The Future of Foundry: Part 2
Future Fab Intl.
A thought leadership project from MazikMedia, Inc.
|The Future of Foundry: Part 2
|The foundry model has enjoyed spectacular success and has resulted in a major restructuring of the semiconductor industry over the past 20 years, but it is now facing critical challenges. Foundries and their customers must adapt to a maturing industry in which the economics of technology development and manufacturing are changing.
In the first part of this two-part series, we examined the trends that are driving changes in the foundry market. In this installment, we look at how the foundry model will adapt to these changes.
Evolution of the Foundry Market
Foundry Market Structure Reflects Increasing Specialization
The commodity foundries will focus on low-cost manufacturing using mature process technologies. Players at this level will compete primarily on price and availability of fab capacity. Prices, and therefore margins, will fluctuate depending on the balance of supply and demand. Can-didates to emerge as leaders in this mainstream production market are Semiconductor Manufacturing International Corp. (SMIC), Dongbu HiTek and Magna-Chip Semiconductor. However, this will be a difficult market to compete in over the long term because of pricing pressures and thus low margins. This foundry market segment could evolve in a way similar to the evolution of the DRAM market, and it is one area of the foundry market that could see some consolidation.
These foundries will provide niche, specialty services. Players at this level will have specific engineering capabilities that enable them to differentiate their foundry services and provide some insulation from competitive pricing pressures. Today the specialized capabilities center on analog and radio frequency devices, areas in which customers need critical support to translate designs into manufacturing. This segment of the foundry market is likely to remain small in comparison to the total market. The two leading examples of foundries positioning themselves in this segment are X-FAB Semiconductor Foundries and Jazz Semiconductor.
Changing Investment Strategies
But because demand for leading-edge processes didn’t develop as expected, foundries shifted their investment focus onto mainstream, mature processes, some even utilizing 200 mm wafers, for which there is still strong demand. Many companies are still doing designs for 200 mm processes to take advantage of the less-expensive capacity that some foundries have. What’s more, this strategy is facilitated by the availability of used 200 mm equipment, which memory fabs are retiring. Foundries can repurpose this equipment at a much lower capital cost than investing in new equipment and processes.
The changes in the foundry market previously identified could mean that a new foundry investment pattern is emerging. Instead of investing heavily in new leading-edge capacity in anticipation of future demand, foundries are now minimizing the initial investment they make in such capacity. The initial investments provide only the capacity needed to qualify the processes and support early designs and prototyping activity. However, foundries also need to invest in the design tools and third-party intellectual property (IP) necessary for leading-edge processes.
Thereafter, they will incrementally add leading-edge capacity to meet production demand as it develops. The key to making this work is to be able to respond rapidly to increases in demand. To achieve this, foundries need to collaborate closely with their customers and with equipment and material suppliers so they have a pipeline of supplies in place when a fast response is needed.
A consequence of adopting such an investment strategy for leading-edge pro-cesses is that foundries will continue to invest in mature process capacity when it’s needed. There is still sufficient demand to make this worthwhile, and the capital cost of providing such capacity is significantly lower than investing at the leading edge, which results in lower-cost capacity.
Gartner’s analysis of the capital intensity (the ratio of capital expenditure [capex] to revenue) for the foundry industry indicates that the effects of slower investment in leading-edge capacity may already be apparent (see Figure 2). This shows that the capital intensity both of foundries and the semiconductor industry as a whole is declining and that the capital intensity of the foundry industry has fallen at a faster rate and from a higher peak.
Foundries Must Look to Expand Their Range of Services
As semiconductor process technology continues its march to ever-finer geometries (65nm and beyond), there is greater interaction between design and the manufacturing process. This provides an opportunity for large foundries, particularly TSMC, to deliver more value to their customers through advanced design services. TSMC will have to move in this direction
Packaging is an increasingly important part of the semiconductor value chain. To date, foundries have not been directly involved in packaging but have had close relationships with back-end subcontractors. The emergence of wafer-level packaging and advanced packaging techniques increases the value of packaging and could therefore be an attractive expansion area for foundries. It would also make sense for foundries that provide design services to provide design/test integration services.
To expand into design services or packaging and test services, foundries should consider acquiring companies with relevant expertise. We anticipate that some foundries, especially TSMC, will acquire electronic design automation (EDA) tool vendors. We also expect some large foundries to either acquire or merge with packaging contract vendors.
Foundries targeting leading-edge process technologies, such as TSMC, UMC and the Common Platform Alliance, need to have a strategy to deliver advanced design services and packaging capabilities. In some cases, this might mean making targeted acquisitions to bring this capability in-house.
Fabless semiconductor companies and IDMs that are using foundry services should take advantage of the stratification of the foundry market and optimize their production loading to a combination of foundries that can provide the right mix of cost, technology and services for their specific needs.
Equipment and materials companies should recognize the ROI challenges that leading-edge foundries are facing and expect lower growth rates from this sector of their customer base than they have seen during the past 10 years. Suppliers to foundries need to find ways to add value in an era of slowing growth and increasing cost pressures.
About the Author