM chip business? semiconductor industry? job cut? IC slowdown?

IBM Corp.'s recent move to implement job cuts within its semiconductor unit follows a dramatic slump in sales, product setbacks and numerous false starts in the sector.

As reported, IBM slashed 1,200 jobs within its systems and chip units, in additional to separate layoffs in the company's information technology groups. The moves not only angered IBM's employees, but it also begged an important question: What will eventually happen to IBM's Microelectronics Group?

Over the years, especially during down cycles, there have been whispers that IBM could sell or divest its prized but costly semiconductor unit. The speculation about the chip unit is heating up again amid the current IC downturn, not to mention IBM's stated strategy to focus on software and servicesand not hardware.

Keep or let go?
Some speculate that IBM will keep the chip unit. Others believe it could spin off the chip unit and go fabless. Some think it could merge the unit, reportedly with the Advanced Micro Device Inc.'s foundry spin-off. Or maybe Big Blue will sell its chip unit to Samsung Electronics Co. Ltd.

Even if it doesn't spin-off the chip unit, there is a distinct possibility that IBM may end up delaying its fab expansion plans due to the IC downturn. Its efforts to expand into the merchant chip markets could slide. And most are watching to see if IBM will ship its high-k/metal-gate technology by year's end, as previously promised by the company.

In any case, IBM's strategy has become clear over time: It is moving from a hardware vendor to an IT service and software provider. Big Blue still makes big iron and other systems, but in recent times, the company has exited many product markets that it originally invented, such as disk drives and PCs. Not long ago, it also exited the printer market.

Officials from IBM argue that its semiconductor operations remain critical for its systems group. The chip unit gives its systems business a leg up on the competition by developing processors, namely the Power architecture. It also develops embedded memory and other IP.

On the merchant side, IBM is a respectable ASIC and foundry vendor. And what's more, the company has a strong chip R&D alliance with several vendors, which share the cost of advanced process technology. And, more importantly, IBM has developed a dazzling array of technology and semiconductor IP.

Others say that IBM's chip unit has been a drag on earnings, and it's only a matter of time before the company unloads the operation. "I think they will get rid of the hardware," said Lee Conrad, national coordinator of the Alliance@IBM/CWA Local 1701, an IBM employee organization.

"IBM has good technology, but they have struggled" in semiconductors, said Naveed Sherwani, co-founder, president and CEO of Open-Silicon Inc., a fabless ASIC house that competes with IBM. "They don't make any money in ASICs."

Sherwani speculates that IBM could shed the chip unit or could go fabless over time, but it would a painful decision, given the "pride factor" within Big Blue. After all, IBM has been involved in semiconductors for decades.

"The future (of IBM's Microelectronics Group) is a sale to somebody, but I don't think it will happen anytime soon," Sherwani said.

Setting the record straight
The boss of IBM's Microelectronics Group dismissed the chatter about spinning off or divesting the chip unit. Michael Cadigan, general manager of IBM's semiconductor and global engineering solutions unit, reiterated that the chip unit plays a critical role for IBM's systems group, as well as being a key ASIC, foundry and IP provider.

In a recent interview, Cadigan described the chip unit as a critical organnamely the lungswithin IBM. "You wouldn't spin out the lungs," he told EE Times in a recent interview.

Cadigan acknowledged that the current IC downturn will be tough and painful, leaving some to wonder if IBM will delay its expansion plans. IBM plans to expand its 300mm fab in East Fishkill, New York in the 2010 time frame, he said.

As reported, the second phase of the new annex within the 323 fab will produce 32nm designs, with 22nm technology in R&D. Some believe IBM will push out that date amid a dramatic drop in sales.

The company does not break out its chip sales, but revenue fell some 34 percent in Q4 08. In 2008, IBM was ranked as the 24th largest chip supplier with $3.3 billion in sales, down 8 percent over 2007, according to IC Insights Inc. In 2007, IBM ranked in 25th place.

Mixed opinions
Analysts were mixed about the fate of IBM's chip unit. Bill McClean, president of IC Insights, believes that IBM has gradually and quietly de-emphasized its merchant semiconductor efforts.

The primary focus for IBM is technology development for its internal systems and the market as a whole. "I don't see IBM being a big foundry player," McClean said, but Big Blue has a significant influence in developing the process "technology platform."

"During the last 15 to 20 years of my career there, when IBM's business went south during lean economic times, there were always rumors that IBM's semiconductor business would be on the chopping block," said one former IBMer.

"But it never materialized even when other technology related assets were sold including, if you remember, the hard disk drive business and the packaging operations in Endicott," the source said. "In each of those hard economic times, the top management of the microelectronics division went forward to IBM's top managers with compelling reasons why the semiconductor technology development and manufacturing capabilities resident in the microelectronics division were key assets to keeping IBM's enterprise computing products very competitive in the marketplace, and thus, extremely important in order to maintain their leadership position in mainframe computing going forward."

Going forward, the source sees a future for IBM's chip unit. "Whether that story is still compelling enough today (my opinion, I believe it still is) or whether IBM's top management, including the 'bean counters,' still buy that argument is the real question. Obviously, time will tell," the source said.

Some agree to some extent, but others wonder what role IBM has in semiconductors today. IBM remains a powerhouse in ASICs and IP, said Bryan Lewis, research VP at Gartner Inc. So, as a result, "I think IBM will keep its fab," Lewis said.

Asked if IBM would spin out the chip group, Broadpoint.AmTech analyst Doug Freedman said: "I would not rule it out. Anything is possible"

A more likely scenario is for IBM to keep its chip unit intact for strategic reasons, Freedman said. The chip and research arms within IBM provide "a lot of IP for their systems and mainframe groups," Freedman said. "Clearly, IBM is a viable player in the foundry camp."

IBM is a foundry player, but its biggest contribution is R&D and process development. Over the years, IBM has formed the "IBM fab club." The group, which co-develops advanced process technology and shares the associated costs, consists of AMD, Chartered, Infineon, ST, Toshiba, NEC, Freescale and Sony.

Big Blue's chip roots
Despite the ups and downs of its chip business, IBM's storied history in computers, semiconductors and other products is unparalleled. Big Blue has also been the pioneer in CMP, copper interconnects and other chip technologies.

Its chip manufacturing roots go back several decades. For example, in 1957, IBM chose Essex Junction, Vermont as the manufacturing site for its data processing division. In 1963, IBM went into production in a new fab, dubbed 310, in East Fishkill. By 1985, IBM upgraded and completed Building 323, a new and modern fab, also based in East Fishkill.

But amid an $8 billion loss in 1993, IBM cut jobs at its plants in East Fishkill, Poughkeepsie and Kingston. Over time, it reduced the workforce in East Fishkill from 9,200 to 4,200 staffers, according to a timeline of events at IBM, which was published by the Poughkeepsie Journal. And at that time, it phased out mass chip manufacturing at East Fishkill.

Starting in mid 1990s, IBM moved to revitalize its chip efforts. For decades, IBM was a captive semiconductor maker. It generally made devices for its own systems, but that changed when IBM took a step in the merchant market in the 1990s.

During the time, it began to roll out its impressive technology breakthroughs for commercial use. In 1998, IBM announced the first standard, high-volume chips built using its patented silicon germanium manufacturing process. In the same year, IBM perfected a process for building high-speed transistors that can be used to deliver higher performance chips. The technology, called silicon-on-insulator, represented a fundamental advance in the way chips are built.

Not all of IBM's technology efforts have panned out. In 2000, IBM rolled out a 130nm process based on a low-k dielectric technology called spin-on glass. For some time, IBM stuck to its guns in spin-on, dismissing the rival approach.

Spin-on proved to be more difficult to develop than anticipated, causing process delays and an otherwise black eye for the company. Following the spin-on fiasco, IBM moved to more conventional chemical vapor deposition for low-k processes.

Its efforts in the merchant semiconductor business have also been shaky. In the 1990s, IBM entered into the CCD, DRAM, processor, MPEG and other merchant IC markets. IBM, along with Motorola Inc., attempted to make its PowerPC processor a standard for not only workstations, but also PCs.

Business flops
IBM also moved into the communications market by entering the network processor and other sectors. For example, in 1998, Big Blue bought CommQuest Technologies Inc., a supplier of silicon-germanium devices for wireless communications.

Many of those efforts flopped. IBM exited the DRAM market several years ago. IBM and Motorola failed to make the PowerPC a de facto standard in PCs. Intel Corp. was able to protect its monopoly in the sector. And like Intel, IBM also fell on its face in communications. It later exited the network processor and cellphone chip businesses.

IBM did find its niche, especially in ASICs, high-end processors and other products. The company became the dominate supplier of game processors starting in the late-1990s. In 1999, IBM and Nintendo Ltd. formed a deal under which IBM would develop the game processors for Nintendo's game console. Today, IBM makes the game processors for Microsoft, Nintendo and Sony.

For decades, IBM has also been a technology powerhouse, but it has experienced ups and downs in manufacturing. IBM has 8-inch fabs in Vermont. And with much fanfare, IBM opened the so-called Building 323 fab in 2002. At that time, IBM's $2.5 billion fab represented the largest private-sector investment in New York state history and the nation's largest since 1995. The 300mm fab was part of a $5 billion capital investment program launched in 2000 to create a broad-based manufacturing hub in the state.

IBM basically refurbished that plant. Until 1993, the fab had been used to manufacture bipolar chips on 5-inch wafers. To accommodate the 300mm equipment, IBM had to take down 4.5 million pounds of concrete to raise the roof four feet.

In another major development, IBM and Chartered Semiconductor Manufacturing Pte Ltd in 2002 announced a joint development and manufacturing agreement. At the time, the companies planned to devise a common process technology platform. Later, others joined the IBM "fab club."

At that time, IBM also wanted to become a major foundry player, claiming it would displace the giants in Taiwan. During the period, IBM announced foundry deals with Qualcomm, Intersil, Xilinx and others. But for the most part, IBM failed in its in dreams to become a major foundry player. "I don't see IBM being a big foundry player," IC Insights' McClean said.

IBM itself has repositioned its foundry efforts. Unlike its Taiwanese rivals, IBM does not plan to build "megafabs," said IBM's Cadigan. IBM still makes products for others on a foundry basis, but its capacity is limited.

Over time, IBM's role has become clear: It helps develop processes and licenses the technology to others. Process R&D is conducted with partners at IBM's R&D centers in Yorktown, New York and Almaden, California, as well as at Albany NanoTech in Albany, New York. On the foundry side of the equation, the processes are developed and transferred to three companies: IBM (Building 323), Chartered (Fab 7) and Samsung (Fab S1).

So far, IBM's "fab club" has worked for the most part. Not all of IBM's manufacturing efforts have succeeded. In 2003, IBM and Infineon Technologies AG announced they developed MRAM technology. The companies also formed a joint fab venture in Germany, which was recently dismantled.

IBM is continuing its research in MRAM. It is now working with TDK Corp. on a technology called spin-momentum transfer, which draws less power and uses smaller bit cells.

Another question mark is the Cell processor. In 2004, IBM, Sony and Toshiba unveiled an advanced microprocessor, code-named Cell, which is geared for next-generation computing applications and digital consumer electronics.

The Cell processor chip was originally developed for Sony's PlayStation 3 game console. The processor will also power the "Cell TV," Toshiba Corp.'s next-generation, flat-panel TV scheduled for launch in the fall of 2009.

The Cell has also been used in EDA, military and other applications. Beyond that, the Cell has not expanded beyond those niches, as the companies previously hoped.

Now, others wonder if Big Blue's entire chip empire is crumbling. Over the last two years, IBM has made selected job cuts in Vermont and East Fishkill.

Recently, IBM announced stellar results in Q4, thanks to its service business. But last week, it made more cuts in Vermont and East Fishkill. IBM remains mum about the layoffs.

What's next? Some expect more layoffs within its chip unit. Just how many employees will be cut remains unclear, but without a doubt, the pain is not over for IBM and others in the IC industry amid the downturn.

In the distant future, IBM may keep its chip unit intact. Others predict that IBM will merge its chip unit with AMD's foundry spin-off. Backed by funding from the government of Abu Dhabi, that possible venture could be a powerful formula.

Translation: The once unthinkable. IBM could one day become fabless.

- Mark LaPedus
EE Times

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