Electronics is unusually an evergreen industry where companies make profit, yet end-product prices go down significantly after a brief period of price skimming. A product phases out quite fast (in case of smartphones every 1.5 to 2 years), but still yields big bucks for successful companies in its value-chain. How does this happen? How long it will continue to happen?
Well, the answer to the first question is highly capital intensive fabs with large wafer capacities and intelligent brains to invent newer ways of doing things with better YoR(Yield of Results), lesser CoR (Cost of Result), and lesser ToR (Time of Results). Of course, the worldwide demand lets it happen too. However, the demand does not sustain beyond a certain price-point; IoT (Internet of Things) market is a live example today, there is a tremendous latent demand, but at low price-point. The end result is – the price reduction has to continue, perhaps with reduction in OPM (Operating Profit Margin) of the companies. So, one can guess, the semiconductor business which started as a ‘blue ocean’ in the last century started turning ‘red’ due to couple of economic recessions and slowdown in this century. Several efforts are being made to keep the water ‘blue’, but how long will it remain blue and to what extent? Let’s analyze some data from an IC Insights’ report about fabs, published last week.
Between 2009 and 2014, just after the last global economic recession which started in 2008, 83 wafer fabs were either closed or repurposed. Majority of the fabs that were closed were 200mm and below wafer fabs. Arguably, the move was towards larger wafers to produce devices at lower cost. However, the economic stress is visible with the closure of some 300mm wafer fabs too in 2013.
This shows the need of consolidation in fab business. Although large mergers have happened in the past, or happening currently, more will happen going forward. New wafer fabs, and wafers at cutting edge technology nodes are no cheaper. The only way is to cut operational cost through consolidation. To me it appears to be a case of good business opportunity for large pure-play foundries like TSMC, GLOBALFOUNDRIES, UMC, and maybe Samsung foundry as well that can supply large wafers at reasonable cost, if not lower. Semiconductor designs should stay fabless.
A region wise graph of closed wafer fabs clearly shows how economies of different countries have affected the fab businesses in those regions.
Japan has closed most of the 83 fabs followed by USA and Europe. This exactly tallies with Japan, a leader in semiconductor business in 1990s, reduced to just one semiconductor company (Toshiba) in 2015 top10 list of semiconductor companies.
How will the electronics cost go down? Wafer cost is not expected to go down further. More mergers and consolidations are going to take place, and still a few 10nm and 7nm fabs will appear. If the fabs business gets consolidated at some pure-play foundry level, then the ocean may turn blue for fabs. However, the semiconductor equipment suppliers will bear the brunt because opening of new fabs will be limited. The electronics cost may stay where it is, if it does not go down further.
One thought comes to my mind is about new fabs in the regions where there are none existing; India is a live example. Should India still go for a new fab when there are fabs closing around the world? My opinion is, even if India opens a fab, it should go for the latest, not less than 300mm, may be 450mm so that it stays cost-effective and relevant for long term to recover the CAPEX and get enough ROI.
Pawan Kumar Fangaria
Founder & President at www.fangarias.com