Fabless IC vendors face tightening wafer supply
By Crista Souza
Electronic Buyers' News
(04/30/99, 04:03:45 PM EDT)
Cheap and abundant silicon may soon be a thing of the past, as demand for semiconductor wafers threatens to outstrip the industry's capacity to process them.
That's what some analysts are saying in the wake of projections that wafer requirements by fabless companies in 1999 will increase 43% over last year's consumption, to a total of 1.5 million wafers. The bulk of that growth-27%-is expected to occur in the first half of the year.
This anticipated increase in demand, coupled with the tendency of integrated-device manufacturers (IDMs) such as Motorola, Philips, and Toshiba to rely on foundries for a greater portion of their semiconductor production, means competition for fab space may be intense.
"We've seen the capacity being soaked up by the other vendors out there," said Chuck Tralka, director of strategic marketing for QuickLogic Corp., which relies on Hsinchu-based Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) for its chip supply.
The concern is so great that the Fabless Semiconductor Association, which sponsored the 1999 wafer and packaging demand survey, is forming a task force to study IDMs' foundry wafer needs, said Jodi Shelton, executive director of the FSA, Dallas.
Shelton said that FSA will be meeting next week with the 'Big Three' foundries -- TSMC, UMC, and Chartered -- to discuss the IDM outsourcing trend and make sure they're prepared for the onslaught of new demand.
By 2003, IDMs are expected to contract out 25% to 28% of their total IC fabrication, compared with just 8% today, according to Donaldson, Lufkin & Jenrette Inc. (DLJ), San Francisco. What's more, pure-play foundries, which today produce 10% of the industry's devices, should account for 50% of total semiconductor production by 2012, according to estimates from Dataquest Inc., San Jose.
Though market watchers differ as to the severity of a possible wafer crunch, most agree the industry could be undersupplied by next year.
The good news is that foundry wafer prices continue to fall. The sharpest declines have been in leading-edge 0.35- and 0.25-micron technologies, which now average $27 to $40 per square inch of silicon, said Dataquest analyst James Hines. Wafer prices may start to creep up again in the latter half of the year, as demand for higher-value semiconductors prompts foundries to shift their mix away from "filler" such as DRAM, said analyst Joe Moore of Goldman Sachs & Co., New York.
But while chip demand is expected to increase, investments in new manufacturing capacity have been curtailed, leaving some to worry that foundries-now running at near-sold-out production levels-won't be equipped to handle the influx of new orders.
If the industry's capital spending stays at the current rate of less than 10% of revenue, the tightening supply situation may be aggravated, "possibly creating serious supply shortages in 2000," said DLJ analyst Charles Boucher.
However, if companies suddenly accelerate capital expansion, the pendulum could swing back to oversupply, noted Mark Edelstone, an analyst with Morgan Stanley Dean Witter & Co., San Francisco. "It's better to have tighter capacity than looser, because then the pricing power comes back to the semiconductor industry and drives a new growth cycle," he said.
Foundries have learned from past cycles to be wary of optimistic forecasts, and now ramp new capacity in moderation, according to Kurt Wolf, director of marketing for TSMC USA, San Jose.
"We've started to put 'placeholders' in our fabs in terms of capital equipment to ramp more capacity for the second half of the year," Wolf said. "We're working closely with customers to keep it balanced."
Five years ago, the story was different. Foundries at that time couldn't build wafer plants fast enough, and droves of fabless suppliers bought equity in fabs or secured long-term contracts to guarantee wafer supply and pricing. Many of those agreements are still in place.
Even so, suppliers whose wafer needs are fairly small, such as Sunnyvale, Calif.-based PLD designer QuickLogic, are concerned that, in a shortage, they'll get squeezed out by larger foundry customers.
"Part of [the foundry's] decision has to be the size of a customer and the potential for it to grow into a significant customer," Tralka said. "But I don't think we're likely to be in that [allocation] situation for the near term, because our existing supply agreements will cover our requirements."
According to the FSA survey results, fabless companies believe 60% of their wafer requirements this year will be at 0.35-micron or smaller geometries. In 2000, 39% of the demand will be for 0.25-micron or less, up from a projected 19% this year and a mere 2% in 1998.
Yet Dataquest's Hines contends that excess capacity in these geometries, which peaked at 32% in 1998, will persist throughout 1999. "It's unlikely the entire oversupply could be absorbed within just a few months," he said.
Demand projections were based on information provided by 82 fabless companies detailing their wafer needs by volume, geometry, layers of metal, and process, and their packaging needs by volume, technology, and power. Past wafer-demand surveys have had greater than 80% accuracy for the entire year, while projections for the first half of the year have been on target, said Shelton of the FSA.
Along with forecast wafer demand and the shift to smaller process geometries, survey participants said their unit-packaging needs will increase 138%, or by about 1 million units, from 1998 to 1999, with thermally enhanced packages growing at more than twice the rate of standard power packages.
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