Recently in Supply & Demand Category

Industry analyst firm iSuppli has run the numbers on companies in the semiconductor business and found they are turning in levels of operating profitability not seen since the glory days of the Internet boom.

Overall operating profitability rose to 21.4 per cent according to iSuppli in the fourth quarter of 2009, the highest level since the last quarter of 2000. Those working around the industry then will remember those heady days, which were quickly followed by a sudden post-Christmas hangover when purchasing managers staggered into their warehouses and wondered: “Cripes. Did we really order all this stuff?”

For those thinking that the world was only just beginning to move out of recession late last year, a lot of the recovery in profitability in chipmaking has come from very aggressive supply management, also known as not spending anything on stuff to make chips with. Major customers are now in the unusual position of not being able to name their price and it’s not going to get any easier for them any time soon even though the big chipmakers are now opening up their wallets to expand production capacity.

Even during the disastrous first quarter of 2009, prices did not fall as far as they used to — because the chipmakers did not allow inventory to build up in the way it did in 1995 or 2000. In fact, prices went up for a while before falling slightly as the recovery got under. This is very different to what happened in 2001 when prices went down and kept going down. The revenue per wafer (red line) and wafer output (grey area) chart here from SICAS and SIA numbers shows what happened.

President and CEO of iSuppli Derek Lidow also cited the increasing focus of chipmakers: “The semiconductor industry has almost completely eschewed the broad-line model that once was the hallmark of the largest players in the business. Instead, chipmakers now are concentrating on specific market segments, allowing them to focus on areas where they have pricing power and a competitive advantage. This has allowed them to improve profit margins and to cut overhead.”

That position echoes former Infineon president Wolfgang Ziebart at Electronica in 2006: “Before, size was very important. This is over.”

At the same panel session, Professor Hermann Simon of Simon-Kucher and Partners went a bit further by chiding the chip industry for being “stupid” by chasing market share, and constantly dumping price to get it.

Infineon’s board thanked Ziebart for his insight by firing him and then wound up shutting down Qimonda just months ahead of a pricing recovery that might have helped the German memory maker find a buyer as a going concern rather than a source of cheap production tools for Texas Instruments.

The numbers for the second half of the last decade don’t really bear out Lidow’s assertion. Profitability fell to a lower sustained level from 2006 onward and really only took off after fab managers decided the best way to cope with the worldwide financial crisis of late 2008 was to turn a lot of machinery off. However, looking into the future, vanishing sockets and increasing focus should demonstrate what Lidow describes in the medium to long term.

This is the last time a graph like this will appear for a while. Because Chartered Semiconductor Manufacturing is now part of Globalfoundries there won’t be an opportunity to get information on the processes the company is running from financial reports. AMD will only report profit or loss in its figures now that the company has switched to equity accounting even though AMD holds the lion’s share of the key stock class that determines overall ownership.

Now that the results are in for 2009, it’s possible to see what effect the semiconductor industry’s bungee recession (thanks to Future Horizons’ Malcolm Penn for the inspiration for the phrase) has had on the shift towards more advanced processes. What’s interesting about the first set of charts is that you’d hardly know the foundries practically turned their machines off for a couple of quarters.

Utilisation plunged to 30 per cent in the dark days of early 2009 before bouncing back to near capacity by the middle of the year. Had it not been for TSMC’s 40nm yield problems, the transition towards 40/45nm processes might have been a bit quicker. But the severity of the recession arguably gave the number-one foundry a bit of breathing space, arguably helped by the better yield on more expensive flip-chip packages that the 40G-process chips would typically go into.

IC Insights has posted its estimates for capital spending by the top ten chipmakers this year as companies open up their wallets in expectation of cashing in on very tight supply through the rest of the year and into 2011.

The analyst firm expects the top ten to increase their spending by 67 per cent in 2010, a bigger jump than that expected for the entire industry. That is also set for a sudden leap in spending, up by 51 per cent, but it’s an indicator of how the big fab owners are gradually pulling away from the rest of the pack in terms of fab spending. Only the biggest can afford to operator fabs while the rest are forced to rely increasingly on foundry production.

Taiwanese foundry TSMC’s estimated spend this year is expected to surge by almost 80 per cent, “spurred on by the challenge from the upstart GlobalFoundries”, writes IC Insights president Bill McClean.

UMC has increased its own outlay dramatically but is already a long way behind TSMC and won’t even match GlobalFoundries this year following the incorporation of Chartered Semiconductor Manufacturing into the Abu Dhabi-financed foundry.

TSMC may only be $200m behind Samsung’s $5bn in terms of 2010 spending. Intel is predicted to pay out around $4.9bn for fab equipment this year and is easily the most conservative spender. However, the company didn’t cut back heavily last year when everyone else was taking an axe to their capital-expenditure budget. The company has a lot of its 32nm capacity in place ready for the launch of the Westmere generation of processors. And there is no point in contributing to a glut of processors when supplies of everything else will be tight.

The top trio alone — Intel, Samsung and TSMC — will account for 38 per cent of all capital spending in the semiconductor business this year. And more than half of the outlay from the top ten, which will represent two-thirds of the total spend.

Although these numbers are big, they won’t have much of an effect on 2010 chip supplies, McClean said at the recent IC Insights seminar in London. Although fab owners are now more efficient at getting tools up and running on the clean-room floor, it still takes several quarters for them to be productive. And the fab-equipment makers have to be able to service the sudden leap in demand having slashed their workforce once again in a sudden semiconductor slump.

However, the big fab owners will have an advantage in ordering: they have cash in the bank. Smaller players, such as the cash-strapped Taiwanese DRAM makers, will probably find themselves at the back of the queue for kit as credit will be in short supply.