Innovation

GLOBAL INVESTOR FOCUS Innovation — 42
Chips
TSMC
2330 TT
BUY
Foundries in general and industry leader TSMC
in particular benefit from greater outsourcing by
semiconductor manufacturers.
ASML
ASML NA
HOLD
The ongoing miniaturization of line width in chip
manufacturing requires outstanding lithography
technology. ASML supplies this equipment.
SEZ
SEZN SW
HOLD
SEZ, with its new Esanti product platform, will
benefit from the success of single-wafer technology
in FEOL applications, starting in 2007.
TSMC shows stronger sales growth
%
140
120
100
80
60
40
20
0
–20
–40
TSMC
Global semiconductor sales
98 99 00 01 02 03 04 05 06
Outsourced production in the semiconductor industry
USD million IC Production (ex. memory, analog, MPU)
% of production outsourced
8000
7000
6000
5000
4000
3000
2000
1000
0
Foundry % of IC Production TSMC % of IC Production
60
50
40
30
20
10
0
2Q90 2Q92 2Q94 2Q96 2Q98 2Q00 2Q02 2Q04 2Q06
Until eight years ago, integrated semiconductor companies outsourced
only around 5% of their production to dedicated foundries.
By 2006, this figure had risen to 20% and it will be substantially
higher in five years’ time. At the beginning of the current decade,
a broad shift in strategy became discernible in the semiconductor
industry, away from pro-cyclical investment in capacity expansion
and in favor of increased cost consciousness. Now there are new
factors underpinning the continuation, and even acceleration, of
this outsourcing trend. There has been a sharp increase in the
costs associated with new production plants, a trend which has
prompted integrated semiconductor manufacturers, in particular,
to push ahead with their so-called asset-light strategy (optimizing
existing production combined with outsourcing) in order to
improve both profitability ratios and cash flow.
As a result, sales in the foundry services segment are expected
to expand at approximately twice the rate of those in the
semiconductor industry in the years ahead. This is why Morris
Chang, founder of the dedicated Taiwanese semiconductor foundry
TSMC, predicts that foundries will account for around 40% of
total semiconductor production in coming years. However, this is
not the only good news for foundries. Integrated semiconductor
manufacturers such as Infineon Technologies, Texas Instruments,
Freescale and NXP (formerly Philips Semiconductors) are planning
to outsource all or part of their process technology to foundries
in order to devote themselves exclusively to chip design.
Even though the demands being made on the foundries are growing,
this additional service provides them with the opportunity to
command higher prices from their customers. Given the resultant
economies of scale, the concentration of production activities at
foundries also appears attractive from a cost viewpoint.
At TSMC, so-called gigafabs are already either at the planning
stage or under construction. The aim of these supersized
foundries is not only to create substantial cost advantages relative
to smaller production units, but also to increase the quality of
production and to shorten timetomarket. This last factor will be
of particular importance in future. On the back of this trend, the
technological leadership of foundry services companies will continue
to be enhanced. Naturally, this will require a sufficient level
of investment in new production facilities. Although, in turn, this
will lead to increased dependency on foundries on the part of
semiconductor equipment suppliers, it will also make it possible for
the latter to introduce new production equipment far more rapidly
and in larger volumes.
TSMC’s technological leadership is based, to a significant extent,
on the company’s close cooperation with ASML, the world’s
leading provider of lithography systems. Developments within this
product segment are decisive in terms of the ongoing miniaturization
of line widths in chip manufacturing, which is critical for containing
costs. At the same time, however, this ongoing miniaturization
places high demands on the purity and thus the preservation
of chip functionality. In this regard, the structure of cleaning systems
is undergoing a process of change. Smaller line widths, in
particular the transition from 65- to 45-nanometer chips, can be
expected to result in increased demand for single-wafer cleaning
systems. The Austrian manufacturer SEZ boasts a product portfolio
that in future will be capable of targeting the entire market for
wet chemical cleaning systems.
Given that foundries are among their most important customers,
the manufacturers of lithography systems and single-wafer
cleaning systems are currently benefiting from the trend toward
smaller line widths and from the foundries’ anticipated relatively
high production volumes. In our view TSMC, ASML and SEZ will
be the main beneficiaries for the continuing acceleration and miniaturization
trend. Ulrich Kaiser
Source: TSMC, SIA, Credit Suisse, UMC, Chartered Semiconductor, SMIC