EETimes.com – Analyst rails against the fab-lite

EETimes.com – Analyst rails against the fab-lite.

LONDON — The fabless chip vendors and pursuers of fab-lite manufacturing strategies are about to get a shock, according to Malcolm Penn, principal analyst with Future Horizons (Sevenoaks, England). Some companies could under-perform, others could be driven out of business in a market that should be booming for them — and all because they have lost control of manufacturing.According to Penn the fab-lite business model is: structurally deceitful, operationally faulty, and financially flawed. “Fab-lite is yet another bean-counting financial analyst deception, just like the disgraced private-equity ‘debt is good’ business model. Going IDM to fabless does not solve the underlying problems. It is simply dicing with death,” Penn told attendees at a one day seminar on the state of the global semiconductor market.

Penn pointed out that outsourcing chip companies will, at the very least see wafer prices increasing. At worst they may miss market windows for lack of chips. “In many ways allocation is a bigger problem than prices increasing,” said Penn.

The background to Penn’s commentary is that, with a lack of investment in manufacturing capacity over the last three years, ASPs are set to rise at the same time as the general economy is recovering. It is Penn’s contention that the worldwide chip market is set for two years of more than 20 percent growth and could even hit more than 30 percent growth in a single year (see Future Horizons sees 30% chip market boom).

“The only people building fabs are Intel, Samsung and a few foundries,” said Penn, highlighting one reason why he believes the semiconductor industry is about to go into short supply.

The fact is that a whole swathe of the semiconductor industry, including such giants as Texas Instruments and STMicroelectronics are opting to go fab-lite. For many companies that means continuing to manufacture older and analog products in legacy fabs but avoiding the massive cost of investing in a new wafer fab. For leading-edge digital CMOS these companies must therefore outsource their needs to one of relatively few foundry sources.

Taiwan Semiconductor Manufacturing Co. Ltd. is three times as large as its nearest rival is an even bigger leader at the leading-edge, said Penn. At 40-nm TSMC is making 10 chips for every one made by another foundry.

With ASPs falling at 2.8 percent CAGR from 2005 to 2009 and the overall chip market effectively stalled between 2004 and 2009 (just 1.1 percent growth) the temptation to slough off high capital costs of manufacturing is easy to see, said Penn. With cheap foundry prices and fabless companies growing fast it was easy to take the view that a fab has no market value and that manufacturing is a sevice that can be outsourced just like test and assembly.

But that is wrong, Penn said. It only holds true when manufacturing capacity is over-supplied.

Many companies will flatter themselves that they have a good relationship with their outsource supplier, but not everyone can be an A-list customer. “If you are not an A-list celebrity you could be delayed access to technology by six months. That could be the difference between success and decay.”

Penn favors IDMs that continue to build fabs but use foundries to smooth the cyclic peaks and troughs in demand. The problem is that such models are not in the foundries best interest who see orders being pulled back into the IDM “That’s a classic adversarial them and us business model. Clearly not in the foundries’ best interests, he said. “The problem is that the investors and bean counters believe it is cheaper to outsource than to build wafers in house.”

Penn said the move by Texas Instruments to begin making analog chips on 300-mm wafers was a good way to expand and also called on IDMs to club together and form a consortium to fund a fab. Such calls have been issued before, without success. It now looks like a number of chip companies are going to find out if there is truth in the famous quote of Jerry Sanders, who as chairman of AMD (Sunnyvale, Calif.) said: “Real men have fabs.” In 2009 AMD effectively went fabless by moving its manufacturing operations into GlobalFoundries Inc. (Sunnyvale, Calif.). AMD now gets its chips from GlobalFoundries and others

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