Foundry Pioneer Bullish on Trend Says share of chip biz will double
From Electronic News--March 15, 1999
By Robert Ristelhueber
Phoenix--Nearly 30 percent of all semiconductor manufacturing will take place in foundries by 2008, double the current rate, predicted Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co. (TSMC), last week.
Giving the keynote speech at the Semico Research conference here, Chang said that growth will come as more semiconductor companies see the wisdom of eschewing their own wafer fabs in order to concentrate on chip design. "The foundry model allows them to focus on their core competency," he said. "I think it's a foolish company that distracts themselves and worries about a fab."
Chang, widely considered the founder of Taiwan's chip industry owing to his formation of TSMC in 1986, estimated that all IC wafer manufacturing currently amounts to $37.6 billion, of which $5.4 billion is believed to be represented by the foundries. By 2008, foundries will account for $39.4 billion of the total $137 billion manufacturing pie, he added. That represents a compound annual growth rate of 22 percent, "considerably faster than the total IC market."
That growth estimate was immediately called too conservative by Rob Chaplinsky, a partner in Mohr, Davidow, who also spoke at the conference. He predicted the foundries will account for "well north of 50 percent" of all wafer production by 2008.
Chang cited the usual reasons why chip companies are following the fabless route, including the low cost of entry. But he also claimed that the foundries have greatly improved their performance, to the point where they can outperform many captive fabs. In the area of process technology, for example, he said, "Intel was once two years ahead, but we anticipate in the 0.18-micron game we'll be fully convergent with Intel."
Foundries are becoming adept at protecting and facilitating the flow of intellectual property (IP) among the different players in the emerging system-on-chip era, he said. "That means in the customer's eye, our fab is like his own fab in confidentiality and information access."
Chang took a shot at chip companies that contract out part of their chip capacity for foundry. "Very, very few, in fact I would say none of them have succeeded. Why? The corporate culture between a normal semiconductor company and a foundry is vastly different. One is service oriented, and the other has other priorities, other bosses they pay homage to. That spells the difference between a good foundry and a part-time, amateur foundry."
Chang gave an in-depth picture of the financial structure of the foundry business, which he said requires an average of $2 in assets for each dollar in annual sales, assuming an 80-90 percent utilization rate. He estimated that Intel probably has less than $1 in assets, a fabless chip company 20 or 25 cents in assets, and a PC company 10 or 15 cents in assets for each dollar in annual sales.
In order to self-fund its growth and not lose market share, a foundry will need to average 26.4 percent profit after tax over the next decade. "So, some customers of our will say, 'Why the hell should you make that when we only make 6 or 7 percent?' Well, the fact is that they make more return on assets and return on equity than we do, even though we make more return on sales."
Chang said TSMC's 8-inch fabs are about 90 percent full right now, while its 6-inch fabs are about 70 percent full. He expects TSMC to have sales of close to $2 billion this year. Research and development costs account for about 6 to 7 percent of sales.
With more integrated device manufacturers (IDMs) choosing to utilize foundries, how will TSMC balance its needs with the needs of its traditional fabless customers? "We have been good partners with the fabless industry since we started," Chang answered. "It was they who made us successful and in turn it was we who helped make them successful. We're not going to give up that marriage because there's a new girl walking around the block. Sure, we'll accommodate the IDMs, but I don't see a real problem because the IDMs are pretty gradual in their outsourcing."
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