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Chip manufacturing moves into fab-tight era

Posted: 20 Dec 2010 ?? ?Print Version ?Bookmark and Share

Keywords:semiconductor manufacturers? fabs? market forecast? foundries?

Semiconductor manufacturers are no longer building wafer fabs in anticipation of demand, according to Malcolm Penn, founder and principal analyst with Future Horizons, presenting his market forecast for 2011.

"Forget fab-lite, welcome to the fab-tight era," Penn said.

Penn, forecasting 6 percent growth of the chip market in 2011, explained that the fundamental situation has changed. The change will drive good news for the foundries, but not for everyone further down the supply chain.

Chipmakers and pure-play foundries used to build wafer fabs in an attempt to be one of the first with significant manufacturing capacity at new manufacturing nodes. This led to the risk of oversupply to the market and boom-bust cyclicality. However, in the latest cycle troubled by the general economic crisis of 2008-2009, capital spending on semiconductor equipment has been conservative, Penn said. This is expected to lead to an undersupply situation, increasing average selling prices and problems for chip companies that do not have control of their own manufacturing, he said.

"We've been running [manufacturing capacity] maxed-out for three years. We are now running in a fab-tight mode," said Penn "The chipmakers are building fabs after the demand, and this changes the rules. The industry just hasn't realized it yet."

Penn described the coming years as "pay-back time," with leading foundries such as Taiwan Semiconductor Manufacturing Co. Ltd to use their strong positions to raise the cost of wafers. Pure-play foundries may even be tempted to enter the market place and sell directly to leading OEMs, according to some observers.

Penn has been a long-time opponent of the so-called 'fab-lite' policy whereby established chipmakers have saved on capital expenditure by outsourcing some part of their chip manufacturing to foundries. This has usually been the leading-edge digital manufacturing leaving the chip companies to fill their older wafer fabs with less aggressive digital designs or analog, mixed-signal circuits. Penn has consistently described fab-lite as unsustainable in the long term and as just a way of describing a transition to fabless status.

Capex collapse
But the rapid exit of established IDMs from leading-edge chipmaking means that capital spending on semiconductor equipment has collapsed. Even though it grew strongly in 2010 at 13 percent of sales revenue it is still well below the long-term trend of 20 percent of sales revenue, said Penn. "2011 capex at 6 to 8 percent means the companies are already throttling back. There will be no excess capacity in 2012, Penn said.

"The fourth quarter of 2010 will be the first capacity growth [for six quarters]," said Penn pointing out that Q3 2010 global chip manufacturing capacity was still 11.2 percent less than the Q3 2008 peak, despite IC unit sales being up 13.2 percent.

"You used to have myriad semiconductor companies building fabs. Now they are expecting a couple of foundries to do it all for them." And the chip manufacturers that are spending are merely performing upgrades or squeezing a few extra tools into existing sites. "The number of new shells is near zero."

Penn pointed out that while TSMC's $6 billion annual capital may seem a lot, it is not going to change the situation significantly, which has seen greater than 90 percent utilization across the board and 98 percent utilization at the leading edge. "Manufacturing capacity utilization will drop back in 2011, due to 2010's capital expenditure, but they will still remain high."

"TSMC have put their prices up. They are not being underhand or deceitful. They just think it is time they were paid full value for all the risk investment they have made. They are tired of being paid $4/cm2 of silicon when their customers get paid $9/cm2.

Penn also suggested that foundries would likely expect customers to start funding future fabs up-front. "The chip industry model is broken. It is over dis-aggregated," said Penn arguing that this is why there are some companies making moves towards vertical integration.

- Peter Clarke
EE Times

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