Semiconductor manufacturing business undergoes wrenching changes amid downturn

by Len Jelinek, iSuppli

USA: Historians will look back at the first half of 2009 as a time of near-global economic implosion. For the semiconductor manufacturing industry, the final chapters of the story have yet to be written.

One thing we know for sure: The industry is going through a serious reconfiguration that is affecting every aspect of the business.

The final outcome has not yet been determined, but indications are that manufacturing specialization and aggregation of demand will reshape how companies design and manufacture chips. The trend of aggregation of manufacturing started several years back with the successful emergence of manufacturing consolidation at foundries.

With the high cost of transitioning to more advanced semiconductor production technologies, more companies have chosen to support technology development platforms using third-party manufacturing in order to develop differentiation through unique chip designs.

Companies also are reducing their product portfolios in order to become more responsive to changing market conditions. The economics of a company maintaining multiple manufacturing facilities to produce a broad base of products are clearly not practical when competing with highly focused manufacturers.

What does all this mean for companies or more regions that are hotbeds for manufacturing? Evolution of the industry is happening but at an accelerated rate and at a time when companies can least afford it.

Gaining maturity
Historically, when Integrated Device Manufacturers (IDMs) transitioned to new technologies, they maintained their mature factories for cost-effective manufacturing of older technology. Today, as competitors transition mature technology to newer manufacturing platforms, cost pressures are driving older manufacturing facilities into a non¬competitive position.

In North America, the lifecycle for mature manufacturing facilities has reached its twilight. In Europe and Japan, companies are struggling with the social economic impact of shuttering facilities that are no longer competitive.

All of this is being accelerated by favorable economic policies toward manufacturing in Asian countries. As these policies continue to gain favor, companies will continue to transition manufacturing to more cost-effective locations.

Since January, manufacturers have experienced a monthly increase in demand. Some of the demand increases have been a result of inventories in the supply chain coming into balance. More importantly, however, has been the increase in demand for innovative new products in need of advanced technologies.

As the global economy continues to improve, iSuppli anticipates that consumers will return to stores in search of the latest innovative products for personal entertainment.

For pure-play foundries, iSuppli anticipates that the third quarter will build off the momentum gained in the second quarter. iSuppli anticipates seasonal slowing in the second half of the fourth quarter and through the first quarter of 2010.

Gap narrowed
For 2009, the foundry business is still expected to underperform the total semiconductor industry, but due to the recent resurgence in demand, the gap has narrowed. The current forecast is for the foundry industry to experience a 25.2 percent contraction while the total industry will experience a 23 percent decline.

Semiconductor capacity utilization for the IDMs in the second half of 2009 will show a marked improvement compared to the first half of 2009. The improvement will partly be the result of factory consolidations that have been announced but will not be concluded until the end of well into the second half of 2009. A second factor affecting the recovery will be the increase in demand as inventory comes more in line with consumption.

The process of inventory balancing is always difficult and usually takes three quarters before it is completed.

Capital expenditures in the semiconductor industry for next-generation technology and capacity will not recover in 2009. The primary factor driving the capital spending remains memory technology, but there has been a glimmer of hope for improved capital expenditures in the second half of 2009.

Leaders in technology are also continuing to see the need for capacity at advanced process nodes of 45nm and below. Although the spending of a few companies will not drive an industry recovery it will be welcome relief for a few select tool manufacturers.

Overall, 2009 will go down in the history books as one of the most difficult years ever experienced by the semiconductor industry. Unlike previous industry downturns, where supply and demand have driven economic chaos, this recession will be directly attributed to external influences on the semiconductor industry that simply will take years from which to recover.

Source: iSuppli, USA