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INDUSTRY NEWSFabless industry segment remains upbeat despite downbeat news
It is an article of faith in the fabless semiconductor community that its business model is more recession-proof than the version operated by integrated device manufacturers. In its just-released 2001 wafer and packaging demand survey, the Fabless Semiconductor Association (FSA) admits to spending "a little time gloating about 2000" because its members performed better on key financial markers than its IDM competitors "despite supply constraints." Revenues in the fabless semiconductor industry segment soared 68% in 2000, compared with 39% growth for IDMs, the report points out. Its faith in the future is such that FSA predicts fabless operations will generate 50% of all IC revenue by 2010. Today that figure stands at 15%. In 2001, however, that faith will be severely tested. While still expressing optimism, Jodi Shelton, FSA's executive director, told a luncheon audience at the launch of the annual report in San Jose that the picture was changing daily, "and unfortunately for the worse." In an interview two days after the April luncheon, Shelton was asked whether she believes the market is as healthy as a quote in a news story about the luncheon had implied. "I certainly wouldn't want to use the word 'healthy,'" she replied. "Fabless companies are suffering from a combination of issues. One, of course, is demand. The others are pricing erosion and an economic slowdown. And all three things are happening at once." The FSA survey touches on this convergence of factors, noting that responding firms had begun feeling the first rumblings of a downturn as the survey got under way. "The aggregate wafer decline of 13% from actual fourth-quarter 2000 numbers to forecasted first-quarter 2001 numbers is the first such decline recorded in many years for the survey," the authors point out. Many respondents reduced their demand projections for the first quarter of 2001 to adjust for their high inventory levels at the end of 2000. "This expected demand dip is entirely consistent with recent industry announcements of dramatically lowered anticipated revenues for Q1 2001," the FSA report notes. "Thus, the root cause of Q1 2001's drop in demand can be attributed to anticipated inventory corrections." Unlike previous downturns driven by excess capacity alone, analysts point out, this slump features a toxic mix of overcapacity and lessening demand. FSA's overview predicts a 13% drop in wafer consumption between the last quarter of 2000 and the first quarter of 2001 with an accompanying 21% dip in revenues during the same period. These results suggest what FSA calls a "meaningful decline" in the average selling prices of finished wafers. Despite having a slightly darker cast, the survey's overall picture remains rosy. Fabless wafer demand will grow approximately 4% in 2001, while IDM demand is forecast to decline by at least 8%. Foundries posted 72% growth themselves last year over 1999, the report notes. These positive signs reflect the nature of the fabless and foundry business, Shelton says. Despite the triple dose of bad news, "fabless companies," she notes, "have traditionally always fared better [than IDMs]. They fared better in the good times, and they fared better in the bad times." The reason? "They seem to do better because they don't have fixed costs. All they have are variable costs." IDMs "running at 40% to 50% utilization...don't have a broad array of products. They have one type of product," Shelton argues. Unlike manufacturers operating their own fabs, "when our foundries have low utilization, the costs are not passed on," she emphasizes.
In addition to the 68% rate of growth in 2000, the fabless industry, now numbering approximately 625 companies around the globe, is a growing presence. The survey points out that most semiconductor start-ups now "take on the fabless business model." According to FSA, at least 10 of the firms launched successful IPOs last year. Among them were Quantum Effect Devices, Silicon Laboratories, Centillium Communications, and Marvell Technologies. Startup Malaysian foundries, such as Silterra and 1st Silicon, and Tower Semiconductor in Israel are poised to give Taiwan—where a concentration of firms such as TSMC and UMC provide more than 65% of all worldwide foundry services—a taste of competition, Shelton points out. As noted in the report, 1st Silicon expects to reach 20,000 wafer starts per month this year, while Silterra announced an $80-million order less than three months after installing its tool set. An increase in outsourcing by IDMs has contributed to the good fortunes of the fabless and foundry model, the survey says. Between 1999 and 2000, IDMs doubled the amount of funds spent on outsourcing. By the end of last year, FSA notes, the trend appeared ready to slow somewhat as several chipmakers found their fab utilization rates tumbling. Although Shelton believes fabless companies can withstand the rigors of the downturn, potential problems loom. Rapid shifts in demand, further cuts in foundry capital outlay, and an upsurge in foundry wafer demand by IDMs could all cause the pain to continue after the worst of the industry's slump has passed. Shelton singles out one risk in particular: Nearly 60% of fabless companies "are geared toward the communications markets. In the overall industry, PCs are still the dominant sector. Interestingly enough, that [end-market] has sort of stabilized. That is one risk that may change [the forecast]." Still, some analysts are bullish on the foundry segment despite the downturn. In March performance and market evaluations of TSMC and UMC, Thomas Weisel Partners forecasts a resumed increase in demand for communications, multimedia, and consumer chips late in 2001 and continuing into 2002. Foundry wafer shipments will bottom out in the second quarter of this year, according to the firm. Weisel pointed to outsourcing by IDMs and fabless companies, which are core customers of the foundries, as principal drivers for long-term growth in the fabless market segment. The survey notes that the amount of wafers fabless companies devote to PCs and peripheral devices continues to diminish as the end-market demand slides toward 50% of IDM revenues. With its emphasis on advanced logic and mixed-signal customer needs, the fabless segment saw its share of wafers sold for communications-related applications rise 5% from 2000. Many of the additional processed wafers were targeted for wireless communications devices. In contrast, the share of wafers fabless companies allocated to the PC end-market shrunk by 8% in 2000, the survey points out. Shelton emphasizes that fabless firms are more than equal to the technological challenges of the submicron era. Each year, more companies are shifting their wafer process to advanced nodes. In 2000, 0.35-µm processes accounted for 39% of all wafer output. The demand for 0.18-µm processes stood at a paltry 1%. However, by the fourth quarter of 2000, approximately 18% of all fabless wafer demand was for 0.18-µm processes, she notes. That figure put the fabless sector on a par with its IDM counterparts, which showed an industry average of 19% at that technology node. The survey forecasts a majority of fabless wafers in 2002 will be processed for the 0.18-µm node or below, a demand that the existing infrastructure can support, particularly at the three main foundries. According to the report, four metal layers were used almost exclusively for the 0.35-µm process node in 2000. A "significant number" of responding companies have been successful with four-metal-layer processes at 0.25 µm. By 2002 more than 80% of all fabless wafers will feature five or more layers of metal, with 75% of them at or below the 0.18-µm node and the rest at 0.25 µm. Fabless firms have made "unbelievable investments" that have contributed to the accelerated growth at the advanced nodes. "I do believe the fabless companies are ahead of the IDMs in taking advantage of that," the FSA executive director asserts. "I heard the other day from Applied Materials that they go to the fabless community when they're building their next generation of products. Fabless companies are on the leading edge of design. That makes sense because they focus on design."
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