Chipmaking: October 2008 Archives

Samsung has decided to walk away from its planned takeover of Sandisk, but made sure it left visible wounds on the hapless flash-card maker. And, perhaps worst of all for Sandisk's current management, signalled to the markets that a deal is still possible but at a much-reduced price. The decision gives Samsung a lot more options over what it can do with all the cash it has in the bank in an environment where companies with heavy borrowings have suddenly become vulnerable.

The first paragraph is standard fare in these letters. Samsung CEO Yoon Woo Lee expresses disappointment with Sandisk's unwillingness to negotiate a deal. The gloves come off in the second paragraph - and reveal a pair of bejewelled knuckledusters:

"Nevertheless, we have obligations to our own shareholders which require that we take a disciplined approach, particularly with respect to significant initiatives such as this. That disciplined approach requires that we squarely face the growing uncertainties in your business, which may continue to deteriorate in this difficult economic environment and further impact your standalone value. Your recently announced third quarter results serve only to illustrate this risk. Your surprise announcements of a quarter billion dollar operating loss, a hurried renegotiation of your relationship with Toshiba and major job losses across your organization all point to a considerable increase in your risk profile and a material deterioration in value, both on a stand-alone basis as well as to Samsung."

And then Lee rounds it off with:

"As a result of these developments, we are no longer interested in acquiring SanDisk at $26/share."

To sign off, Lee wishes Sandisk's management well in a kind of "now that you're lying in the street try not to get run over" way.

AMD has bought itself some time with the decision to hive off its manufacturing operation and has silently answered the question of what it is going to do about getting its own products made. It is just about conceivable that AMD's core processor business might follow ATI to Taiwan, where the graphics chipmaker has had its products fabbed for years.

If AMD really wanted to frighten the horses, it would do exactly that. If anything, AMD could well be set to pull business away from the Taiwanese foundries such as TSMC. But, in setting up The Foundry Company with money from Abu Dhabi - an operation that almost certainly has to join IBM's Common Platform group to gain any business at all — AMD is more or less set on a course to even tighter links with IBM. AMD's silicon-on-insulator (SOI) process uses technology licensed from IBM, although the x86 processor maker has not joined Common Platform to date.

TSMC has clearly been angling for processor business in general, having decided to introduce a high-k, metal-gate process at what it calls the 28nm process node. Processors, graphics processors and field-programmable gate arrays (FPGAs) are the target for this version of the process. AMD's endorsement would have been a major boost even for the world's runaway number-one foundry. However, TSMC has never been keen on SOI whereas a number of vendors in the Common Platform camp have worked with it. IBM is the obvious candidate for external SOI production. But Samsung has worked with SOI in the past and, although a tiny player in the foundry business, is the fastest-growing. And it has a full 300mm fab dedicated to the foundry business, something that the The Foundry Company won't.

Bill McClean of IC Insights put out a note last night on AMD's stated funding plans for the fabs that will go into The Foundry Company, assuming that the deal - with its non-US source of funds - clears the regulatory hurdles and a possible spat with Intel over patent rights. It concluded:

"Given that Foundry Company’s capital spending budget for the next five years is forecast to be less than AMD’s capital spending outlays over the previous five years, it is highly unlikely Foundry Company will help AMD gain additional marketshare. In fact, AMD will be lucky to sustain flat marketshare in the MPU segment. Moreover, a significant portion of the Foundry Company’s budget must be allocated to the new foundry business, and this, of course, will take away precious spending needed for MPU production!"

The capital expenditure for the company next four years will be between $3.6bn and $6bn. That sounds like a big heap of money but even at its maximum it's only about half of what TSMC spent in the last four. Not only does this money has to be divided between AMD and foundry-oriented gear, which will probably mean additional equipment for bulk silicon wafers on top of those used for SOI, it's guaranteed to be less than what AMD itself spent in the past four years.

McClean also noted: "There is a lot more to being in the IC foundry business than hanging out a sign and announcing you are a foundry, just ask some of the Malaysian and Chinese foundry startups about the difficulties of gaining marketshare in this segment of the IC industry."

In the past five years, TSMC got the recipe right and built up a formidable reputation for getting it right. You often hear fabless companies say, when asked who they're using: "TMSC, of course." Now, you have to add a little dose of scepticism. Like Fight Club, TSMC's customers are wary of talking too much about their relationship with the foundry except in those rare situations where TSMC tows them around to tout the company's advantages. However, you don't hear the same things about many of the other foundries and trust in a foundry's ability to deliver is probably the biggest contributor to their continued growth.

It's not all TSMC. SMIC picked up some loyal customers early on, partly due to the seemingly tireless Richard Chang who, like TSMC chairman Morris Chang, spent many years at Texas Instruments. SMIC has overtaken Common Platform member Chartered Semiconductor Manufacturing but it's been hard work and the company remains a fifth of the size of TSMC.

There is some good news for The Foundry Company in terms of its position. AMD's annual sales are close to $6bn. If you split that in half to come up with what The Foundry Company's sales might be to AMD, then that puts the business fairly close to number-two foundry UMC. Equally, the dominance of one company in the foundry's business is unlikely to attract other fabless players unless the company can bring something the other foundries, or Common Platform suppliers cannot.

For TSMC, the situation will be interesting. Suddenly, with The Foundry Company onboard, the Common Platform group would as an aggregate be able to claim number-two status. Total sales would still lag TSMC but, in perception terms, the group could claim to provide a serious alternative to TSMC and provide the thing that the big fabless companies keep saying they want - true multiple sources for the same products. And that makes the strongly capitalised Samsung even more of a threat to TSMC.