Chips' big chill
INDUSTRY REDRAWS LANDSCAPE TO SURVIVE ECONOMIC COLD SPELL
By Therese Poletti
Mercury News
siliconvalley.com
As the semiconductor industry's worst-ever downturn stretches into its third year, even those who believe a recovery may be just months away are tempering their optimism and hedging their bets. It's been a slow, gradual process, but analysts and executives are coming to realize that the good old days of sustained double-digit growth are not coming back.
Whenever this dark chapter finally ends, the $140 billion industry will look very different than it did when the downturn began in 2000. The slump, which coincided with an industry-wide shift to new technologies, has permanently changed the way chip companies do business.
``We remember '85 as the worst, up until the one we are in right now, which is twice as deep and twice as long,'' said Aart de Geus, founder and chief executive of Synopsys, a maker of computer-aided design software for chip designers in Sunnyvale. ``That is not a downturn. I think it's a recasting of the whole semiconductor industry.''
There are several trends at work altering the chip landscape:
• Large companies are following their smaller brethren to a model that relies on independent contract manufacturers known as ``foundries.''
• The industry's largest players are also entering into joint ventures among themselves and with smaller companies for manufacturing and design.
• Companies are abandoning product areas and businesses that are either risky or peripheral to their core operation.
• Perhaps the biggest change of all for the industry: The cost of transitions to new technologies, combined with persistently low profit margins, will mean slower growth in the years ahead.
Late last year, at the Semiconductor Industry Association annual forecast dinner, Advanced Micro Devices Chairman Jerry Sanders said the industry was headed for a ``sea change'' with its compounded annual growth rate expected to slow to 8 percent to 10 percent, down from an average growth rate of 13 percent to 15 percent that been the norm for the past two decades.
After peaking at $204 billion in revenue in 2000, sales plunged to $139 billion in 2001, as demand for PCs fell off dramatically. At the same time, orders for communications products plummeted after a huge over-ordering binge by telecom-equipment makers. That sudden vanishing of demand for PCs and telecom gear, combined with continually falling prices, made 2001 the first year sales of electronics declined worldwide. Last year, the chip industry and the equipment makers who serve it both saw revenue sink to 1995 levels.
Now, executives say, demand is returning as prices continue to fall.
T.J. Rodgers, the founder and chief executive of Cypress Semiconductor, believes that the industry will see a big rebound this year and possible product shortages as early as next year. ``The worse a recession is, the bigger the boom is going to be on the other side,'' he said.
But whether demand returns with a big bang or just a whimper, many executives concur that the heady days of double-digit growth are likely over and that the industry is maturing.
``This recession has created a different mindset that will be with us for awhile,'' said Wim Roelandts, chief executive of Xilinx, a San Jose maker of programmable logic devices.
Beyond profits, the downturn has also cost the industry thousands of jobs as companies try to align their businesses with reduced revenues. In November 2000, the chip business in the U.S. employed 309,000, according to the Bureau of Labor Statistics. In March, that number fell to 248,000. ``It's been total carnage,'' said Risto Puhakka, a vice president of VLSI Research, a market research firm in San Jose.
One unforeseen consequence of the downturn is the blossoming of global partnerships. Now, more than at any time in its history, the industry has embraced a variety of collaborative structures -- from joint development deals to shared manufacturing.
With the contract foundries in Taiwan, Singapore and China now the center of semiconductor manufacturing, only giants such as Intel and Texas Instruments can afford to build their own plants. These fabrication facilities (also known as fabs) cost a minimum of $2 billion to equip with the most advanced chip-making equipment.
The move to 300-millimeter wafers is one of the major technology shifts coinciding with the current downturn. These silicon wafers, about 12 inches wide rather than the older 10-inch standard, will further drive costs down as companies get 30 percent more chips off each wafer. But initially, the equipment to retool the factories is expensive.
New materials
Also adding to the increasing costs is a shift to new materials and processes, such as using copper wiring to make electrons move faster, silicon-on-insulator technology to conserve power and new lithography tools to create ever-shrinking transistor sizes.
All those expensive new technologies and manufacturing upgrades are forcing companies into partnerships of convenience that would have been unheard of 10 years ago.
AMD is a good example of a company once committed to manufacturing its own chips that has recently formed joint ventures to help defray the increasing capital spending costs. This is a great leap for a company whose co-founder, Sanders, was once quoted as saying, ``Real men have fabs.''
When Intel got fierce with price wars amid declining demand for PCs, AMD needed to lower its costs, yet still develop more advanced PC processors. In February 2002, AMD signed a deal with United Microelectronics (UMC), the No. 2 foundry in Taiwan. They intended to jointly build a 300-millimeter plant to make advanced chips with line widths of 65 nanometers. One nanometer is about one-thousandth the width of a human hair.
AMD-IBM deal
But when the work with UMC didn't progress quickly enough, AMD signed a deal with IBM. The computer giant offers customers design services, along with chip manufacturing, as a way to leverage its own research expertise, and pay for its $2.5 billion state-of-the-art plant in East Fishkill, N.Y. AMD now has about two dozen engineers working at IBM to develop advanced chips.
``A lot of people in the past have said, `We will do everything ourselves.' You can see now that people are trying to do different things,'' said Ray Burgess, a vice president and director of strategy at Motorola's semiconductor group.
In 2000, with its semiconductor business struggling, Motorola slashed its factories from 28 to eight. It now works with the world's largest foundry, Taiwan Semiconductor Manufacturing Co. (TSMC), and has joined a development effort with Philips and STMicroelectronics creating an R&D lab near Grenoble, France.
Analysts expect these unlikely marriages to continue.
``Ultimately, most companies won't be able to afford a fab anyway,'' said Joe Bryne, an analyst with Gartner Dataquest in San Jose. ``It's just a matter of time before this middle ground gravitates to this foundry, fabless model.''
While some chip makers have been busy forming alliances during the downturn, others have decided to focus on their strengths, and have streamlined their businesses.
Intel of Santa Clara, for example, pulled the plug on a series of high-risk ventures it had initiated during the boom years, such as a costly gamble on Web hosting and data-center services, which resulted in a $100 million write-down.
The chip giant also has gradually sold off some start-ups it bought, and disbanded smaller unsuccessful products or businesses, including its AnyPoint home networking products and consumer electronics business, both in 2001.
National Semiconductor, based in Santa Clara, decided to get out of its once-ballyhooed information appliance business and focus on its core product, analog chips. It also tried unsuccessfully to sell its cell-phone processor business.
The moves to focus on essential product lines have pleased investors and changed the structure of Silicon Valley's biggest chip companies. Gone are the days when National and a few other companies offered a huge variety of chips.
``(It) is the decline of the number of companies that did the soup-to-nuts chips, a full-service vendor,'' said Kevin Krewell, an analyst with MicroDesign Resources in San Jose.
Diversified companies such as Motorola, Philips and the big Japanese conglomerates are even questioning if they should be in the semiconductor business at all, said Bill McClean, president of IC Insights. Late last year, Mitsubishi and Hitachi formed a joint semiconductor company, combining each of their chip businesses into a $7.3 billion revenue giant.
``A lot of companies are choosing their own model, whether its fabless, a merger, a spinoff, or something different, the downturn has really spurred that change,'' McClean said.
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Contact Therese Poletti at tpoletti@mercurynews.com or at (415) 477-2510. |
