Five IC makers join $3B ‘capex club’

Five IC makers join $3B ‘capex club’.

Semiconductor capital spending is expected to hit $59.070 billion in 2011, up 15 percent over 2010, according to IC Insights Inc. SUNNYVALE, Calif. – Semiconductor capital spending is expected to hit $59.070 billion in 2011, up 15 percent over 2010, according to IC Insights Inc.

The forecasted 2011 top 25 semiconductor capital spenders are shown below. ”There are five companies that are expected to spend at least $3.0 billion in 2011, the same number as in 2010 and three more than in 2009,” according to IC Insights.

The members of the $3 billion ”capex club” are Samsung, Intel, TSMC, Globalfoundries and Hynix,” according to the firm.

“Five of the top 10 increases are expected to come from major DRAM and flash memory suppliers. However, the top increase in 2011 is forecast to come from Intel, a massive $3.8 billion surge,” according to the firm.

10 semiconductor themes for 2011

10 semiconductor themes for 2011.

What’s in store for 2011? Gus Richard, an analyst with Piper Jaffray, has provided his 10 predictions-or themes-for 2011 (and beyond). SAN JOSE, Calif. – What’s in store for 2011? Gus Richard, an analyst with Piper Jaffray, has listed his 10  themes for ICs in 2011 (and beyond):

1. The Fourth Wave of Computing

”In our view, the era of the mobile Internet, thin client or ultra mobile computer is upon us. It is the 4th wave of computing. In our view, in the 4th wave, the critical capability is not the processor capability, but rather connectivity or bandwidth as well as very low power. The iPad, iPhone, and Android operating system are all early winners in this new era, leading the 4th wave.”

2. ASIC to PLD Conversion

”ASICs and ASSPs are being replaced by programmable logic devices, PLDs. With each successive node the cost of a design goes up. The cost of a 45-nm SOC chip design is estimated to be roughly $80 million and a 32-nm SOC is $130 million. We estimate that the addressable market of these chips needs to be roughly $400 million and $650 million to make a reasonable return assuming a 50 percent gross margin.”

3. The Super Cycle and Increased Capital Intensity

”Over the last 10 to 15 years more and more companies have gone fabless or fab lite as fewer and fewer companies have been able to afford the cost of a leading edge 300-mm manufacturing plant. The question is who is going to pay for the increasing capital intensity. Clearly the dominant manufacturers are going to be spending including: Intel, Samsung, Toshiba, TSMC and Global Foundries.

While we haven’t heard of any discussions, we think it is only a matter of time before companies like TSMC and UMC start asking customers to share the burden. We think this will be the source of capital that takes capital intensity back to a cycle high in the mid 20 percent range.”

4. Lithography’s Increasing Share of Wallet

”Lithography is increasing as a percentage of fab spending. The last generation ASML lithography system, the XT 193-nm immersion, cost 30 million euros; the current generation, NXT, cost 40 million euros. The EUV systems are also more expensive than 193-nm immersion tools. The pre-production tools shipping today cost 42 million euros and production tools due to ship in late 2011 will cost 65 to 70 million euros.”

5. The Low Down on the Slow Down of Moore’s Law

”There are only three ways to increase the output of a fab. The first is to scale (shrink) the size of the transistor and other structures on a chip (Moore’s Law), the second is to move to a larger diameter wafer and the third is increased the number of wafers processed. For all but Intel and Samsung, Moore’s Law is slowing and the transition to next generation process technology is grinding to a halt.”

6. Increasing Levels of Innovation and Killer Applications

”There is now increasing visibility into new drivers of semiconductor demand. It has been a long time since the semiconductor industry benefited from a killer app that could move the needle in terms of growth. We think there are several demand drivers now occurring. These include: the 4th wave of computing or the ultra mobile era dominated by smart phones and tablets, the second is the proliferation of internet connectivity to an increasing array of devices (ubiquitous connectivity, Ubiquinet as mere ‘internet’ is no longer appropriate), the need to upgrade the communication infrastructure to support an increasing plethora of devices, the increased use of video over IP and the need to support the mobile internet. We believe these trends are driving an upgrade cycle for electronics as well as increasing semiconductor content in existing devices and a crop of new devices.”

7. Increased Investment in Communication Infrastructure

”We are seeing a shift to data from voice in mobile phones, increased delivery of video over the internet IP and the emergence of cloud computing. This is driving a need for infrastructure upgrades.”

8. Home Networking

”Bandwidth to the home is increasing at a rate of 40 percent per year. Fiber-to-the-home (FTTH) is a significant driver of this growth in developed economies and video over IP is driving the growth of FTTH. The need to support HD video on an increasing number of devices and more connected devices in the home are driving home networking. The solutions will be both WiFi and networks over existing wires, in our view.”

9. LED Lighting

”The growth of LED lighting is being driven by increasing global regulation banning the incandescent bulb, which should accelerate over the next 2 years. Currently the EU prohibits the sale of 75W and 100W bulbs and moves to an outright ban on all incandescent bulbs by Dec 2012. The US begins a similar tiered restriction beginning in 2012 with the 100W bulb and all bulbs banned by 2014. While initially much of the incandescent bulb replacement will be CCFL we think over time LED will be the solution of choice as they provide a better quality light and the cost comes down as volumes increase. We estimate that the number of general purpose light bulbs has been doubling every year to an estimated 200 million this year and 400 million units next year.”

10. The Analog Bifurcation and Over Investment

”During the lost decade of the 00s, the analog semiconductor market saw renewed interest and likely too much investment. While analog is rich with niche market opportunities, we think it will be harder for companies in the analog market going forward. In analog like other chip markets, gross margin is inversely proportional to volume. That is to say the higher the volume the lower the gross margin and the lower the volume the higher the gross margin.

Moreover, we would expect TI to use its new 300mm fab to drive market share in very higher volume standard analog markets as well. While not all analog companies will be impacted, those whose products and business models overlap with TI will come under pressure.”

Analyst: Intel to break ARM

Analyst: Intel to break ARM.

SAN JOSE, Calif. – ARM Holdings plc and Intel Corp. are on a collision course.

ARM’s technology has dominated the mobile processor business. Intel has a near monopoly on the traditional PC and server markets. 

Now, ARM and its partners—Marvell, Nvidia and others-want a piece of the traditional computer segments. And Intel is looking to make inroads in the mobile, tablet PC and related segments dominated by ARM.

The winner? Intel, according to one analyst. But clearly, the chip giant faces some major challenges, as it did not have the ”best of CESs (Consumer Electronic Show), which is remarkable given that the company may very well have launched the most powerful CPU family in decades:  Sandy Bridge,” said Hans Mosesmann, an analyst with Raymond James & Associates Inc., in a report.

”The issue of course for Intel is that CES 2011 is all about Android, tablets, and smartphones, which the Street tends to not associate with Intel. Oh, and that punch-in-the-gut commentary by Microsoft that its next generation Windows O/S will support ARM processors in addition to x86,’’ he said.

”First, there is no way around this. The fact that consumers can buy a Windows-based notebook a couple years down the road based on an Intel or AMD x86, or a TI or Nvidia ARM SoC is just not good news on its own despite our view that x86 will easily outperform an ARM core,’’ he said.

”On this note, the bottom line is can Intel penetrate the tablet/smartphone market enough to offset ARM encroachment in its mainstream notebook domain? Our view is yes in the mid-term as the company has a good head start: Android tablets/smartphones based on x86 in 2011 will easily sport double-digit performance advantages over ARM solutions running Android inasmuch as that is the metric of choice,’’ he said. 

”Also, look for Intel to have a cost advantage veres ARM SoCs (System on a Chip) given the company’s one to two node process advantage,’’ he added. ”Longer term, Intel has its challenges and 2011 will go a long way in helping to answer if Intel is up to the task.’

ATIC takes control of GlobalFoundries

ATIC takes control of GlobalFoundries.

As part of a new and complex transaction, Advanced Micro Devices Inc. (AMD) has reduced its stake in GlobalFoundries Inc. from about 30 percent to 14 percent. SAN JOSE, Calif. – As part of a new and complex transaction, Advanced Micro Devices Inc. (AMD) has reduced its stake in GlobalFoundries Inc. from about 30 percent to 14 percent.

In the deal, Abu Dhabi’s Advanced Technology Investment Co. (ATIC) now owns 86 percent of GlobalFoundries, a U.S.-based silicon foundry vendor. Previously, ATIC owned 70 percent. The ATIC is a specialist investment company created by the Government of Abu Dhabi to focus on investments in the advanced technology sector. ATIC’s sole shareholder is the Government of the Emirate of Abu Dhabi.

In 2009, the chip-manufacturing arm from AMD was spun off into a new foundry company. The foundry spinoff, GlobalFoundries, had been a joint venture between AMD and Abu Dhabi’s ATIC. At the time, AMD moved to become a fabless chip maker.

ATIC had planned to boost its stake in GlobalFoundries from about 68 percent to 70 percent. Over time, ATIC is supposed to take the entire stake in GlobalFoundries from AMD. In September, ATIC agreed to acquire Singapore-based Chartered Semiconductor Manufacturing Co. Ltd. for a total of $3.9 billion. Chartered has been folded into GlobalFoundries.

Then, on Dec. 27, 2010, ATIC said that it contributed all of the outstanding ordinary shares of GlobalFoundries Singapore Pte. Ltd., a private limited company organized in Singapore (formerly Chartered Semiconductor Manufacturing Ltd.) to Globalfoundries Inc., in exchange for 2,808,981 newly issued shares of GF Class A Preferred Shares.

As of the closing of the contribution, AMD’s ownership of GlobalFoundries is now approximately 14 percent. AMD’s processors are made on a foundry basis by  GlobalFoundries. Some of AMD’s chips are made by TSMC and others. By reducing its stake in GlobalFoundries, AMD is free to expand its ties with TSMC and others.

Despite a sudden and disturbing lull in the IC market, GlobalFoundries is moving full speed ahead with its aggressive silicon foundry strategy. As part of those efforts, the company recently disclosed plans to devise a 20-nm process and rolled out a new, high-end 28-nm offering. It also announced an intellectual property (IP) deal with ARM Holdings plc and said it is developing technology to enable 3-D chips based on through-silicon-vias (TSVs).

ATMC plans to spend up to $7 billion to build a semiconductor fab in Abu Dhabi, the capital of the United Arab Emirates,

Toshibas logic unit goes fab lite

Toshibas logic unit goes fab lite.

Toshiba Corp.’s logic IC unit is going fab lite. SAN JOSE, Calif. – Toshiba Corp.’s logic IC unit is going fab lite.

The company’s so-called Logic LSI Division will expand its outsourcing of cutting-edge products, including 40-nm chips, to multiple foundries from fiscal year 2011, according to Toshiba. This has been in the works for some time.

As part of the strategy for transforming its system LSI business and ”securing an asset light business model,” Toshiba has signed a memorandum of understanding with Sony Corp., expressing the intent to dissolve Nagasaki Semiconductor Manufacturing Corp. (NSM) and to transfer 300-mm wafer fabrication lines
there from Toshiba to Sony. The move was expected.

Toshiba will continue to keep and maintain its NAND flash fabs. There appears to be no change on that front.

However, Toshiba is implementing a series of measures to transform its System LSI  business, with the goal of boosting profitability by allocating resources to focus product areas. Towards this, the company will restructure its current System LSI Division on Jan. 1, 2011.

In other words, it will go fab lite or asset lite on the logic front. Other Japanese chip makers-including Fujitsu, Renesas, and, to some degree, Elpida-have moved in a similar chip outsourcing direction for good reason: It is simply too expensive to have and maintain a leading-edge fab. And they are embracing foundries after years’ of avoiding them.

Toshiba’s non-memory unit will will be reorganized into two parts: the Logic LSI Division, responsible for cutting-edge SoC (system-on-chip) fabricated on 300-mm wafer fabrication lines; and the Analog and Imaging IC Division, which supplies key components for a wide range of products.

The Analog and Imaging IC Division will concentrate on analog ICs and imaging ICs, particularly CMOS image sensors, and use existing production lines at Oita Operations, including 300mm wafer lines, and Iwate Toshiba Electronics Co. Ltd. The main focus will be general-purpose products, allowing the division to streamline its production lines.

As part of the plans, the Logic LSI Division will promote a flexible manufacturing strategy responsive to demand volatility by combining use of its own production line with outsourcing.

Meanwhile, as reported this week, Sony plans to re-acquire a semiconductor fab in Nagasaki, Japan, that it sold to Toshiba in 2008. Sony will buy the fab for about $597.2 million in order to double its capacity to produce CMOS sensors. The acquisition will double Sony’s image sensor output to about 40,000 wafers per month, according to the report.

Sony transferred its Fab 2 in Nagasaki to Toshiba in March 2008 as part of a complex $835 million deal between the two companies that included the establishment of a joint venture.

NSM, which was established in March 2008 and is located in the Nagasaki Technology Center of Sony Semiconductor Kyushu Corp. (SCK), has been manufacturing the “Cell Broadband Engine™” processor, the graphics engine “RSX” and other high-performance semiconductors and leading-edge SoCs.

Toshiba and Sony aim to execute definitive agreements as soon as possible before the end of the fiscal year ending March 31, 2011. Thereafter, Toshiba and Sony aim to complete the transfer early in the fiscal year ending March 31, 2012, subject to any necessary government approvals.

UMC, He Jian terminate merger deal

UMC, He Jian terminate merger deal.

Taiwan’s United Microelectronics Corp. (UMC) has terminated its acquisition agreement with Infoshine Technology Ltd., the holding company of Chinese foundry vendor He Jian Technology Suzhou Co. Ltd. SAN JOSE, Calif. – Taiwan’s United Microelectronics Corp. (UMC) has terminated its acquisition agreement with Infoshine Technology Ltd., the holding company of Chinese foundry vendor He Jian Technology Suzhou Co. Ltd.

This was seen as a blow for UMC, which counted on He Jian for access into the China market. Last year, foundry vendor UMC said it would pay $285 million to acquire the 85 percent of Chinese foundry He Jian that it did not already own. UMC already owned 15 percent of He Jian.

Then, UMC’s proposed acquisition of Chinese foundry He Jian was in jeopardy last year, because of Taiwan government regulations, according to a report issued by a trade group. A report by the U.S.-Taiwan Business Council on the Taiwan semiconductor market states that Taipei is standing in the way of the deal because investment regulations stipulate that there can be no more than three Taiwan chip fabs in China, and that all three are spoken for.

The original merger consideration involved a combination of common shares, ADR and cash as options for payment to He Jian’s shareholders. ”However, an investment regulation governing foreign holdings of Taiwanese securities, coupled with other restrictions from the amended operating rules of the Taiwan Stock Exchange Corporation for issuing new shares to merge foreign unlisted companies, precluded the issuance of common shares or ADR as payment options,” according to UMC.

”Meanwhile, He Jian’s shareholders had not decided whether to accept a cash-only merger. As such, based on considerations of timing and changes in the industry environment, the board resolved today to terminate the merger agreement,” according to UMC.

Going forward, UMC said it will continue seeking possible alternatives with He Jian shareholders, including a full or partial acquisition of He Jian in cash upon revaluation.

At a low-key event in Taiwan earlier this year, silicon foundry vendor UMC celebrated its accomplishments during its 30th anniversary. But will 2010 be UMC’s last party? Despite the current upturn and renewed growth at UMC, many wonder if the foundry vendor will survive in the long run, as the company has fallen behind the technology curve.

At one time, the company sat comfortably as the world’s second largest foundry vendor, behind neighbor Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC). Now, it faces competition from a trio of strong players, including TSMC, GlobalFoundries and Samsung Electronics Co. Ltd.

Going forward, UMC has two choices. The company could continue to go it alone-without a big R&D partner. Or, UMC could get acquired.

Some believe that GlobalFoundries or its big investor–Abu Dhabi’s Advanced Technology Investment Co. (ATIC)–may take a stake in UMC in return for fab capacity. In fact, there was once a rumor that ATIC would buy UMC.

Others believe that TSMC may buy UMC. There have been talks over the years about such a deal taking place.

The challenge facing the front-end semiconductor equipment industry

The challenge facing the front-end semiconductor equipment industry.

The semiconductor equipment industry, which has been experiencing tough sledding since 2007, failed to cope with the last two cyclical downturns and is not well positioned to face uncertain economic conditions. Editor’s note: This article is part one of a two-part analysis on the state of the front-end capital equipment industry and its future prospects.

The semiconductor equipment industry has been battling a significant industry cyclical downturn since the end of 2007. Vapital spending by customers in the industry has declined significantly from the boom times in the 2000 period. In 2010, the industry is seeing signs of a cyclical rebound—albeit perhaps short-lived as the world copes with a sluggish recovery from the deep recession. I believe the industry has failed to cope with the last two cyclical downturns and is not well positioned to face uncertain economic conditions.

Lack of product innovation

Insignificant product innovation from all of the major equipment companies has led customers to restrain investment in R&D type of equipment and capital. Product development by the equipment companies in the past three to five years has only offered incremental improvement, which the customers refuse to pay premiums for, thereby reducing the profitability of the equipment companies. Unit volumes for new products have not grown due to the lack of innovation, demand interruption caused by the cyclical downturn and the customers’ ability to reuse equipment.

Fundamental business model change

There has been a fundamental change in the business model of the semiconductor capital equipment company caused by the lack of product innovation. Product innovation is defined as products that are disruptive to the current installed product set that demonstrates a significant value through productivity improvement and process capability that enables customers to shorten their product development cycles.

In the 1990s, Applied Materials developed the physical vapor deposition system (Endura) which dramatically improved the capability of the customer and had an average selling price that was nearly 3X the price of its nearest competitor. The value proposition was so compelling that the customers willingly paid the prices since the tool improved the customers’ capability significantly.

The current lack of innovation has the impact of commoditizing the tool set, which results in price erosion, consequently lower gross margins and therefore pressure on operating expenses which starts the cycle all over again. The equipment companies have had to reduce capacity and cost and spend less money on R&D and process development. Applied Materials’ workforce is actually fewer  today than it was in 2003. They have also shed employees and other valuable employees have left the industry completely moving to alternative energy or the biotech industries.

The major factors for this value migration is the impact of the lack of product innovation AND the impact of the 300-mm production implementation by the customers. There has been a resultant “brain drain” from the semiconductor equipment industry to other industries where process engineering skills are critical to growth. Venture-backed investment in equipment company startups has been virtually non-existent, with no single new company emerging as a major player in the industry.

300-mm production generation
The 300-mm product life cycle has been devastating to the equipment industry. The fundamental business model was changed as pricing of 300-mm equipment was significantly less than 200-mm without the attendant cost reductions, thereby compressing margins of the semiconductor equipment company.

The equipment industry believed that unit volume would stay flat or grow a bit due to increasing product complexity evidenced by the number of process steps in future product generations. The customers slowed their migration to increasing complexity and the impact on the equipment industry was reduced unit volume.

The customers achieved significant cost benefits through the significant increase in die per wafer (more than 225 percent over 200-mm equivalents) without having to pay enough for those cost benefits.

Gross margins for the equipment industry of more than 50 percent have been reduced by as much as 10-15 points, making it difficult if not impossible to invest in R&D at traditional model levels of 15-20 percent of sales. Operating margins are contracted, forcing the value migration to the semiconductor manufacturer.

The major companies in the pursuit of Moore’s Law—Intel, Samsung and TSMC—have been successful in their supply chain practices reducing equipment company margins. Equipment companies tried in turn to leverage their supply chain without much success, as their leverage over their supply chain is minimal.

Many suppliers to the semiconductor equipment industry abandoned the business entirely rather than succumb to continued pricing pressure. This business phenomenon forced equipment companies to reduce their research and development spending and, while the chip companies reap the benefit of enhanced production of 300-mm tools, the lack of profitability and returns for the equipment industry actually constrains the growth of the entire industry since innovation and new applications cannot be pursued economically.

In addition, venture capital for the entire industry has been impacted by this situation. As growth rates and applications decline there is no reason for entrepreneurs to develop new ideas for the space. The equipment companies did little strategically to combat the behavior of their customers such as:

Used equipment— the equipment industry did not develop an adequate used tool strategy to maximize revenue, instead the customers learning the techniques of “equipment reuse” which should have been the bastion of the equipment company’s expertise.

Services—the equipment company’s failed to add value added service offerings such as process development, equipment maintenance cost savings, parts offerings etc. to buttress the loss of capital equipment spending.  Other companies filled this vacuum.

Sematech-the consortia abandoned their approach to improved productivity as focus by member companies turned to photolithography requirements for advanced technology nodes and significantly reduced the size of Sematech’s budget.  The State of New York lured Sematech and its member companies through strong subsidies abandoning manufacturing capability initiatives based in Austin, Texas.

The upshot is that the supply chain to the semiconductor equipment industry has become disheveled and weak and not capable of response. Many companies went bankrupt during the downturn and other stronger entities moved on to other industries and refused to grant the cost reduction demands of the equipment industry executives.