Semiconductor CAPEX Down - TSMC Capex Increases

The number of semiconductor companies spending more the one billion US dollars in 2009 on capital expenditures (CAPEX) has declined from eight in 2008 to just three in 2009. Fabtech cites an IC Insights reports. According to Fabtech:

The elite of the elite as far as semiconductor capital spending is concerned are in desperate need of new members, otherwise the ‘Billion-Dollar Club’ is in danger of closing its doors. According to IC Insights, only three companies, Intel, Samsung, and TSMC, are planning CapEx of over US$1.0 billion in 2009, down from eight companies in that club in 2008, and 16 companies in 2007.

Intel still sits at the head of the table with spending plans of US$4.7 billion, Samsung with US$4.5 billion and TSMC with its revised upward plans for US$2.3 billion spending in 2009. Compared to spending in 2008, Intel is spending 10% less, Samsung by as much as 33% less and TSMC is the only one increasing spending by 23%.

Capital spending as a percent of semiconductor sales will barely top 12% in 2009. Considering that it reached a record low of 16% in 2008, there is little joy for equipment suppliers.

However, the good news is that IC Insights believes this will lead to much stronger IC average selling prices (ASPs) beginning in 2010 and extending through 2012. Thus generating the profit margins required for greater capital spending.

Fabtech gets it right when it says this provides serious issues for equipment suppliers but this is nothing new and they were probably expecting the decline. Last year in August in Chip Manufacturing Orders Down we quoted a CNET article that anitcipated this decline. So really it is nothing new or surprising. Most companies have struggled in the past year and planning expensive capital projects is difficult to do when orders are not coming in. One would imagine it would take a longer period of time for these equipmenet manufacturers to recover. I assume the manufacturing companies will first need to develop a solid forecast of future sales before they start to invest.

There are some encouraging signs though. Earlier in the week we saw PC Demand is Climbing and other reports out of Taiwan suggest some parts of the chip design sector are in recovery mode with EDN reporting Top 20 semiconductor companies saw 21% sales surge in Q2, Reuters reporting Chip packager ASE sees higher Q3 shipments and the Wall Street Journal (WSJ) reporting MediaTek 2Q Net Profit Jumps 80%; Sees Stronger 3Q.

There does seem to be some sort of recovery in the semiconductor sector. Of course this will be driven by the consumer, enterprise and organizational spending on products and equipment that will largely be driven from demand and perception among users at the end of the value chain. From the consumer perspective, lower average selling prices on chips will make products cheaper so it does make products more appealing to consumers.

As for CAPEX spending by the big guns, well it might take a longer time and cycle for this to increase and enable the equipment manufacturers to increase their sales.

FabTech: Billion-Dollar Club’ members depleted

Intel and TSMC Strategic Partnership

Intel and TSMC have struck a deal to co-manufacture Atom system-on-chips. According to PC Mag:

Intel and foundry Taiwan Semiconductor Manufacturing Co. have struck a deal to allow customers to design their own Atom system-on-a-chip processors and manufacture them at TSMC.

Intel is not outsourcing the Atom processor, as this reporter speculated on Friday. Customers who wish to buy standalone Atom chips will buy them from Intel, and Intel has not altered its Atom roadmap or production.

Intel, however, has also made the Atom a cornerstone of a system-on-a-chip strategy, such as the "Moorestown" and "Lincroft" for the mobile Internet device market. Now, an Intel customer will be able to use TSMC's process flow, tools, and intellectual property (both from TSMC and its partners) to create their own Atom-based system-on-a-chip products, which will be sold under the Intel brand.

"It's enabling Atom on TSMC,"said Anand Chandrasekher, general manager of Intel's Ultra Mobility division, during a conference call Monday morning. "It will allow TSMC to go after new market segments and allow Intel and TSMC to go after new market segments together."

This deal will inevitably be more beneficial for TSMC but it will also enable Intel to penetrate other market segments more easily and one would guess enable system-on-chip designers to leverage some of the advantages of the Intel Atom processor for their own designs. Its an interesting partnership to say the least.

PC Mag: Intel, TSMC Strike Atom Design, Foundry Deal

Morris Chang Predicts Three Year Recovery

Interview in the Wall Street Journal, Morris Chang anticipates the semiconductor industry will take three years to recover to 2008 sales levels. The pounding the semiconductor industry has taken over the past few months due to the financial crisis has forced semiconductor sales to drop dramatically. According to the WSJ:

The global semiconductor industry has yet to hit bottom and likely won't recover fully from the current downturn for another three years, according to one of the industry's senior figures, Taiwan Semiconductor Manufacturing Co. Chairman Morris Chang.

In an interview Friday, Mr. Chang said the industry, which has been hard hit by the global economic slowdown, was "pretty close" to the bottom. But he said that a return to the sales volumes that the industry had before the current slump would be extremely slow. "You get a precipitous drop and a very slow rise," he said.

"I think it will be 2012 before the total revenue of the semiconductor industry gets back to the '08 level," said Mr. Chang, who founded Taiwan Semiconductor in 1987.

The WSJ continues:

Mr. Chang also said he expects industry consolidation to pick up. He predicted a continued decline for companies that make both consumer products and semiconductors. Of the companies that still do both, he said that only Samsung Electronics Co. and Intel Corp. are in a strong position. He said others would likely divest themselves of their semiconductor operations, leaving production to companies like TSMC, which manufactures semiconductors on a contract basis for other companies.

Mr. Chang has worked in this industry for a long time and his thoughts do carry some weight. It will be interesting to see how this all pans out over time, especially the consolidation of the foundry industry. What will be more interesting will be to see how the new foundry company being spun off will survive. The foundry business is a tough business to play and one can only imagine the perils of entering the industry at this point in the economic cycle.

Wall Street Journal: Executive Sees Chip Industry Recovery in Three Years

Taiwan IC Design Houses See Small Recovery

Digitimes reports that same design houses like MediaTek, ITE Tech and RealTek are seeing a recovery in orders. According to Digitime, MediaTek is expecting 10-15% growth in February and both ITE and RealTek have seen increased orders from companies like ASUS and MSI.

According to Digitimes: "Customers in China have begun to rebuild inventory levels, helping sales of Taiwan IC design companies to grow this month, according to industry sources." Digitimes also says analog design houses and LCD driver chip design houses are also expected to see some growth in February.

To see some sectors making small, incremental gains is encouraging. Is this growth sustainable over the course of the next few months? Who knows? Its been a wild ride down over the past few months and why will the short term future be any different?

Digitimes: Taiwan IC designers see recovering sales

Financial Crisis Affects Semiconductor Industry

Yesterday in Financial Crisis Pushing Taiwan's Tech Sector Down we noted how the financial crisis is affecting Taiwan's tech sector. Of course the financial crisis is not only wreaking havoc with the tech sector in Taiwan but with the global hi-tech value chain. Yesterday Reuters noted the president of SEMI as saying there will be a significant decline in global sales of semiconductor equipment. According to Reuters:

Global sales of semiconductor equipment are expected to fall 28 percent to $30.9 billion this year as deteriorating world economies prolong a slump in the chip sector, industry association SEMI said on Tuesday.

SEMI said sales had declined to levels last seen in 2003. Earlier this month, it said North American chip-equipment orders fell 28 percent in October, while in Japan they plunged 68 percent as chipmakers slashed or even froze spending.

"We anticipate a second year of double-digit decline in 2009," SEMI's President and Chief Executive Stanley T. Myers said in a statement.

SEMI said it expected a 21 percent decline in 2009 followed by 31 percent growth in 2010, although it was relying on history repeating itself as it had little else to go on.

"Impaired or non-existent business trend visibility is pervasive amidst the deteriorating global economy. Therefore our outlook for 2010 is based on patterns of previous industry recoveries," Myers said.

In related news, yesterday Kaohsiung based Applied Semiconductor Engineering (ASE), the world's largest chip packager, has cut is Q4 revenue outlook by between 25% and 28%. According to the Taipei Times:

Advanced Semiconductor Engineering Inc (ASE, 日月光半導體), the world’s biggest chip packager, yesterday slashed its fourth-quarter target, blaming accelerating contraction in demand amid a global economic slowdown.

ASE said fourth-quarter revenue could decline by between 25 percent and 28 percent quarter-on-quarter, rather than its forecast of a drop of between 15 percent and 20 percent a month ago, following in the steps of semiconductor heavyweight Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), which recently trimmed its outlook.“As end demand is shrinking faster amid deteriorating global economic prospects, the company’s fourth-quarter revenues will be lower than the forecast it made on Oct. 31,” ASE said in a filing to the Taiwan Stock Exchange.

The current financial crisis and associated slowing of demand and in the semiconductor industry is continuing to wreak havoc with the entire hi-tech value chain.

Reuters: Chip equipment sales seen down 28 pct in 2008-SEMI
Taipei Times: ASE cuts fourth-quarter sales forecast

Chip Manufacturing Orders Down

CNET reports that orders for the equipment is used to manufacture chips has decreased. According to CNET, the orders for equipment reflects the situation for the entire computer value chain. Apparently orders are at the lowest for some time. CNET argues the industry is being plagued by both the financial crisis and the difficulties in the memory industry. CNET writes:

The chip equipment business is "on hold," said an analyst at a major industry association, and that bodes ill for the electronics industry in 2009.

Chip equipment makers signal how the electronics industry will fare in the future. They take orders from chipmakers which, in turn, take orders from electronic gadget makers.

Lara Chamness, a senior market analyst in industry research and statistics at Semiconductor Equipment and Materials International, talked about prospects for the industry in an interview. SEMI is an industry watchdog that covers the manufacturing supply chains for the microelectronic, display, and photovoltaic industries.

"We were hoping that 2009 would be the comeback year for semiconductor equipment. Now our outlook is much more cloudy," Chamness said.

On October 16, SEMI issued a report saying that the book-to-bill ratio for North American semiconductor equipment manufacturers slipped to 0.76 in September, the lowest ratio since November 2001. A lower ratio indicates lower orders.

While Chamness said the economic crisis is affecting everyone, the chip equipment industry is facing a double whammy of downturn and glut. Above and beyond the financial crisis, the overcapacity in memory has been affecting the bottom line of just about every major chipmaker, including Intel, SanDisk, Samsung, Taiwan Semiconductor Manufacturing Co., and Micron Technology.

"Things have been really difficult for the memory guys in the last few years...They're focusing on cleaning up their own operations and not expanding," Chamness said.

Then there is the worldwide financial problem on top of this. "Capital markets are freezing. So that's directly impacting capital equipment. It's indicative of what's happening in the worldwide economy," she said. "The addition of fab capacity is on hold right now. People are being very conservative with their money."

She cited TSMC, the largest contract chipmaker in the world, as an example of a company where factory utilization rates are low. "TSMC has announced a pretty significant drop-off as far as utilization goes."

This is inline with the expectation that companies will hold on to their cash (see Pundits urge companies to tighten belts, hold cash). The reason is clear. Anticipated weak demand in the near term future is forcing companies to cut back on capacity expansion directly and reduce their capital expenditures to ensure they are able to survive the storm. Companies will also be reluctant to raise debt right now as the mistrust in the credit markets has made the issuance of debt very expensive. Furthermore, borrowing money from the bank creates additional leverage with no certain mechanism to guarantee payments in the short term.

CNET: Chip gear industry's funk is a red flag

More Pressure from the Financial Markets

Yesterday in Madness in the Markets we looked at the effect of the financial meltdown on some tech sector companies. Following this theme today we read on the China Economic News (CENS) that spending on semiconductor manufacturing equipment is predicted to be in decline. According to CENS:

Semiconductor Equipment and Materials International (SEMI) recently cut its 2009 forecast of global capital expenditure on semiconductor manufacturing equipment to somewhere between a 5% growth and a 10% decline, sharply down from a 20% surge it previously forecasted.

The trade organization, which represents suppliers of semiconductor equipment and materials and suppliers of liquid-crystal display equipment and materials, ascribed the bearish forecast mostly to the worsening global financial crisis.

Some equipment suppliers pointed out that the market is now anemic. Taiwan Semiconductor Manufacturing Co. (TSMC), the world`s No.1 silicon foundry, is reported to further cut on expenditure plan for next year while No.2 supplier United Microelectronics Corp. (UMC) is said to spend US$400 million, compared with this year`s US$600 million outlay.

Total 2009 expenditure by Taiwan`s top four dynamic random access memory chipmakers-PowerChip Semiconductor Corp. (PSC), ProMOS Technologies Inc., Nanya Technology Corp. and Inotera Memories Inc.-is estimated to be only half the NT$88 billion (US$2.7 billion at US$1:NT$32) they spend this year. Weak market has sent spot market price of 1-gigabyte DDR2 chip slumping to only US$1.2 apiece.

SEMI estimated the financial meltdown to force global spending on equipment down by 20% throughout this year. Applied Materials, the world`s No.1 supplier of semiconductor manufacturing equipment and materials, even announced a drastic 40% drop.

Such downbeat mood has infected fabless houses: Realtek Semiconductor Co., Ltd.`s vice president, J.S. Chen, estimated the downturn would last at least six to nine months.

Industry watchers pointed out that, unlike past market downturns, this downtrend is across-the-board, giving almost no sector a chance to bring about a boom cycle. To weather such hardship, chipmakers choose to hold more cash.

I don't think any industry is immune to the meltdown. The semiconductor manufacturing is an expensive game and holding on to cash is an important part of the equation. Highly-geared companies in this environment with uncertain or declining cash-flows may be in serious trouble. Semiconductor manufacturers will then be loath to spend on expensive fabs.

As if to reiterate the effect of the financial meltdown on different companies,Winbond revenues decline by 40%. According to Digitimes:

Winbond Electronics reported September revenues of NT$1.677 billion, a decrease of approximately 9.25% compared with NT$1.848 billion in the previous month. September's sales were also down more than 40% from the same period one year earlier.

Accumulated revenues for January to September of 2008 were NT$18.05 billion, down 29% from one year earlier.

September business was negatively affected by a soft DRAM pricing. Under a weakening macroeconomic environment and in order reduce losses, Winbond continues shrinking technology, driving cost reduction and adjusting production capacity to niche products.

Winbond are struggling but at least they are proactively trying to reposition themselves by focusing on cost reductions and targeting niche product markets.

CENS: SEMI Cuts 2009 Forecast of Semiconductor Equipment Capex
Digitimes: Winbond September sales down 40% on year

AMD Loses Their Manhood

In July in Is AMD Going to Spin-Off their Manufacturing we noted foundry industry observers were commenting AMD were going to have to spin-off their fabs to stay viable. Later we noted in AMD's Asset Smart Strategy: What is it? AMD had adopted an asset-smart strategy. Although this strategy was not clear it was predicted that AMD meant they would be dumping their fabs. Well, its come to pass. AMD will no longer manufacture their own chips. According to the New York Times (NYT) AMD are going to split into two companies. One will focus on chip design and the other on manufacturing. According to the NYT:

Advanced Micro Devices said Tuesday that it would split into two companies — one focused on designing microprocessors and the other on the costly business of manufacturing them — in a drastic effort to maintain its position as the only real rival to Intel.

In addition, the company said two Abu Dhabi investment firms would inject at least $6 billion into the two firms, mostly to finance a new chip factory that A.M.D. planned to build near Albany, N.Y., and to upgrade one of the company’s existing plants in Dresden, Germany.

A.M.D., based in Sunnyvale, Calif., makes graphics, computer and server processors. It will own 44.4 percent of the new entity, which has been temporarily named the Foundry Company, a reference to the technical term for a chip factory. The Advanced Technology Investment Company will own the rest.

Advanced Technology, which was formed by the Abu Dhabi government, has promised to put up $2.1 billion immediately and contribute $3.6 billion to $6 billion more to build or upgrade chip fabrication plants, also known as fabs. A.M.D. said the two companies would share voting control equally.

The Mubadala Development Company, an Abu Dhabi company that bought 8 percent of A.M.D. in November, will pay $314 million for 58 million newly issued shares, increasing its stake in the presplit company to 19.3 percent. It will also get warrants to buy 30 million shares. A.M.D. stock closed Monday at $4.23 a share, down 30 cents.

“We generally believe this deal is a game changer for the industry,” said Khaldoon Al Mubarak, chief executive of Mubadala. “It’s bold, and I think it’s smart.”

Coming up with the billions of dollars needed to construct each new chip plant has proved to be a huge drain on A.M.D., the perennial No. 2 to Intel in the market for microprocessors, the powerful chips that control the functions of personal computers and the larger corporate machines known as servers. As of June, A.M.D. reported that it had $5.3 billion in debt and just $1.6 billion in cash.

With the constant need to devise smaller, faster, more energy-efficient chips to keep up with Intel, A.M.D. was forced to turn to outside help.

Well this turn of events was certainly not unexpected. AMD have been smashed around for the better part of three years in a ruthless price war with Intel. They are on the ropes and there is nowhere to go except to be broken up and allow the latent value in either firm to be unlocked somehow.

This will however have an impact on the global semiconductor industry. A new foundry provider in these dark times will increase the competitive environment in the pure play foundry business and smaller competitors may feel the pinch of it. I suspect TSMC, the world's pre-eminent pure-play foundry, will not be effected initially but they certainly cannot ignore the emergence of a new player in the game.

So why is this piece titled "AMD Loses Their Manhood"? The NYT answers (emphasis added):

The split, which has been in the works for more than a year, did not come easily to A.M.D. According to company lore, A.M.D.’s co-founder and longtime chief executive, W. J. Sanders III, known as Jerry, once remarked that “real men have fabs.”

Under the deal proposed by A.M.D., the company would retain many of the traditional benefits of fabs, since part of Foundry will be dedicated to serving A.M.D. and will remain in close communication with the company’s engineers.

“We feel like we’re still pretty manly at A.M.D.,” Mr. Meyer said. Noting that Mr. Sanders made his quip over a decade ago, he added, “Frankly, the math has changed.”

Welcome to a whole new semiconductor landscape, the future will be interesting.

New York Times: A.M.D. to Split Into Two Operations

Is AMD Outsourcing?

The China Economic News (CENS) reports AMD has outsourced their 40nm CPU production to TSMC. According to CENS:

Some foreign institutional investors recently said Taiwan Semiconductor Manufacturing Co. (TSMC) has won foundry contracts to make central processing units (CPUs) for Advanced Micro Devices (AMD), the world`s No.2 computer-microprocessor supplier second only to Intel Inc.

They said the volume production would begin at the end of the second quarter next year and run with 40-nanometer process. The contracts, they added, would give a boost to the world`s No.1 silicon foundry`s revenue.

In reaction to the reports, TSMC`s executives haven`t made any comments, simply saying pursing CPU contracts has been one of the company`s plans. Industry watchers said the contracts coming in economic meltdown reflected TSMC`s unmatched technology and manufacturing service.

AMD`s farming contracts to TSMC has been within expectations of industry watchers expectations after AMD announced plans to spin off its manufacturing operation at the end of this year to focus on IC design. However, the contract-production schedule comes around half a year earlier than expected in light of the reported second-quarter 2009 production.

AMD has already contracted TSMC and United Microelectronics Corp. (UMC) to make graphic chips after merging ATI Technology, with TSMC offering manufacturing to newer chips whereas UMC offering service to its older chips.

Well, there was rumor from the new AMD CEO about their asset smart strategy and rumors have been going around for a while that AMD will be forced to get rid of their fabs (see AMD's Foundry Business). AMD has been in a brutal price war with Intel over the last few years and their purchase of ATI Graphics made it more difficult for them to move as they are heavily burdened with debt.

If they have entered into a partnership with TSMC then I think it will be win-win for both of them. AMD will be able to focus on designing competitive chips and will be able to offload their very expensive fabrication plants. Of course the news would be good for TSMC and would show further consolidation in the IC manufacturing industry. Remember last week we said Morris Chang predicted only three semiconductor manufacturing companies would be around in 10 years.

From a consumer perspective, a strong AMD is very important. AMD's superior product line a few years ago forced Intel's hand and made them develop better chips faster. It also reduced the overall processor prices and made computers cheaper. A semiconductor world without AMD would not be good. If outsourcing the manufacturing helps them to remain competitive in the design of chipsets and processors, then it is the right move for them.

CENS: TSMC Reportedly Wins AMD`s CPU Foundry Contracts

Morris Chang Looks to the Future

Morris Chang, founder of Taiwan Semiconductor Manufacturing Corporation (TSMC) believes the future of the semiconductor industry, and speficially the manufacturing side of the industry is in the hands of three global giants: Intel, Samsung and TSMC. The Statesman commented on a speech by Morris Chang saying:

As Morris Chang looks to the future of the semiconductor industry, he sees technical and economic challenges that will strain chip makers' bankrolls and their intestinal fortitude.

In a decade or so, he expects to see only three companies still devoting major resources to pushing chip manufacturing technology dramatically forward.

The final three, he says, will be Intel Corp., the long-standing kingpin of the industry, South Korea's Samsung Electronics Co., the biggest maker of memory chips, and Taiwan Semiconductor Manufacturing Co.

The Statesman continues saying:

Chang believes the chip industry can gradually push ahead to the next two or three generations of advanced chip-making technology before really big challenges start to appear.

When that happens, the number of chip makers that will keep spending heavily on research will start to shrink.

The reason only three will remain is the prohibitive cost of the technologies and the plants. One plant costs in the region of US$5 billion. The Statesman wrote:

State-of-the-art chip factories now cost as much as $5 billion to build, and they require enormous production runs to operate efficiently. Fabless smaller companies would rather let TSMC take care of the chip manufacturing while they concentrate their efforts and their money on innovative design and aggressive marketing. And so would increasing numbers of large companies.

It is hard to see anyone else from capturing market share in the future from these three companies. AMD tried to compete with Intel and got hammered into the ground during an extensive price war over the past few years that has left the company teetering on the brink.

Digitimes recently reported that TSMC had "94% of all profits generated by four wafer foundries in Taiwan." According to Digitimes:

TSMC "revenues were up 25% on year to NT$170.8 billion (US$5.39 billion) in the first half, whereas net profits increased 28% on year to NT$56.9 billion during the same period.

United Microelectronics Corporation (UMC) saw its net profits decline 59% on year to NT$2.6 billion due to falling non-operating income, losses incurred from foreign exchange transactions and declining financial asset values, the company said.

That is not to say the fabless design model is without its threats and dangers. One recent analyst suggested companies like Nvidia may have to reavluate their relationship with TSMC as TSMC is unable to guarantee them production runs. EETimes comments:

Nvidia Corp. is not getting the 55-nm capacity it needs from silicon foundry giant Taiwan Semiconductor Manufacturing Co. (TSMC), a problem likely to worsen as the graphics chip maker moves to the 40-nm node, according to Doug Freedman, an analyst at American Technology Research.

In a report published Thursday (Sept. 11), Freedman wrote that the "fabless business model seems to be getting stressed out" and that the Nvidia-TSMC relationship "sounds problematic" and "needs to evolve."

In order to minimize its own risk, TSMC is building less capacity as it ramps new technology nodes, according to Freedman. TSMC doesn't get enough visibility from its smaller customers such as Xilinx Inc., Altera Corp. and Broadcom Corp., Freedman wrote, so the foundry cannot take the risk of building new capacity to support larger customers. Nvidia is TSMC's largest customer, he noted.

TSMC's board of directors last month approved a $795 million capital spending plan that includes a push into 45-/40-nm CMOS processes and MEMS.

Maintaining high capacity utilization and managing the risk of not receiving sufficient orders for maximum utilization rates is a delicate balancing act for TSMC. One which they will have to manage.

Maybe Morris Chang will be proved right, then again maybe not. We will have to wait and see in 2018 who is still around.

The Statesman: A chip prediction: In the end, three will dominate R&D
Digitimes: TSMC tops Taiwan wafer foundries in revenues and profits in 1H08

MEMS Market Attracting more Players

In Taiwan Manufacturers Move into MEMS market we noted that TSMC, UMC and ASE were all moving into the micro-electro-mechnical system (MEMS) market sector. In TSMC Increases Their CAPEX we noted TSMC were upgrading their 0.35 micron processes to be able to accomodate MEMS systems.

Reuters noted yesterday that the growth of the MEMS market due to the rapid adoption of motion sensor chips in the Wii gaming devices and the Apple iPhone has provided an increased incentive for the world's chipmakers to jump into the market. Reuters notes TSMC had sat on the sidelines of this sector for sometime but has now jumped into the market, confirming the earlier reports. Reuters observes:

Chip makers are convinced of the potential for motion sensing chips in portable gadgets, thanks to the success of Nintendo's Wii game consoles and Apple's iPhones.

The market for micro-electro-mechanical systems (MEMS) devices, which detect motion using acceleration sensors, could reach $7.3 billion this year and $11 billion by 2011, Taiwan chip maker TSMC has said, quoting independent research.

However, although there is growth opportunities in this sector, the sector is still small. Reuters writes:

In dollar terms, the MEMS market is still relatively small for firms that generate billions of dollars in revenue each year. But potential growth is triple that of the meager 4 percent rise that TSMC projected for the entire $280 billion semiconductor market this year.

But with chip manufacturers facing a downturn in demand for memory and logic chips, the growing use of motion sensing devices in mass market gadgets, such as phones and music players, offers a chance to boost sales.

At its annual technology symposium in May, Taiwan Semiconductor Manufacturing Co Ltd (TSMC), the world's top contract chip maker, featured MEMS as among the most promising new technologies.

"TSMC sat on the sidelines for several years but now appears convinced that MEMS is ready for prime time with consumer electronics and mobile applications," iSuppli analyst Richard Dixon said.

"Following iPhone's lead, which put motion sensing to the core of the stunning display, we expect to see (MEMS) mobile phones rapidly expand as manufacturers scramble to differentiate with similar functions."

NEW DEVICES

TSMC, which has started making MEMS chips for Analog Devices , could see the business make up 10 percent of its total sales this year, with the ratio growing to 20 percent in the next 2-3 years, Taiwan's Topology Research said.

Rival United Microelectronics Corp (UMC) is also reportedly preparing to supply similar chips later this year or next, although the company declined to comment.

MEMS suppliers that traditionally made most of their revenue in the automotive sector have reached the limits of capacity, and many have chosen either to upgrade their manufacturing technology, like STMicro or Freescale, or to subcontract out production, iSuppli's Dixon said.

In an interview with Tech-ON, the head of TSMC's MEMS business Robert Chin-fu Tsai discussed TSMC's movement into the sector. Mr. Tsai said:

MEMS output is about 4,000 chips per month at both Fab2 and Fab3. Considering that the output capacity of both lines is slightly more than 100,000 chips per month, MEMS production accounts for a tiny portion at the moment. This amount will expand rapidly, however, in the second half of this year.

The number of MEMS devices to be mass-produced will increase all at once from late 2008 to early 2009. Among the multiple MEMS projects we are currently conducting, three will enter the volume production phase within 2008 and one in early 2009. In accordance with this schedule, the ratio of MEMS production is likely to increase at Fab2 and Fab3 first.

This is another new sector for Taiwanese companies and once again they are leveraging their pure-play foundry strengths to establish a dominant position.

Reuters: Chip makers get moving with motion sensing chips
Tech ON: TSMC Discusses MEMS Foundry Biz

AMD's Asset Smart Strategy: What is it?

An excellent article on the Guardian covers most of what AMD have been going through over the past couple of years. The Guardian writes:

Advanced Micro Devices Inc's future depends on still-murky details of a plan to overhaul its manufacturing, and Wall Street is impatient.

AMD now lags far-larger rival Intel Corp in chipmaking technology and could be about nine months behind Intel when it introduces chips with elements as small as 45 nanometers in the second half of this year.

The company has also reported seven straight quarterly net losses in a row, and it's hard-pressed to afford building a new, next-generation chip plant, which can cost $3.5 billion, with $5.6 billion in long-term debt on its books.

Together, Intel and AMD control virtually the entire market for microprocessors, the electronic brains of personal computers and server computers that comprise corporate networks.

AMD's future hinges on what it calls Asset-Smart strategy: whether it adds capacity by striking a deal to use foundries of an Asian contract chipmaker such as Taiwan Semiconductor Manufacturing Co Ltd, or perhaps signing an agreement with longtime partner International Business Machines Corp.

"I don't know what Asset-Smart looks like, but anything is better than today. Anything is better than going out of business because you run out of money" said Stifel Nicolaus analyst Cody Acree. "It might be a partnership with IBM or TSMC or it might be an outright sale of their manufacturing."

Executive Chairman Hector Ruiz, who led AMD as its CEO for more than six years and stepped aside in mid-July to hand the reins to Dirk Meyer, is driving the plan to completion and has repeatedly promised answers by the end of the year.

We have been following this story for some time and the above quotation is a good summary of the situation as it stands now. Honestly, good luck to AMD to staying in the game. I personally think much of the innovation and acceleration in product design by Intel has been because of AMD punching above their weight. Without at least a minor competitor how fast will Intel develop products? I recall earlier this year Intel wanted to delay the rollout of some processors as there was no reasonable external competition and they felt the newer processors would compete directly with their earlier generation of processors. They denied the rumor but it wouldn't be out of the realm of possibility. Ultimatey this doesn't benefit the consumer.

Also, the brutal price war between AMD and Intel has signifcantly lowered the prices of processors. If AMD are pushed out of the game, Intel will monopolize the market (haven't they already?) and set prices as they please similar to what Mircrosoft does.

So seriously, here's hoping AMD can pull out of their slump and get back in the game, with or without fabs.

Guardian: AMD manufacturing plan key to chipmaker's future

Taiwan Manufacturers Move into MEMS market

More and more Taiwanese semiconductor companies are moving into the micro-electromechanical system (MEMS) market. What is MEMS? MEMS and Nanotechnology Clearing House say the following:

Micro-Electro-Mechanical Systems (MEMS) is the integration of mechanical elements, sensors, actuators, and electronics on a common silicon substrate through microfabrication technology. While the electronics are fabricated using integrated circuit (IC) process sequences (e.g., CMOS, Bipolar, or BICMOS processes), the micromechanical components are fabricated using compatible "micromachining" processes that selectively etch away parts of the silicon wafer or add new structural layers to form the mechanical and electromechanical devices.

The China Economic News (CENS) reports:

In light of increased availability of micro-electro-mechanical systems (MEMS), heavyweight Taiwanese chipmakers are competing for an advantageous position in the market.

Asia Pacific MEMS System Corp., in which United Microelectronics Corp. (UMC) holds dominant stakes, recently announced it would contract UMC to make its products designed on sub 0.35-micron processes.

Taiwan Semiconductor Manufacturing Co. (TSMC), currently the world`s No.1 pure silicon-foundry supplier, has begun using its 150-mm and 200-mm fabs to make MEMS used in inkjet heads of printers after starting to make contact image sensor (CIS) in cooperation with Omni Vision Inc. TSMC plans to shoot for foundry orders for radio-frequency MEMS and digital mirror device (DMD) next year.

Advanced Semiconductor Engineering (ASE) Inc. has won considerable orders to test and package automotive sensor devices, RF-MEMS modules, biochips, and silicon-based microphones in cooperation with subsidiary Universal Scientific Industrial Co., Ltd. for Nordic, VLSI, austriamicrosystems AG, and Medtronic. Industry watchers note that MEMS accounts for around 50% of packaging and testing costs.

For a long time, MEMS technology has been mostly applied to automobiles and industrial equipment. Recently, it has been increasingly built into consumer electronics like mobile phones and game consoles. Apple iPhone and Nintendo Wii are two typical consumer applications of the technology.

Demands for MEMS devices have surged sharply along with brisk growth of consumer-electronics market. Besides foundries TSMC, UMC and ASE, IDMs Texas Instruments (TI) and Sanyo have also entered MEMS market.

And according to Digitimes, both UMC and TSMC are bidding for contracts with Invensense, the world leader in motion sensing solutions for mobile devices. Digitimes says:

Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) are said to be geared up to bid for micro electro-mechanical system (MEMS) orders from InvenSense, with their respective backend solutions also being prepared, according to industry sources.

The sources indicated that leading MEMS gyroscope supplier InvenSense plans to outsource its front-end CMOS production to foundries in Taiwan, which has spurred the two leading pure-play foundries to compete for the potential orders.

Actually over the past while we have been reading more and more about MEMS. As the CENS articles says, MEMS have been around for a while but the rate of adoption is increasing quickly and more and more MEMS are being applied in consumer electronics. This will definitely provide Taiwan semiconductor companies with more opportunity to expand their market and product offerings. Both UMC and TSMC are ready to provide the fabrication facilities needed. This is another emerging market sector that will be interesting to watch over the next while. We will keep you posted!

MEMS and Nanotechnology Clearing House: What is MEMS Technology?
China Economic News: Taiwanese Chipmakers Venture Into MEMS Segment
Digitimes: TSMC and UMC bid for MEMS devices orders from InvenSense

Semiconductor Market Trends

EE Times India says an analyst has predicted 10% growth in the semiconductor industry over the next few years saying the lack of investment on expansion in the semiconductor industry and the growth in the global economy will spur growth in the semiconductor industry. According to EE Times India:

Malcolm Penn, founder and principal analyst with Future Horizons Ltd, believes the market forces are at last moving into place to deliver a couple of years of booming growth for the semiconductor industry. Penn offers three possible results for annual chip market growth in 2008, ranging from 7 per cent at the low side up to 10 per cent growth at the top end.

He is convinced that, because of a lack of investment in semiconductor manufacturing capacity at present, prices will continue to rise, alongside units in 2009, giving rise to a market growth in the "high-teens" of per cent.

This would be a return to glory days of the semiconductor; albeit one prompted by an unprecedented move away from chip manufacturing at the leading-edge by many of the major chip vendors.

But Penn is being bullish while the analysis forest remains full of bears. Others have expressed concern that a general economic slowdown could suppress demand in the second half of the year. Falling units with weak pricing is a recipe for a semiconductor market collapse. In contrast Penn believes that unit sales will hold up and when put together with increasing average selling prices (ASPs) will start to deliver strong overall chip market growth for the first time in many years.

The article is an interesting one and well worth the read. There have been concerns in the semiconductor industry about the low prices being driven down by high inventory levels. Any growth in the semiconductor industry will be good for Taiwan firms such as TSMC and UMC.

EE Times India: Expect 10% chip market growth, says Penn

Mr. Ma please don't move the fabs to China

We were going to comment on President Ma Ying Jeou's latest idea of moving Taiwan's 12-inch wafer fabs to China. When I heard about it I thought he was mad! The semiconductor industry is one of Taiwan's strategic industries. Taiwan's tax payers, through the Industrial Technology Research Institute (ITRI) invested a lot of money in developing the industry. To send it to China wrapped in Christmas wrapping is just insane! Yeah yeah, lets cut out the emotion.

As I said, I was going to comment but Professor Jason Liu from the National Taiwan University of Science and Technologydoes a much better job in the Taipei Times.

In an attempt to revive Taiwan’s struggling stock market, President Ma Ying-jeou (馬英九) said on July 10 that restrictions on chip investment in China would be relaxed. But this “good news” could severely hurt the economy.

Ma said Intel is building a 12-inch wafer factory in Dalian that will use 90-nanometer technology. He said the Wassenaar Arrangement on Export Control for Conventional Arms and Dual-Use Goods and Technologies allows high-tech transfer into communist states such as China, which means Taiwan is falling behind the rest of the world because it only allows Taiwanese chipmakers to produce 8-inch or smaller wafers in China. The Ministry of Economic Affairs is planning talks with chipmakers and it may relax restrictions in September.

The problem is that Intel is just building a DRAM memory chip fab, whereas Taiwan is looking at loosening restrictions on wafer fabs, which are capable of making multiple integrated circuits with more complex technologies. We cannot just focus on the Wassenaar Arrangement. More important is the impact that the relocation of the wafer industry will have on Taiwan’s economy and society.

Taiwan has the world’s best wafer foundry industry. Including design, testing, and packing, the total production value of the industry is as high as NT$1.5 trillion (US$49.3 billion) and employs at least 150,000 people.

Quick comment: The stock market is not struggling because the 12-inch fabs are in Taiwan and not China, the stock market is struggling because the global economy is in the gutter. Raw material prices are surging, weak deamand in big countries is also hurting Taiwan. When the economy in the world improves, the economy in Taiwan will improve. It really is that simple!

The other day we posted an article showing the decline in prices of tech companies listed in the Taiwan Technology Index! Yesterday oil dropped by US$5.00, the Dow Jones and Nasdaq went up by more than 3% and guess what, so did the Taiex. The Taiex and Taiwan stock market prices are heavily dependent on the global economy and are highly correlated with the US markets (one day when I am not too tired I will do the calculation). Moving the fabs to China will not change this.

Professor Liu ends his editorial saying:

In 2006, China launched its 11th Five-Year Plan, vowing to use 0.13-micron and even smaller technologies to develop its own 12-inch wafer foundry industry, with the goal of boosting its production value to 300 billion yuan by 2010. It is keen to replace Taiwan in the global semiconductor industry. However, the quickest way to achieve that goal is to entice Taiwan’s high-tech professionals to work in China to reproduce a copy of Taiwan’s upstream, midstream and downstream semiconductor industry.

The semiconductor industry remains crucial to Taiwan and the government must do what it can to keep the industry here. Ma cannot just loosen restrictions, thereby strengthening China’s semiconductor industry and weakening Taiwan’s national competitiveness. The government must not make a decision based solely on talks with chipmakers. It should invite all sectors of society to extensively discuss the issue.

We agree completely with Professor Liu! Do you?

Taipei Times: Don’t be in such a rush to destroy the economy

TSMC is Ranked 5 in Global Semiconductor Sales

IC Insights just released their May update to the Maclean Report. According to them:

"[The May update]...describes the big shakeup in the 1Q08 top 20 semiconductor supplier ranking (Figure 1). There are eight U.S. companies in the top 20 (including three fabless semiconductor suppliers), six Japanese, three European, two South Korean, and one Taiwanese company (IC foundry supplier TSMC) in the ranking. As shown, it required at least $1.0 billion in first quarter sales to make the top 20 ranking. Although the top four ranked companies remained the same, there were a number of "movers and shakers" up and down the remainder of the 1Q08 ranking as compared to their full-year 2007 positions."

TSMC was ranked fifth and listed as the fastest growing of all 20 companies in the list. The top four companies remained unchanged and were listed as Intel, Samasun, Texas Instruments and Toshiba. TSMC was the only pure-play foundry on the list.

According to the China Economic News (CENS),

The market-research organization ascribed the significant growth of TSMC mostly to outstanding sales at Nvidia and Qualcomm, the world`s top two fabless houses depending on TSMC for foundry manufacturing service.

Burgeoning shipments of third-generation (3G) handsets worldwide in the first quarter led Qualcomm to deliver 85 million sets of handset chipsets, pushing up the firm`s revenue for the period by 29% ( from a year earlier) to US$1.6 billion. The company was ranked the No.10 chipmaker for the first time last quarter.

Nvidia increased contracts to TSMC in the first quarter to keep up with thriving demands for its G92 graphics chips, which helped bulk up the company`s sales for the quarter to US$1.1 billion, up 37% year on year. The increase pace made the company the second best performer of the top 20 chipmakers in terms of revenue growth. Nvidia was placed on the 18th position on the top-20 list.

Yesterday CENS also mentioned Texas Instruments would be contracting both TSMC and UMC to manufacture their 45 nm chips. According to CENS:

When Texas Instruments (TI) recently announced its plan to have its 45nm base-band chips and digital signal chips made at two silicon foundries next quarter, industry watchers believed Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC) would be the choice partners.

The main reason for this increase is that Texas Instruments will not independently develop process technologies below 45 nm.

Article 1: Shakeups Rock 1Q08 Top 20 Semiconductor Supplier Ranking
Article 2: Texas Instruments to Have 45nm Chips Made at Foundries

Effect of Sichuan Earthquake

The huge earthquake to hit Sichuan province will not, many believe, have a significant impact on the chipset supply chain.Both Intel and Semiconductor Manufacturing International Corporation (SMIC)have operations in Chegndu but no one is expecting these to effect the supply chain. Digitimes says:

Despite concerns the 7.8-magnitude earthquake in Sichuan, China may have a possible impact over ongoing IC supply as Intel and Semiconductor Manufacturing International Corporation (SMIC) both run IC backend facilities in the region, industry players from Taiwan caution against overreacting.

Most industry players from Taiwan believe that impact from the quake should be short-lived. Recalling experience from the 921 earthquake that shook central Taiwan nine years ago, sources at Advanced Semiconductor Engineering (ASE) indicated that company operations were only affected for one day. They added in saying that industry players should not overreact and noted that other packaging and testing houses would not "benefit" from a sudden influx of orders.

Sources at SMIC's Chengdu Cension Semiconductor Manufacturing fab said the fab activated anti-quake measures and production resumed during the evening of May 12. Monthly capacity of 7,000 8-inch wafers was not affected, they added. This Chengdu fab mainly focuses on power management IC (PWM IC), high-voltage IC and niche memory production.

The Chinese-language Economic Daily News (EDN) quoted SEMI senior director of industry research and statistics Dan Tracy as saying that Intel is flexible enough to adjust its capacity mix, meaning the quake impact should be limited. Tracy also commented that impact should be limited for other semiconductor companies such as SMIC.

Some sources from the packaging and testing industry were also quoted by another EDN report as saying that the majority of backend production at the Intel fab in Chengdu is dies instead of wafers, meaning that any damaged chips could be replaced relatively quickly. They also added in saying that Intel outsources up to one-tenth of its IC backend production orders to other partners.

Currently ASE is partnered with Intel for the packaging and testing of southbridge chips and some NAND flash memory, while Siliconware Precision Industries (SPIL) is also partnered for southbridge and some networking chips, according to industry players.

However, since some of the production capacity has been affected, Intel are considering moving some of their production to other plants. According to China Economic News (CENS):

Intel Corp. is reportedly mulling delegating part of its production at its test and assembly factory in the earthquake-stricken Sichuan Province of mainland China to its other factories and pure assemblers including Advanced Semiconductor Engineering (ASE) and Amkor.

CENS also speculates that Intel will have to outsource some of its testing to other companies. CENS says:

Taiwanese industry watchers estimated Intel might contract ASE and Siliconware to test and assemble south-bridge chips for the chipsets and some logic chips waiting at the Chengdu factory. ASE is running a factory outfitted with 1,500 wire-bonding machines in the mainland. The factory will double output capacity by the end of this year.

Although the the factories may not have been damaged, the damage on the overall infrastructure in Chengdu may have an effect. Shortly after the September 21 earthquake in Taiwan in 1999 (921)there were rolling power cuts for a month. The same may happen in Chengdu. CENS reports water and electricity have already been cut. I should also imagine many of the transportation routes have also been cut off and the remaining routes saturated with humanitarian aid. It will take some time for the infrastructure to be ready for full production capacity and for the supply chain to run smoothly.

Of course the priority now for the authorities there must be to deal with the human tragedy.

Article 1: Taiwan packaging and testing companies caution against quake-impact overreaction
Article 2: Intel May Switch Production From Quake-stricken Sichuan Plant to Shanghai

Should the IC Industry Provide Services?

According to the China Post (CP) Professor Joseph Shyu of National Chiao Tung University (NCTU) said that Taiwan's IC manufacturers should look to providing services in the future and reduce their focus on manufacturing.

Taiwan's integrated circuit (IC) industry should switch from major manufacturing to providing IC knowledge and management services, a scholar proposed at an international forum yesterday in Taipei.

Speaking to 22 visiting engineering majors from Ecole Poly technique of Montreal, Canada, Professor Joseph Shyu of National Chiao Tung University (NCTU) said that it is not wise for Taiwanese companies to focus only on manufacturing.

Taiwan is such a small island with a limited population -- we have no reason to believe that we can compete against economies like the United States or China," he said. "We have to be flexible and dynamic."

The fact is Taiwan's pure-play foundries (TSMC and UMC) have already competed against their US counterparts successfully. In fact, TSMC and UMC created a whole new type of business and in many ways were responsible for nurturing and developing the fabless design industry. Prior to the pure-play foundries chipset companies had to invest heavily in their own manufacturing facilities. Enabling companies to outsource chipset manufacturing provided an ideal environment for smaller fabless companies to exist, one of the most famous being Nvidia.

These companies have also spun-off their own fabless chipset design companies. For example UMC have spun-off ITE Tech, Novatek and Mediatek to name a few. Taiwan's IC manufacturing companies are strong and will continue to remain strong over the short term at least. Of course market conditions change and the competitve environement will change too so these companies will have to adapt in the future. However, competing against TSMC or UMC will be very difficult for any startup, even in China.

Professor Shyu is correct when he says "We (Taiwan) have more international experience and primary management systems (than China)."

Article: IC industry should provide services: scholar

VIA Processors Making a Comeback

According to Digitimes, VIA processors are making a comeback on low cost PCs. Digitimes reports:

With Hewlett-Packard (HP) said to have ordered 100,000 C7-M ULV processors for its initial mini-note low-cost PC launch, (which is expected to reach 500,000 units in total in 2008) while Gigabyte Technology's new M700 series UMPC (ultra mobile PC) will also adopt VIA Technologies' CPUs, the Taiwan-based chipmaker may have a chance of recover from its long series of losses, according to industry watchers.

In addition to HP and Gigabyte, more hardware vendors are said to be evaluating VIA's CPUs for their UMPC and low-cost PC products.

The Atom processors recently lauched by Intel have certain limitations and therefore are not attractive to low cost PC manufacturers.

I also managed to dig up an old 2001 interview with Wen-chi Chen, VIA' s CEO. In that interview he argues for the development of the low cost processor. When asked why focus on cheap processors he argued:

We think that the value-line product will be the fastest growing in the whole PC space. It can easily grow another 20% higher than the whole market. That's the market where people want the products. People are looking at [a] second or third PC for the home, and the value line serves that purpose better..

When asked why, he replied:

The Internet will be the biggest driving force. For Internet applications, the processor is not the main requirement -- the pipe is more important than the engine. It's like the auto industry: It used to be that people build bigger and bigger engines. But the road was only so wide, and car drivers were more limited by the road than by the engine. So people started looking at efficiency of the engine and went to smaller engines..

It seems his 2001 optimism about this market is about to pay off. No doubt however AMD and Intel will respond and, even though the Atom has limitations, if there is money to be made they will readjust their strategy to ensure they stay ahead of the pack.

Article 1: VIA CPUs to stage comeback in low-cost PC market
Article 2: Wen-chi Chen: Taiwan's Answer to Andy Grove? [PDF File]
C7 2006 Press Release: New VIA C7®-M ULV Processor Family
C7 Product Page: VIA C7®-M ULV Processor

Amazing Taiwan

Just found and interesting book on Amazon.com. The Silicon Dragon: High-Tech Industry in Taiwan. Looks interesting but pricy at US$120.00.

To judge from its size, Taiwan, an island of about 30,000 km², is only a tiny dot on the globe. Its size, almost equal to that of the Netherlands, is about one seventh the size of the United Kingdom, one 250th the size of the United States, one 260th that of China, and cannot even be seen on a world map. Taiwan had nonetheless achieved a production value of US$21,000 million by 1999 and become the third biggest manufacturing centre of information hardware with over 40 computer-related product ranked first in the world. These products include scanners, monitors, motherboards, desktops and notebooks, and key components such as computer chips. Considering its size, Taiwan's achievements in the computer industry ae remarkable.

Indeed....

Reference: Bor-Shiuan Cheng, "'Dragon appearing in the field': the legend of semiconductor industry in Taiwan," on page 1 in "The Silicon Dragon: High-Tech Industry in Taiwan" edited by Terence Tsai and Bor-Shiuan Cheng)