Value and Cost in the Semiconductor Industry
(7/8/02) Future Fab Volume 13
By Terry Higashi, Tokyo Electron
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Although the semiconductor market is said to be in a recovery, the recovery seems to be very slow. Particularly, the semiconductor production equipment market may need more time to recover. This down cycle was not the typical cyclical equipment demand pattern. The typical cycle is a result of rapid capacity building by many semiconductor suppliers at the same time. Thus, growth in capacity gets ahead of growth in demand. As a result, capital spending is decreased for some time until the new capacity is utilized. In this down cycle, we experienced an unprecedented collapse in demand.
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Vertical integration vs Horizontal integration
Generally speaking, in the industrial age of the Old Economy, people paid for products that served specific functions or services offered by suppliers. However, in the information age of the New Economy, people will pay for the best integrated solutions. Another change is the speed of innovation. These changes have been brought about by the globalized economy which followed the cold war in 1989, opening access windows for worldwide players. According to these changes, the industrial structure has been moving from so called vertical integration to horizontal integration. This dramatic change contributed to the creation of new business models, such as the foundry business in semiconductor manufacturing. In the New Economy, this means that the system is based on a critical parallel chain of interdependent vendors within the manufacturing process. In the vertical integration system, the system was controllable within one body. The semiconductor industry is horizontally integrated. As part of the critical chain, we may not be able to continue to innovate as we have in the past because the IT crash has had such a dramatic impact on our network of vendors.
Value and Cost, for What?
Now, back to the semiconductor industry and its equipment business. With the concept of the Old Economy, the cost of the equipment has been calculated based on the various costs to build the product, including variable cost and fixed cost, or direct cost and indirect cost. However, the semiconductor equipment in the New Economy era provides the customer with solutions and expertise beyond the product itself. These solutions have become the heart of the equipment business, and therefore determine the value of the product. Solutions and expertise are developed through knowledge.
Until now, many attempts to evaluate the effectiveness of the equipment have been made using measures such as COO or OEE. These measures mainly focus on apparent capabilities, such as “what is the cost per wafer?” or “how many wafers can it effectively handle per hour?” However, it does not include the evaluation of other important performance factors, such as process expertise, or process capabilities for device shrinking. These are capabilities of process integration that generate far more benefits for the customer.
Another point to examine is the speed of development. The semiconductor development cycle is getting shorter because the economy is shifting from a mass economy to a time economy. Also, due to the diversity of applications and technological difficulties, the targets and the best processes for development are becoming unclear. This makes it difficult to achieve return on investment for new equipment and process development without any acknowledgement of future costs.
Decreasing Costs. What approaches are required?
There are three main approaches for lowering costs of the semiconductor industry. The first is to cut inefficient extra costs. This is a traditional and well-known approach. Many methods have been proposed and adopted, including global procurement, outsourcing, the foundry business, short cycle time manufacturing, TQC, the use of common units/components and so on. In addition to these conventional methods, new ones have been adopted, such as e-diagnostics, e-commerce, and etc. These must continue to be developed.
The second is decreasing cost by improving performance. This is more effective for both the customer and the supplier in the industry. This is because high-tech businesses can only thrive through technological innovation, which is their only source of value. This approach has also has been pursued, but has weakened recently due to the increasing speed of innovation.
The last approach is relatively new. I would call it “bird’s eye view cost control”. There are two major categories in the semiconductor manufacturing industry; front-end processing (wafer fabrication), and back-end processing. Historically, the costs of front-end processing have been less than back-end processing according to Moore’s law. As a result, some devices’ testing cost is higher than the cost of chip fabrication. Therefore, there is now pressure to decrease testing costs, and DFT (Design-For-Test) is being seriously considered. This approach is also effective for shortening design cycle time of new devices, especially SOC. Wafer level packaging is another approach to reducing the back-end cost from a packaging point of view.
We also need to keep in mind that there are sometimes exponential benefits of the Performance Improvement method, while cost reduction, and bird’s eye cost control methods are done incrementally.
5. Doing it yourself vs Making it happen
The next question is how can we decrease costs?
There are also two approaches. These are, ‘Do it yourself’ and ‘Make it happen’. Core company functions are of course handled internally. Although the core portions are selected depending on the company’s strategy, their limited resources will be concentrated on the target of increasing performance, which differentiates the company from others, and provides many benefits for both the customer and the company. The company should utilize the strengths of each partner in order to focus on their core competencies. This will clearly identify which portions cannot be done alone. Then, the company should consider collaboration with suppliers, regional/global consortium, academia, and government institutes. Collaboration with competitors should also be considered through joint development, standardization, and etc. It is now important to note that the ‘Make it happen’ model is established for the entire semiconductor industry. In the future, we can expect to see more collaboration at all levels of the equipment development chain. Collaboration among equipment suppliers and sub-system/material suppliers allows risk sharing and accelerated tool development. Collaboration between the equipment supplier and the customer results in solutions that are well matched to the problems and accelerated deployment to high volume manufacturing.
Finally, we are seeing the beginning of innovative methods for service and support delivery, such as E-commerce, E-diagnostics, E-learning, E-documentation, E-collaboration, and E-delivery of critical information. Collaboration with customers is critical to realizing the benefits of this new information technology while maintaining security for all parties.
Conclusion
In the New Economy era, the concept or meaning for value, cost or decreasing costs include the following:
The value concept includes software solutions, expertise, service and so on, rather than hardware or product solutions. This is created through networking activities in the industry. The cost approach includes not only the accumulated or previously invested costs, but also includes factoring in the total future cost investment. The decreasing cost approach needs to be pursued not only through conventional approaches, but also through a bird’s eye view approach. These are essential, but are limited without an increase in performance.
The principles of value, cost or cost reduction will change dramatically in this New Economy era. The acceleration of technology to commodity and the acceleration of technological innovation require us to become more creative in our approach to problems and bolder in our adoption of new thinking. We will add value to our products with software, with innovative technology, with innovative service capability and with more effective products. However, a new spirit of collaboration will be required so that all members of the chain can prosper in the ‘New Economy’ of the semiconductor industry. We must have these perceptions in order to overcome the semiconductor industry’s cycles and to prevent future downturns.
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