Analysis: Quake forces reexamination of sourcing strategies
By Robert Ristelhueber
EE Times
(09/24/99, 11:24 a.m. EDT)
SAN JOSE, Calif. — The earthquake this week in Taiwan might seem an extreme example of risk in the supply chain. But not to industry veteran John East, president of Actel Corp. and alumnus of Advanced Micro Devices Inc., among other suppliers.
"I've gone through power failures, politics, exchange rate fluctuations, typhoons, export regulations, yield crashes, and a volcano," East said, rattling off some of the plagues that have hit his supply lines through the years. Those experiences taught him a lesson that paid off for him this past week: spread your risk and suppliers around — a lot.
Securing multiple sources for a single component, generally called second sourcing, was more common before the 1980s. Then microprocessor vendors Intel Corp. and Motorola Inc. took the lead in convincing customers that it was safe to rely on just one vendor for a key component. Since then, OEMs have gradually moved toward single sourcing for many of their parts, preferring to reduce the number of vendors they must deal with.
But as this week's events in Taiwan demonstrate, there are risks in relying on one supplier, or one geographic region, for the bulk of your components. Intel and Motorola, after all, adopted a stealth form of second sourcing, using multiple fabs to produce individual parts. Intel's "copy exact" strategy of building identical fabs enabled it to quickly shift production around from site to site, guaranteeing an uninterrupted supply to customers.
The industry may have learned a lesson the hard way with in Taiwan quake. Before the quake, PC OEMS seem to have been unconcerned, for instance, that about 80 percent of their motherboards were coming from Taiwan. Fabless chip companies also saw no problem in relying on Taiwan-based fabs for the vast majority of their devices.
Whether the recent disaster will cause some to hedge their bets in the future remains to be seen, and Taiwan's growth may depend on the answer. But as East's comments reveal, there are no risk-free regions or suppliers. Taiwan, after all, has been living under threat of military attack from mainland China since 1949, but that didn't deter the electronics industry from flocking to the island.
Silicon Valley sits atop numerous geological fault lines. A large share of the world's DRAM supply is produced within artillery range of North Korea. A sizable electronics industry, including a wafer fab owned by Intel, is now situated in Israel, site of four wars in the last five decades.
The trick, according to East, is not in avoiding risk, which is impossible, but in spreading it around. Actel is using three different processes — antifuse, SRAM and flash — for its field programmable gate arrays. It uses foundries in Japan, Singapore, Taiwan and Germany to handle the load.
"Right now we're launching three new families. The last thing we'd want is to have an earthquake stop them," East said. Taiwan accounts for only 10 to 15 percent of Actel's supply, so the earthquake will have a relatively minor impact on the company, East said.
Others have adopted a similar model. Altera Corp. is a major customer of Taiwan Semiconductor Manufacturing Co. (TSMC), which saw its wafer fabs grind to a halt on the island this week. But Altera said it expects almost no impact from the event because it is also using TSMC's fab in Camus, Wash. for a large part of its output.
That fab, called WaferTech, is a joint venture of several suppliers. Since it builds Altera's parts in a process that's identical to one used by TSMC in Taiwan, "we can move production seamlessly between them in case of any unforeseen event," an Altera spokeswoman said.
Of course, in times of tight capacity, as is currently the case, it may still not be possible to quickly shift capacity even in Altera's circumstances. But the potential at least exists, unlike the time-consuming process of qualifying a chip in a new fab.
At Motorola's recent "Horizons" forum, company executives said their goal was to have primary, secondary, and in some cases tertiary sources of supply for one product. Motorola only recently began using outside foundries to produce a large part of its wafers.
Even the Taiwan foundries have begun spreading facilities around. In addition to its Camas fab, TSMC is building a fab in Singapore, according to Magnus Ryde, president of TSMC USA. And United Microelectronics Corp. last year acquired a fab in Japan, its first production operation outside of Taiwan.
As in the case of Actel, having multiple sources can be particularly critical when launching a new product family. A major part of a product's profits are usually generated in the first six months following introduction, so an early slip-up can be disastrous.
Nvidia Corp. may be facing such a threat. That company unveiled its GeForce 256 graphics processor just four weeks ago, to a positive reception. But that device is fabbed at TSMC, and it is all but certain that some of its chips will be lost due to the earthquake, said Mike Hara, vice president of corporate marketing at Nvidia.
He argued, however, that some competitors may be worse off. "If the fabs are down for two weeks, then we are looking at a two week loss of product." But if a competitor was nearing completion of a prototype of its chip, which could take a month, a fab shutdown could force it to start the process over, producing a lengthy delay until production, Hara said.
Some geographic regions might seem perfectly safe. New Mexico, for example, where Intel has much of its capacity, would appear completely benign. Wrong. Intel has been battling local environmentalists for years regarding its expansion plans. And according to East, Fairchild Semiconductor was forced to shut an assembly plant in the 1970s because of unrest on an Indian reservation in the state.
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