Here's something that everyone here should be concerned with. Note that in its Annual Report 3dfx specifically noted that it does not enter into supply agreements with its chip fabs but instead uses "buy" orders. If supply does get tight, they may need to change this practice or else face product shortages even greater than normal for Rampage and followon chips. I know that S3 has agreements which lock up some supply for them not mentioning their 10% stake in a Tiawanese chip facility.
Fabless IC Vendors Face
Tightening Wafer Supply
(05/03/99, 1:51 p.m. ET)
By Crista Souza, Electronic Buyers' News
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 percent over last
year's consumption, to a total of 1.5 million wafers. The
bulk of that growth -- 27 percent -- 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, which relies on
Hsinchu-based Taiwan Semiconductor Manufacturing
Co. (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, in Dallas.
Shelton said 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
percent to 28 percent of their total IC fabrication,
compared with just 8 percent today, according to
Donaldson, Lufkin & Jenrette (DLJ), in San Francisco.
What's more, pure-play foundries, which produce 10
percent of the industry's devices, should account for 50
percent of total semiconductor production by 2012,
according to estimates from Dataquest, in San Jose,
Calif.
Although 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 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., in 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 percent 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., in 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, in 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 percent of their wafer requirements this year
will be at 0.35-micron or smaller geometries. In 2000,
39 percent of the demand will be for 0.25 micron or
less, up from a projected 19 percent this year and a
mere 2 percent in 1998.
Yet Dataquest's Hines contended excess capacity in
these geometries, which peaked at 32 percent 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 percent 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 percent, 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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