Outsourcing and Offshoring in the Semiconductor Industry

1
Outsourcing and Offshoring in the Semiconductor
Industry

• David A. Hodges
• Robert C. Leachman
• Competitive Semiconductor Manufacturing Program
• UC Berkeley
• Sloan Industry Centers Annual Conference
• Atlanta, GA April 19-21, 2004

2
U.S. Integrated Device Manufacturers(e.g. Texas
Inst., Motorola, Intel, )

• Labor-intensive chip assembly work mostly
  off-shored since the 1960s
• Initially, plants served just one company
• More recently, independent assemblers and testing
  firms are serving multiple customers
• IBM automated in the 1960s
• Automation of assembly and testing now spreading
  industry-wide and world-wide

3
U.S. IDMs, 1960-1990

• Capital-intensive wafer fabs were off-shored
  selectively important aid market access
• Cost of direct labor not a significant factor
• US ownership, international professional staff
• Hazards weak infrastructure, long supply lines,
  business and political climate
• Early examples Texas Instruments (Japan), Analog
  Devices (Ireland), Intel (Israel)

4
U.S. IDMs, 1960-1990

• Skills-intensive process development and product
  design mostly remained in the US
• Firms sought advantages from proprietary
  technologies
• Few skilled professionals available abroad
• Some exceptions Chip design centers in England
  (TI), Israel (Intel) typically devoted to
  specific products for worldwide markets
• Sales, marketing, customer support efforts
  carried on world-wide

5
Changing business modelsIDMs forced to become
specialists

• Intel, AMD microprocessors
• Samsung, NEC, Micron, Infineon memory
• Texas Inst., STM chips for cell phones
• These are standard products, MM units same
  designs purchased by many competing original
  equipment manufacturers (OEMs)
• Above categories represent about ½ of total
  worldwide semiconductor production
• What about the other half?

6
Factors leading to foundries

• Competitive modern wafer fabs cost 2-4B
• employ 1000 people (total for 7 x 24 operation)
• Annual revenues gt ½ fab cost for profitability
• Worldwide standardization of mfg. process
• Innovative design firms require only a fraction
  of one fabs capacity
• Vastly different management skills design vs.
  fab
• IDMs rarely succeed in serving fabless firms
• Foundries were established to serve this need
• Leadership of Morris Chang!

7
Fabless-foundry business model

• Fabless firms define, design, market chips
• small investment, quick response
• 300-500K revenue/employee
• 50,000 well-paid U.S. jobs 13,000 ROW
• Asian foundries fabricate chips for many firms
• huge investments fixed costs 75 of total
• 15,000 factory jobs, well-paid by local scales
• highly automated for tight process control
• short production cycle
• timely intro of new technology generations
• excellent customer service
• some niche specialists with old technology

8
Outsourcing, Offshoring?

• Fabless design centered in the U.S.
• MS, PhD grads of top U.S. universities
• U.S. is 1 (78 of 03 revenues)
• Taiwan is 2 (11 of 03 revenues)
• Equivalent design skills very rare elsewhere
• Most silicon foundries are in Asia
• Many process development jobs in Asia
• Many grads of top US universities
• Weak U.S. domestic investment (except Intel)

9
Food chain for semic. industry

• Semiconductor production equipment raw
  materials are supplied mainly from U.S., Japan,
  and Europe
• U.S. leads in key areas
• MS PhD education
• Computer-aided design for semiconductors
• University-industry cooperation
• Climate for innovation
• Market for advanced technology
• Government support is strongest in Asia

10
Factors influencing location for manufacturing
investments

• Trophy value of semiconductor fabs
• (Think about the steel industry in the 1960s)
• Trophy sought by govts worldwide tax
  incentives!
• China is the current leader in incentives
• Most capital comes from outside PRC
• Fading concerns about investment risks
• Weaker controls on U.S. equipment export
• Commodity status of manufacturing technology
• Return of expatriates spread of higher education
• Protected IP less important than know-how
• Improving infrastructure in China, other nations

11
Chinese competition for foundry business

• Semiconductor Manufacturing Intl Corp. (SMIC)
• largest, most advanced Chinese foundry
• founded in 2002 3 8 fabs in Shanghai
• purchased Motorolas 8 Tianjin facility
• 12 fab in Beijing under construction
• 3/17/04 1.8B IPO in HK NY -12 as of 4/6/04
• U.S. filed WTO complaint re Chinas lower VAT
  for locally designed or manufactured
  semiconductors
• China remains far behind in chip design
  capability
• China establishes unique domestic standard for
  cellular telephony Chinese partners required

12
2003 Foundry revenue leaders

• 1. TSMC (Taiwan) 5.9 billion 26
• 2. UMC (Taiwan) 2.7 27
• 3. Chartered (Singapore) .73 49
• 4. IBM (U.S.-IDM) .56 - 27
• 5. NEC (Japan-IDM) .43 33
• 6. SMIC (China) .37 630
• 7. Hynix (Korea-IDM) .34 39
• 8. DongbuAnam (Korea) .33 27
• 9. Jazz (U.S. ex-Rockwell) .19 16
• 10. HHNEC (China) .17 13
• 11. SSMC (Singapore) .16 82
• 12. X Fab (E. Germany) .13 27

13
Survival strategies of U.S. IDMs

• Intel heavy investments try new markets
• Texas Inst limit investments use foundries
• IBM partnered with Chartered, Infineon
• AMD more German incentives in Dresden
• Micron innovation more cost reductions
• Motorola divesting semiconductor business
• National product focus use foundries
• Analog Devices limit investments foundries

14
Conclusions for semiconductor industry

• Its a fully globalized industry
• Microprocessors Intel unchallenged
• Memory is a commodity Samsung leads by far
• IDM business model is dead for other products
• U.S. leads in innovative chip design
• U.S. unchallenged in design software
• design software skills are bound to spread!
• Asia leads in foundry manufacturing
• U.S. is not a serious competitor poor ROI
• TSMC, UMC are likely to remain leaders
• Overcapacity looms SMIC payoff is uncertain