“During the first three quarters of 2010, foundries were under intense pressure to meet customer demand,” said Len Jelinek, director and chief analyst for semiconductor manufacturing at iSuppli. “The pressure is leading to increased revenue, as consumer spending has come back with a vengeance following a dramatic downturn in the fourth quarter of 2008 and for all of 2009.”iSuppli has raised its revenue forecast for all semiconductor foundry activity for 2010 to $29.8 billion, up 42.3 percent from 2009’s $22.1 billion. It had previously predicted revenue would rise 39.5 percent this year.
By 2014, total pure-play foundry revenue will reach $45.9 billion, managing a CAGR of 9.4 percent from $26.8 billion in 2008. Pure-play foundries are contract manufacturers whose business consists of producing semiconductors on behalf of other chip companies.
Thanks to my good friend Jon Cassell, I managed to hook up with Len Jelinek to find out more.
Enhancing foundry forecast
I started by asking Jelinek what were the chief reasons for enhancing the foundry forecast. Jelinek said: “The forecast increase is based on the anticipated strength in demand for products in Q2 and beyond. Additionally, it is also simple math. The foundry market had a good Q2, and last year, Q1 and Q2 were quite challenging. So, by having a good first half of the year, the percentage must increase.”
Also, given that there has been renewed demand for consumer electronics products, what are the specific CE products, besides netbooks, mobile phones, that have been seeing renewed demand, and why?
He added that televisions have shown significant growth. “Also, if you look at all of the consumer products that are growing — they are the new products that require advanced chips. The foundry suppliers are the primary suppliers of advanced technology 45nm and below. These are also the most expensive products that a foundry manufactures. This of course means that the revenue will go up.
“This trend will continue into the future because, with the exception of Intel, Samsung, IBM and Toshiba, there are no IDMs that have large volume production capacities at 45nm.”
Foundry spend directions
Let us now cast a look toward the foundry spend. Much of the foundry spending is going toward developing advanced semiconductor manufacturing processes — specifically, which ones and why? When will the older processes get phased out?
While specific numbers would be hard to unearth, generally speaking, minimal investments are being made in mature technology.
Jelinek clarified: “The only investments are for capacity constraints that can be resolved by adding a few key pieces of equipment. We are not seeing any foundry commit to building a 200 mm fab. If you look at GlobalFoundries and TSMC, of the $7.2 billion CAPEX for 2010, less than $250 million is being spent on expansion of fabs that produce 0.13-micron technology.
“Older process will not be phased out. Companies are always transitioning technology. Additionally, as IDMs decide to consolidate their manufacturing, they are moving those mature technologies into the foundries. I would say, a more accurate statement is that the capacity of the mature technologies is modest to meet the needs of clients at foundries.”
What should China do differently?
Very interestingly, it seems that China was unable to develop technology differentiation or expand during the downturn, a point made by iSuppli. Therefore, what should China now do differently, given that low prices alone do not promise profits!
Jelinek said: “China as a manufacturer has become limited to a fast follower. The Chinese companies should focus their efforts to growing internal business through association with emerging fabless design companies based in China. These companies are designing for the domestic market. Some of the foundries in China still believe that they can compete with the major foundries. However, this is highly unlikely.
“Foundries in China could also expand through alliances with specific IDMs that are looking to become nearly fabless rather than look to the general market.”
So, where’s the next wave going to be?
iSuppli also said that an ‘era may be coming to an end when fabless suppliers look to China for low-cost manufacturing.’ If that indeed is going to be the case, where is the next wave likely to be and why?
Jelinek added: “Fabless semiconductor companies typically go to a specific foundry because that foundry has a technology that is capable of meeting their needs. Fabless companies outside of China typically are looking for advanced technology or processes they need to develop a product that is specific for a market of application.
“Going to China will not provide state of the art technology. Going to China will result in lagging technology that is common place.
“Fabless semiconductor companies are not totally driven by cost. They need technology and China is not capable of delivering that technology in volume. As for the next wave of manufacturing, I believe that you will see a few regional specific fabs such as in Russia or Dubai, and possibly in South America. All of these fabs will be built for only one reason — to meet a local or governmental need (perhaps, even military).
“History has shown that the demand for cheap semiconductor products is unprofitable for investors of the company or group of companies.”
Lessons for India!
I was a bit curious, but not by much, that Jelinek did not mention India, along with other countries, where a ‘next wave’ could likely happen!
Therefore, I could not help asking him if he thought that sufficient work has been happening in India that should deserve a foundry. His reply did not surprise me.
Jelinek said: “Again, only for the reason of domestic pride. If there is a foundry built in India, it will have to start at mature technology, which they will have to underprice just to get business, Financially, this makes no sense for any investor, except for the government, which can protect the foundry (their investment) through tariffs.”
Maybe, here lies a hidden lesson in China’s story for the Indian electronics and semiconductor industries. Perhaps, the Indian industry needs to carefully monitor and understand all of this, and take the correct measures that will lead it to future success, especially with several attempts being made to kick-start electronics manufacturing in the country.
Finally, for the statistically inclined, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United Microelectronics Corp. (UMC) were the leading pure play semiconductor foundries in 2009. Besides the pure-play foundries, semiconductor IDMs, which produce semiconductors for their own use, also engage in some foundry chip making.
The figure presents iSuppli’s global foundry revenue forecast, consisting of both pure-play and IDM production.
iSuppli’s Global Foundry Revenue Forecast
Source: iSuppli, July 2010, USA.
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