SAN FRANCISCO (Reuters) - The semiconductor industry is being forced to abandon the idea of owning their own plants as costs for new factories reach US$3 billion and more, leaving manufacturing concentrated in the hands of a few big players.
Speaking at the Reuters Semiconductor Summit, many executives said that they preferred to deal with Taiwanese and other chip manufacturers that work with a variety of design firms as contract suppliers.
Some companies have begun banding together in three- and four-way partnerships to fund plants. Eventually, only the world's largest chipmakers -- Intel and Samsung Electronics -- and a handful of others like Texas Instruments may build their own fabrication plants.
"These new technologies are just staggeringly expensive," Harold Hughes, chief executive of Rambus Inc, a semiconductor designer that licenses its technology to other chipmakers for use in their own devices.
Specialty chipmaker LSI Logic Corp is the latest major semiconductor maker to elect to give up factories, known fabs, for fabrication plants, as the cathedrals of the computer age are known.
Instead, LSI is joining the vast majority of chip designers who have gone "fabless". It previously relied on a "fab-lite" strategy in which it contracted out most of its production to Asia while operating its sole remaining plant.
It is currently seeking a buyer for its Gresham, Oregon plant. LSI aims to keep some production at the plant after it changes hands and shift new production to foundry suppliers now mostly located in Asia, chief executive Abhi Talwalkar said.
"The decision was pretty straightforward," Talwalkar said. "The economics around deploying next-generation process technology and building a fab (fabrication plant) requires that you have US$8-10 billion dollars of revenue," he said.
Arithmetic is driving the consolidation. The latest 300 millimetre, or 12-inch-wide, silicon wafers from which computer chips are made offer 2.25 times the capacity of the prior generation of 200 millimetre wafers, analysts note.
Hughes of Rambus said the output required to make building a new plant economical can only be justified if the company can sell hundreds of millions of units.
"When I look at the math, it tells me something's going to change," Hughes said. "The industry is going to have just two companies that can afford to run their own fabs: Intel and Samsung," he said.
For decades, owning manufacturing plants allowed a company to create proprietary designs that allowed it to command higher prices for its products. That strategy appears to have run its course.
Potential entrants face a new barrier: the cost of designing chips. A major new chip product can run as high as US$50 million to design, up from roughly US$5 million a decade ago, Gartner semiconductor equipment industry analyst Jim Hines told reporters.
Gartner estimates that a plant must produce US$5 billion worth of product revenue over its life to breakeven on a US$3 billion investment in a state-of-the-art 65 nanometre plant. He sees only 10-15 companies worldwide able to justify the cost.
"(Fabs) are not even an advantage anymore because they are heavily capital intensive, they distract executives, they give you false security that you have captured all the (profit) margin in the food chain," Hines said.
"Today fabs are a handicap," said Scott McGregor, a former executive at consumer electronics maker Philips who became chief executive at diversified communications chip maker Broadcom earlier this year. Broadcom relies on foundries in Taiwan, China and elsewhere to build its products.
"What should concern you is that you are producing at the lowest cost factory in the world -- not necessarily in your factory," said McGregor, who, at Philips, also sat on the board of directors of Taiwan Semiconductor Manufacturing Co Ltd, the world's largest contract chip maker.
Reuters Summit: Microchip makers avoid building plants
By Eric Auchard on Nov 7, 2005 9:00AM
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