Economist on semiconductor

Jerry Sanders, the erstwhile CEO of AMD, was famous for saying that “real men have fabs.” So of course it was interesting that AMD should be just about the first integrated device manufacturer (IDM) to go fabless when it sold off its fabs to Middle Eastern private equity that renamed them Global Foundries.

There’s an interesting article in last week’s Economist on the state of the semiconductor industry. They also have the view that there will primarily be three fabs, Samsung in memory, Intel in microprocessors and TSMC for foundry. The rest will be “nationalistic” ventures in need of regular government bailouts.

For instance, they open with a look at Saxony (Dresden) where there are two main fabs. Qimonda (bankrupt and unlikely to resurface in anything like its original form) and Global Foundries whose German fab I would describe as “not closed yet.” Part of the problem with fabs is that they have got too expensive even for governments to simply pour money into. Fabs are a capital-intensive business with long-leadtimes so they tend to be feast or famine. And right now in the current downturn they are famine. DRAM spot prices are a quarter of what they were a year ago; good money then, not so much any more.

One comparison that I hadn’t thought of is that fabs cost a couple of times as much as a nuclear power station. They are increasingly automated so don’t even create much employment, and with electronic systems increasingly removed from their manufacture, the high value part of the chain isn’t helped by having a fab nearby. “Designed by Apple in California and manufactured in China” as it says on the iPhone box. With, I believe, an Infineon chipset presumably made in Germany.

Europe, in particular, is in bad shape in semiconductor since it has so few fabless semiconductor companies (except in Israel, traditionally treated as part of Europe for the electronic market). European technology has always suffered from big company syndrome, especially in France and Germany. I once asked a senior executive at Bull (then a large not-dead-yet French computer manufacturer) why there were no equivalents of Sun Microsystems in Europe. “Because the European governments would pour money into Siemens and Bull to build workstations, and we’d be successful enough to kill off any small companies but not successful enough to win,” was the gist of his reply. Semiconductor is like that: it’s all NXP (the old Philips Semiconductors), Infineon (the old Siemens semiconductor division), and ST Microelectronics (a merger of French Thomson Microelectronics with Italian SGS). All European champions who have consumed any Euros available for investment without actually achieving a world-class scale (ST being far and away the most successful of the three).

With 18” wafers maybe on the horizon (but with the semiconductor equipment manufacturers balking since they haven’t even yet recovered the investment they had to make for 12” conversion) the price of entry into the fab world is only going to go up. Semiconductor delivers chips incredibly cheaply, but it is a mass production process. And the required mass is going up not down, meaning greater and greater returns to scale. Intel talks of only requiring a single fab for their entire production and wanting separate fabs mainly for risk reduction (fire, political instability, losing the process etc).

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