By David Lammers

Journalists are trained to not make assumptions. But it is hard not to. A few years ago, many of us routinely accepted the idea that the semiconductor industry is a “commodity industry” that had reached a “mature” phase.

In the midst of this low-growth scenario was another pessimistic assumption: that the Chinese would take over, leaving crumbs for the rest of us.

Here we are in 2011, a few weeks after a devastating earthquake – a good time to revisit assumptions.

Perhaps we should start with the idea that the chip industry’s best days are behind it. At the SEMI Industry Strategy Symposium Europe, Malcolm Penn, chief analyst at Future Horizons, presented data on semiconductor industry revenues which grabbed much attention.

Year Market ($B) Growth (%)

2010 $298.315 31.8%

2011 $325.040 9.0%

2012 $377.046 16.0%

2013 $369.505 -2.0%

2014 $399.066 8.0%

2015 $454.935 14.0%

Source: Future Horizons.

If the chip industry does grow annual revenues from roughly $300 billion now to >$450 billion in five years, it will benefit those who take big risks: companies which borrow to develop new products and/or build new factories.

Malcolm Penn

And it was Penn who noted that TSMC “thunders on” by boosting capex by 30 percent this year, though it will take a couple of years before that spending results in significant new capacity.

China’s Clone Cell Phones

Which leads to a second assumption that was challenged at the SEMI ISS meeting: that China will become a major player in the chip industry. Of course, we all know that it will, simply because the PRC’s population is so large, smart, hard-working, and hungry for information and entertainment technology.

It was Bill McClean of IC Insights who traveled from Phoenix to Grenoble to tell the largely European crowd that IP protection really, really matters in the foundry industry. When McClean spoke (in early March), industry scuttlebutt had it that Apple would switch a big chunk of its foundry business to TSMC, and perhaps, GlobalFoundries. McClean largely agreed, saying that Samsung just competes too closely with Apple at the systems level. Another factor is that TSMC is now spending enough to ensure Apple that it can handle, say, a $400 million piece of new business, he said.

Bill McClean

“Samsung is Apple’s biggest competitor: its Galaxy smartphones and tablets compete with the iPhone and the iPad. Taking your chip design to your biggest competitor is a very scary thing to do.”

We have to assume (there’s that word again) that Samsung executives are figuring out an iron-clad IP protection program for Apple.

But according to McClean’s line of thinking, any fab making processors for Apple won’t be in China. “China’s IP protection is terrible. It must be a very scary thing to do to bring a leading-edge design into China. Broadcom and the big fabless companies would never do that.”

As evidence, McClean said China’s clone cellphone manufacturers make a total of 130 million knock-off handsets every year in the PRC. “The Chinese government knows about this, and it has gotten so big that they are not going to shut down the illegal cellphone industry. IP production is just not there in China.”

But there we go again: making assumptions. SMIC, China’s largest foundry, has brought on David N.K. Wang as its CEO. Wang, an extremely capable person, is a native of the PRC who worked at Applied Materials for many years. Wang no doubt has a plan in place to assure Broadcom and others that SMIC, indeed, will be able to provide iron-clad protection of their design IP. We assume so.

By David Lammers

My wife’s sister, Takako, now 57, and her husband Kiyoshi, live in Fukushima City. I got to know them when I married, back in 1983, and over the years they have provided me with a close-up view of what living in Japan means. Now that the nuclear meltdowns have occurred just 40 miles or so from their house, that takes on a new meaning.

Mieko and her extended family are from Niigata prefecture, near the Japan Sea. Kiyoshi is from Fukushima, and when he and Takako-san met during college and married, she moved there and became a nurse at a hospital. Later, Mieko’s mother retired from her nursing job in Niigata prefecture and moved to Fukushima, where she lives now in a nursing home.

It was Kiyoshi, a broad-shouldered man, who provided me with a window into Mr. Everyman, Japan style. After we married, Mieko and I were blessed with four children over seven years. We lived in western Tokyo, and every few months over 15 years we would pile into our pale green Mazda station wagon and drive the five hours to Fukushima City, northeast of Tokyo.

There, Kiyoshi, Takako, and their three children lived in the second story of the extended family’s house, just a few steps away from a shrine where our children could run around. Kiyoshi’s parents, later joined by Mieko’s mother, lived downstairs.

When I first met him, Kiyoshi ran a Shell station in Fukushima, fixing cars and pumping gas (Japan was not a self-service nation back then). After Japan’s economy went into a downturn, Shell Japan took an unusual step. Rather than fire workers, Shell  asked them to go door-to-door selling electronic back massagers to the elderly in the area. After a long day at the station, Kiyoshi would dutifully go out several evenings to peddle the vibrating massagers. He didn’t like it much, but he did it.

Later, he got a better-paying job with a company making plastic molding machines. That turned out to be another view of modern Japan. One by one, the company’s customers moved their manufacturing operations out of high-cost Japan, to China and elsewhere. As a field service person, at first Kiyoshi often spent weekdays away from home teaching customers how to maintain their equipment. Then even that dried up, as there were few customers that did manufacturing in Japan.

Again, he switched jobs, getting up at 3 a.m. to deliver bottles of milk to homes. After several years of that, he now works at a Volvo car dealership in Fukushima.

These past 28 years, as Takako struggled with pancreatic problems that required surgery and as Kiyoshi adapted to Japan’s changing economy, they have dealt with many of the same issues that people everywhere face. How to pay for college. How to care for elderly parents. How to get along with and support each other, in good times and in bad.

Kiyoshi, perhaps because he was mechanically inclined, provided a good contrast to my wordsmithing job writing about electronics. We enjoyed seeing our children getting to know each other, taking them on weekend beach vacations and the like. We drank, barbecued, photographed, and talked, bridging the language barrier somehow with mutual understandings.

It was ironic. Being a Japanese, in a country which has a reputation for lifetime employment, Kiyoshi was the one who was forced to change jobs. And the economic shifts wore on him.

Now, with radioactive material spewing forth, I worry about them, and about Mieko’s elderly mother. Fortunately, they have geography somewhat on their side. The Fukushima Daiichi power plant is near the ocean. Fukushima City, which has perhaps half a million people, is ringed by mountains. Sitting in a bowl, our hope is that the toxins won’t breach the mountains.

Kiyoshi and Takako briefly evacuated, driving to an aunt’s house in Tokyo for the weekend after the quake. Then they turned around and went back to Fukushima, where they are now. It is almost impossible to get gas in that region — fuel is being saved for the emergency vehicles. As a car man, that is probably hard on Kiyoshi, but at least he is alive. I imagine he is one of those Fukushima residents standing in line, patiently waiting for bottles of water and other essentials.

Like all Japanese, Kiyoshi grew up with earthquakes, volcanoes, typhoons, and the like. It is a culture that has prospered because people take care of each other, don’t much admire greed and ego-driven behavior, and work hard to survive. This is just another test, presented by Nature, though an extraordinarily tough one.

By David Lammers

As the semiconductor industry becomes more concentrated, both in terms of which companies are investing and where those investments are going, being near a cluster is paramount to success. Europe has three such clusters – Intel’s Leixlip facility in County Kildare, Ireland; the Dresden, Germany complex where GlobalFoundries is expanding; and Grenoble, France, where a combination of STMicroelectronics, the French research center Leti, and Soitec all have fabs.

A fourth cluster may one day develop in Abu Dhabi, where GlobalFoundries is likely to build a fab several years from now. Already, about 60 engineers from Abu Dhabi have gone to Dresden for training, said Gitta Haupold, vice president of Silicon Saxony. At the very end of the SEMI Industry Strategy Symposium (ISS) Europe, committee chair Cor Claeys of imec said Abu Dhabi was being considered as the location for ISS Europe 2012. The possible Abu Dhabi venue is an indicator of how Greater Europe is expanding its virtual border to include not only Moscow, where SEMI is holding Semicon Russia in late May, but in the Middle East as well.

Intel’s continued investments in Ireland, and the GlobalFoundries expansion at Dresden, have helped SEMI Europe to expand by 70 members, to around 1,200 companies. Indeed, Europe has a strong base of equipment companies (ASML, ASM International, EV Group, Oerlikon, Aixtron and others) and materials suppliers (Soitec, BASF, and others). Many of today’s fabs are built by the M+W Group.

But participants at the ISS Europe meeting said there is a strong feeling that Europe is slipping badly while Asia grabs an ever larger share of semiconductor manufacturing.  Slowing down the shift of chip manufacturing to Asia, and building more energy into the manufacturing clusters in Europe, is a challenge which affects the future of Europe, speakers at ISS Europe said.

André-Jacques Auberton-Hervé, chairman of the SEMI Europe advisory board and the CEO of the Soitec Group (Bernin, France), said “semiconductors are as important to the future of Europe as is access to natural resources.” Heinz Kundert, president of SEMI Europe, said “losing competitiveness in silicon means losing our base in all industries.”

Indeed, the trend line is alarming for Europe. For decades, Europe accounted for 20-30 percent of semiconductor capital spending. That declined to 8-10 percent, and in the last few years even that meager share has dropped to only 4 percent, said Jean Therme, Director of CEA Grenoble, quoting statistics from IC Insights. (During an Applied Materials conference call last month, the company said roughly 10% of its fiscal Q1 sales came from European customers.)

A few years ago, Europeans seemed resigned to the inevitability of outsourcing semiconductor manufacturing to the large Asian foundries. Then, a light bulb went off when SEMI’s leadership began pounding home a message that many of the industries on which Europe’s economy depends are, in turn, reliant on staying ahead in semiconductors. Autos, medical equipment, wireless and wired communications, are among the world-leading European industries built on integrated circuits.

Neelie Kroes, vice president of the European Commission, summed it up well in a heartfelt message presented during ISS Europe. “Europe is in the middle of a series of crises, including a rapidly aging population, a globalizing economy, and environmental issues. We can’t solve them without a strong IC industry. Just as grain was central to an agrarian economy, and iron and steel to the machine age, it is semiconductors which are central to the information societies we now live in.”

Ms. Kroes described the strengths of Europe in R&D, noting that research means relatively little unless new ideas can be brought to the market by commercial enterprises. “As a Union, as Europe, we need a presence in advanced manufacturing. There is no use trying to do that in a fragmented fashion. We need to take concrete actions, and we need to take them now.”

The semiconductor industry has formed a group of 27 executives and experts, called the European Commission, Key Enabling Technologies (KET), High Level Group. The EU’s KET initiative is pounding home the message that manufacturing is essential for Europe, and that semiconductors, nanotechnology, advanced materials, photonics, and biotech are key to future growth.

Therme, chairman of the group which helped create the ideas behind the list of Key Enabling Technologies, said Europe is in a near-crisis. While 22 new fabs in Asia are planned for 22 nm technology, only one is being planned in Europe. In solar and lithium-ion batteries, Therme described similar stories, including interest-free loans to solar companies in China. Europe does the R&D, but China and Taiwan account for 80 percent or more of the manufacturing in these emerging industries.

Therme’s call for advanced manufacturing was taken up by Carlo Bozotti, CEO of STMicroelectronics, who speaks to public gatherings fairly infrequently. After recounting the successes of European research consortia, Bozotti made a key point: “History shows that when manufacturing relocates, R&D follows soon after.”

There was an consistent line of argument during the symposium: while More Moore (density doubling) continues, More Than Moore is set to play a more prominent role. Bozotti clung to this line by detailing the growing importance of More Than Moore, including the integration of passives, analog, and advanced packaging. “More Than Moore is changing the rules. It is the beginning of an increasingly important story.”

Taking no questions, Bozotti left the stage after his call for “mastering manufacturing science.” But during the next few days, people returned to Bozotti’s special situation, speculating on the EU political forces pulling STMicroelectronics to build a 300-mm fab in Europe. However, Bozotti faces a chief financial officer and others within his own company who are said to be reluctant to pour capital into another 300-mm fab. With TSMC and GlobalFoundries investing so heavily, the risk of capacity shortages at its foundry partners may not be quite so large, at least not for the near term, some participants said.

GlobalFoundries is hiring about 100 people a month to work in Dresden, and is “looking all over Europe,” including in Poland and Czechoslovakia, for the “highly specialized technical and engineering skills” needed to expand the foundry’s operations, said Jens Drews, a GlobalFoundries government relations executive based in Dresden. “The graduation rates for engineers in Europe are not high enough to sustain successful clusters of manufacturing,” Drews said.

Ironically, the two U.S.-based companies operating in Europe, Intel and GlobalFoundries, are expanding aggressively near Dublin and Dresden, including recruitment campaigns. Intel currently has 300 Irish workers in the United States for training, preparing for a technology upgrade in Leixslip, and is recruiting in Ireland, said Leonard Hobb, engineering research manager at Intel Ireland. Given that neither NXP Semiconductors nor Infineon Technologies are likely to build 300-mm fabs again, the question is: What will STMicro do?

Bill McClean of IC Insights said STMicro may have to counter the 300-mm manufacturing moves by Texas Instruments by building a 300-mm analog IC fab. French president Nicolas Sarkozy has backed STMicro as much as possible. But with Sarkozy’s approval rating at 22 percent in the latest poll and facing an election in 2012, major French government funding for another STMicro fab in Grenoble may hang on the results of that election. Budget deficits are as real in Paris as they are elsewhere.

What is to be done? Besides educating bureaucrats in Brussels, Paris, Berlin, and other capitals, there are other measures that must be taken to foster semiconductor manufacturing in Europe. Energy costs can be twice as high as in some Asian countries. Tax credits for research and development can be strengthened. Subsidies, of course, are required to match those given in Asia and elsewhere. Perhaps most importantly, as Alain Astier, a group vice president at STMicroelectronics said, Europeans must believe in their own strengths.

The good news is that the mood has swung in favor of manufacturing. “There has been a sea change in the last 12 months. You would have been crucified a year ago for proposing to manufacture in Europe. Now, manufacturing is on the agenda,” said Malcolm Penn, president of market research firm Future Horizons.

And the necessity of manufacturing may swing the fence sitters into action. The semiconductor industry is headed toward an era of tight capacity, increasing ASPs, and rising foundry wafer prices at TSMC and elsewhere, Penn said.

Thought precedes action. Building a consensus in Europe that semiconductor manufacturing is worth financial support and is an exciting career path for European students, is a good start. SEMI and the executives on its board deserve great credit for driving home the message that advanced semiconductor manufacturing is vitally important for Europe.

Now it is up to companies to take the next step. And those companies need not be limited to STMicroelectronics. Samsung and perhaps TSMC could build fabs in Europe and, I am sure, profit from the experience.