By David Lammers

For the second year in a row, July kicked off on a bit of a chilly note. Last year, executives talked about a “pause” in orders, and, sure enough, July 2011 began what proved to be a poor second half for the semiconductor industry.

This year, a similar story appears to be unfolding, as the otherwise lively Semicon West in San Francisco began with Applied Materials CEO Mike Splinter explaining that “a bit of seasonality” has crept into the industry. Applied’s strong order book for semiconductor equipment, he said, had weakened due to foundry pushouts.

Since then, non-foundry companies have been acting cautiously, with Toshiba cutting NAND production by 30 percent, for example, and Texas Instruments expressing concerns about its order book.

Gartner analyst Dean Freeman said the equipment order pushouts are largely due to a couple of large foundries “overinvesting” in recent quarters. TSMC usually adds about 20,000 wafer starts of leading-edge capacity in one year. This year it is on track to add 50-55k wspm – more than two years worth of new capacity in a single year. Delays in getting TSMC’s new fabs ready are contributing to the equipment order hiccup.

Samsung also is investing, bringing its total capacity add this year up by 65,000 wspm. With Apple due to unveil the iPhone 5 in October, perhaps, and Samsung’s smartphones selling very well, Samsung needs new capacity.

The short-term view must be balanced with a big picture outlook. It was just a couple of months ago that Qualcomm and others were screaming for more 28nm capacity. (Stock analysts use the word “lumpy” to describe foundry investments.)

Bob Johnson

Gartner is predicting that semiconductor industry capex will have a compound annual growth rate (CAGR) of only 0.6 percent between 2011 and 2016. Because 2011 was a fairly strong capex year, the number appears low, but if the time period is shifted to 2010-2016 the semiconductor capex CAGR improves to only 3 percent, said Gartner analyst Bob Johnson, speaking at the SEMI/Gartner market forecast event at Semicon West.

The main problem is the world economy. Instead of the 3.6 percent global GDP growth expected for this year, the world economy will be lucky to eke out 3 percent growth, a huge difference for the chip industry. And while the very largest companies are investing heavily, the much larger number of small- and medium-sized fab owners are investing relatively little.

Splinter looks at the world economy and sees various challenges, including “weaker economies in China and Europe than we saw last year. PC shipments are quite weak, and NAND shipments also are less than what we thought. And there are certain factory operational issues at some customers.”

None of this seemed to dampen the overall mood at Semicon West. Dan Hutcheson of VLSI Research said the activity level at West was among the highest ever. Bob Hollands, the head of U.S. marketing for ASM International, also was upbeat. “Sure, the world economy is shaky now, and there are some customer delays. When demand does pick up, they expect us to be able ship equipment to them quickly – they need it in five minutes.”

Dan Tracy, the SEMI market statistics director, was positive, though he may have tempered his optimism in the weeks since Semicon West. While semiconductor capex will decline slightly this year, Tracy sees a 10 percent gain next year, to $46.7 billion. Korea will be the largest market next year, followed by North America with $10 billion in capital investments, led by Intel’s build out of Fab 42 and D1X. And don’t ignore Japan: it is still at or near the top in terms of materials, with a large number of fabs consuming wafers, chemicals, and other materials.

Christian Dieseldorff

SEMI senior analyst Christian Dieseldorff said at this time last year SEMI was pessimistic about new fab construction. But there are now 26 construction plans underway for next year. TSMC is building four fabs at the same time. Samsung has a “superfab” underway at Line 16 in Korea, as well as the S1c and S1d expansions.

“Things are looking pretty rosy for this year, and we could see 2013 hit an all time record,” Dieseldorff said.

I think the world economy is too shaky to put a “rosy” label on the industry’s prospects. We all remember 2009 after Lehman Bros. went bankrupt and the U.S. housing bubble burst. The possibility of both Europe and China solving their financial issues soon is fairly remote (not to mention Japan’s energy crisis).

One of the great things about going to sunny and cool San Francisco for Semicon West is the chance to meet what we journalists call our “good sources.” I ran into Len Jelinek, the semiconductor manufacturing analyst at IHS iSuppli, and he brought the chip industry’s prospects down to ground level. “Just ask yourself,” Jelinek said, “when was the last time you bought a new laptop, or a new TV?” His point is that people are learning to make do with what they have.

His question brings to mind a quote attributed to the Greek philosopher Epicurus: “Nothing is enough for the man to whom enough is too little.”

By David Lammers

The apparent end of the Semiconductor International Capacity Statistics (SICAS) program is not the end of the world, but it is an indication of the consolidation trend in the semiconductor manufacturing industry.

SICAS’s end was not mourned by Gartner semiconductor manufacturing analyst Bob Johnson or VLSI Research CEO Dan Hutcheson. The message from those two gentlemen: “Don’t worry, we’ve got you covered.” While SICAS was free to all (even journalists), Gartner and VLSI offer their respective data sets for a fee. And Hutcheson said his company’s fab utilization report is better than what SICAS offered, partly because VLSI’s fab utilization data comes out monthly rather than quarterly.

SICAS tracks capacity by technology node. (Source: SICAS)

SICAS, which tracks fab capacity and utilization, is a relatively small program compared with the World Semiconductor Trade Statistics (WSTS), which saw Intel drop out following AMD’s withdrawal in December. IC Insights president Bill McClean said he was trying to get the SICAS board to revise its data categories and revive the SICAS program. And McClean also was contacting his sources to see if Intel could somehow get back in and participate in a revised category within WSTS, without “exposing” its pricing data to customers. If the WSTS would merge MPUs with, say, the SoCs which are used as the application processors in cellphones, it would support the WSTS’s overall goals and allow Intel to “hide its data,” McClean said.

When AMD withdrew from WSTS in December, for reasons yet to be made clear, Intel was “exposed” by being the last participant in the MPU category at WSTS. Knowing that Intel was the only company in the category apparently allowed customers to see Intel’s average selling prices. “Intel was exposed. It is a pricing issue. Customers can look at the WSTS data and are go back to Intel and say, ‘You charged us more’ than the average,” McClean said. UMC (or TSMC) was in a similarly “exposed” position when one or the other of the big Taiwan foundries decided to drop out.

VLSI Research tracks fab utilization on a monthly basis. (Source: VLSI Research Inc)

TSMC apparently withdrew from the SICAS program because SICAS reported foundry capacity data by technology node, allowing others to see how much overall foundry capacity was available at, say, 28nm. Since TSMC discusses sales by technology node on a quarterly basis, the withdrawal had Hutcheson and Johnson theorizing that TSMC and other companies simply didn’t see the added value in dealing with SICAS.

McClean argued that fab utilization data is “the kind of thing that is useful,” noting that in the first quarter of 2009 SICAS was reporting a measly 66.8 percent utilization rate. By the third quarter, utilization had jumped to 87 percent. “That showed everybody how fast the industry was recovering,” McClean said.

Johnson said Gartner arrives at its utilization data by tracking the total silicon consumed and the total wafer capacity by node. Dividing those terms gives Gartner its utilization data. Analysts who don’t own their own utilization data, Johnson said, will have to “scramble around, because their models are based on SICAS.”

Overall, the SICAS demise is part of a larger trend. The large companies, with well-staffed sales and marketing organizations, gather their own data and want to “control the message” going out to the marketplace.

“The big companies don’t want to talk about what they are doing with the smaller companies around. We might as well get used to it. Intel knows who builds wireless devices, and there are only a few companies building smart phones who really matter. Do the big companies really need WSTS? Probably not,” Johnson said.

“With the WSTS, Intel is not controlling the message. The WSTS withdrawal by Intel is symptomatic: companies as big as Intel, Samsung, and TSMC want to control their own messaging to the market,” Johnson said.

If it were a matter of simply merging categories in the WSTS reports to hide Intel’s ASPs, or shrouding the foundry data in SICAS somewhat but keeping the bigger utilization picture intact, these kinds of fixes would be worthwhile. The SIA is studying the issue, a spokeswoman said, while emphasizing that both SICAS and WSTS are independent bodies with their own boards.

“SIA has no decision-making authority regarding SICAS and the administration of the quarterly report. However, we do help sponsor the program, encourage our members to participate, have many common members and republish the SICAS report on our website,” the SIA spokeswoman said.

Once the three companies decided not participate, the SICAS executive committee made the decision to discontinue the report because of the diminished value of the data.

“In speaking with SIA members we understand that the real value of the report is that it provided a global view, and while many of our members are open to continuing to provide this data, the return on investment for them is just not significant enough if the report does not capture a global picture of production capacity,” she added.

That statement suggests that, while the SIA and the SICAS members wish the group had not fallen apart, without data from what she called “a key region” it appears unlikely SICAS will be revived.

Jonathan Davis, president of SEMI’s Global Semiconductor Business operation, said he believes SEMI has the most comprehensive fab capacity information, but it doesn’t monitor utilization levels, as SICAS does. “SICAS reported trend data to the supply chain that was valuable,” Davis said. And while the largest equipment and materials companies may have their own research organizations which can gather and collate data from multiple sources, there are many smaller suppliers which do not have that option.

“The broader supply chain — the long tail of the supplier base — benefits (from SICAS and WSTS), and even the largest companies call us regularly to verify their own data. SICAS was not perfect, and all of these market research tools are imperfect. The data is less valuable when some companies are not participating,” Davis said.

Hutcheson of VLSI Research had an interesting take on SICAS, comparing it to government programs which compete with private businesses.  “It costs us to develop the primary (capacity and utilization) data, and with SICAS out there it made it more difficult to convince people to pay for it, even though our reports are on a monthly basis,” he said.

And Hutcheson said capacity or utilization are not the best measures of how the industry is doing, or whether a downturn is on the way. Capacity is an always-evolving number. Since foundries and others need to invest in capacity for leading-edge linewidths ahead of demand, the result can be a lower utilization number. What the IC vendors and systems companies want to know is whether a foundry or IDM has enough leading-edge capacity in place to supply chips which will be needed for future demand, Hutcheson said.

Inventory levels turn out to be a better indicator of when a downturn might be around the corner, Hutcheson added, noting that has called two earlier downturns ahead of other market research firms by watching the rising inventory levels and comparing the inventory data with billing numbers.

In 2000, for example, the industry was in a fab-building boom, but shortly thereafter inventories started scaling up. “It was inventories that gave us the signal (of the 2001 downturn). Capacity utilization was a lagging indicator,” Hutcheson said.

WSTS is a different story, he said. WSTS tracks such a wide variety of chip types — ranging from analog to discretes and power IC — that all companies benefit from the WSTS data.

“If Intel drops out of WSTS, it looks bad. Intel is a company that needs to play a leadership role,” Hutcheson said. And he recalled that the WSTS data collection effort started with Intel, National, AMD and other compies in Silicon Valley, with Texas Instruments joining a few years later. The WSTS data was used as the gold standard during the U.S.-Japan semiconductor trade negotiations in the mid-1980s, with Washington demanding that the Japanese government use WSTS data — rather than MITI or EIAJ numbers —for determining the market share of non-Japanese companies in the Japan semiconductor market.

Having spent so many years of effort to build up the completeness and credibility of the WSTS database, it would be unfortunate to see it diminished by the absences of Intel and AMD.

The larger companies gather different data sets, buying information from VLSI, Gartner, and iSuppli, and then adding in the public data from SICAS, WSTS, and other sources. Fabless IC vendors need to make sure they are ordering enough wafers.

Similarly, chip makers need to watch utilization levels and make sure they are included in the slots allocated for important tools. Hutcheson noted that in 2009 several big IC companies — aware that it takes as two years or longer for Nikon and ASML to build an immersion scanner — gobbled up all the scanner capacity. That left one of the major foundries fourth in line for scanners, which hurt its bottom line when demand bounced back.

By David Lammers

This year, 2012, is a “Year of the Dragon” in the Asian zodiac calendar, yet another reason for Samsung Electronics to build a third semiconductor fab in Austin, Texas.

There are 12 animals in the Zodiac menagerie. People born in the Dragon years have assertive personalities, bringing vitality and confidence to their business pursuits. That “Dragon personality” seems to characterize Samsung, which has invested in the semiconductor industry’s down cycles with great success.

All signs point to the need for another Samsung logic fab in the United States. Samsung saw a 73 percent rise in its smartphone/tablet business in the most recent quarter, and the company racked up more than $5 billion in quarterly profits. To meet demand for Apple’s foundry needs and Samsung’s own internal SoC consumption, a new logic fab will be needed.

Ana Hunter

Add to that Samsung’s long-range plan to make foundry equivalent to its memory business. Ana Hunter, the vice president of Samsung’s foundry business, was in Austin recently for a Global Semiconductor Association (GSA) event, and she outlined how important leading-edge foundry is to Samsung’s strategy. Samsung and GlobalFoundries have cooperated on developing a 28nm process aimed at smartphones and tablets, she said, adding that the two foundries “will cooperate on second sourcing and technology and will compete for business.”

Samsung has a 330-acre site in north Austin, with the logic-oriented Main Fab (earlier called Fab 2 or S2) reaching high yields soon after completion of the $3.6 billion expansion project. C. J. Muse, an analyst with Barclay’s Capital, predicts that Samsung will need to add ~43,000 wafers a month of 32nm capacity in 2012 to support Apple’s A6 production and internal Samsung application processor demand. To meet that need, Samsung’s LSI operation will nearly double its logic-oriented investment to about $7 billion this year, exceeding Samsung’s memory-related investments, Muse said.

Christian Gregor Dieseldorff, a research director at SEMI, said Samsung has “allocated much more spending for System LSI/Foundry-business, more than ever seen before.” Samsung will increase its installed capacity for System LSI and foundry by more than 30 percent in 2012, from ~530,000 wafers per month (in 200 mm equivalents) at end of 2011 to ~700,000 by the end of this year.

Sure, there are issues which need to be worked out in central Texas. Travis County and Samsung are trying to reach agreement on the tax valuation of the Samsung property and production equipment, a dispute which one would hope will not turn out to be a showstopper. Earlier, Austin’s electric grid was a concern, but Austin Energy added the needed substations.

Probably the biggest challenge is the talent pool. Samsung competes with Intel and the other big chipmakers for experienced technicians and manufacturing engineers, some of whom are more comfortable working for a U.S. company with schedules that are less aggressive than Samsung’s deployment expectations. Unfortunately, Texas schools are not very well funded, and are not turning out enough people who want to learn to maintain an etcher or boost fab productivity.

Recent global events also lean in favor of a new Austin fab. The leadership change in North Korea could easily provoke military conflicts that could impact Samsung’s Kihung fab complex, not far from Seoul. The earthquake and tsunami in Japan is fresh in everyone’s memory, or should be.

There is a new realization that putting all of one’s chips (or disk drives) in one geographical locale is just not smart business. Apple, for all of its legal issues with Samsung’s system designs, needs to source chips from at least one fab complex not in a military or seismic danger zone.

I’ll close with an anecdote garnered when three friends of mine and I gathered at a restaurant in Austin for a holiday burgers-and-beers lunch. “What kind of laptop should I buy after I turn in my company system?” said Greg, who is retiring in March after 40 years of managing J.C. Penney stores. “Oh, I wouldn’t get a laptop,” said Garry, a software engineer, arguing that a new iPad tablet would be able to do everything Greg needs to do. I sat back and thought how ludicrous that would have sounded just two years ago, but how much sense it makes in the Year of the Dragon.

It all adds up to the need for a new logic fab in Austin, opening in mid-2013.