Research firm Future Horizons held its annual review and forecast for the semiconductor industry on Tuesday, Dec. 14, in London and predicted the market will grow 6 percent or more in 2011, building on a 34 percent expansion in 2010.
However, Malcolm Penn, chairman and CEO of the UK-based company, was more concerned about certain trends he has identified in the industry, all of which he said have the potential to hamper future growth and create massive supply chain disruptions. Penn said IC vendors are too dependent upon foundries for wafers and warned that capacity is tightening due to sharp cutbacks in semiconductor equipment capital expenditure over recent years.
The researcher identified several myths he says are driving business management in the semiconductor market. These beliefs, according to Penn, formed the background and foundation for decisions industry executives, investors, and financial analysts have taken over the last 10 or more years.
Many of these decisions — including the proliferation of production outsourcing to lower-cost regions of the globe, the use of severe price cuts to win market share, and the fabless manufacturing system adopted by even the largest chip vendors — have upset the traditional equilibrium in the market and further reduced visibility in the already foggy forecasting environment to no more than one to two quarters, according to Penn.
Is Penn right when he says, for instance, that “the single biggest problem we have now in the electronic industry is the huge lack of visibility” into demand at all levels? Electronic companies he added, including OEMs, which used to preside atop the supply chain, now “have no control over inventory while component makers don't know who is buying what because of the presence of contract manufacturers.”
Some of the factors identified by Penn and many other executives and government officials are emerging as major discussion topics across the industry. Officials at the European Commission, for example, are so concerned about the transfer of high-level semiconductor manufacturing to Asia that they recently ordered a review of the benefits and feasibility of reigniting advanced or next-generation chip production in their own region.
That research, lyrically entitled “Benefits and Measures to Set Up 450mm Semiconductor Prototyping and to Keep Semiconductor Manufacturing in Europe,” is set to commence sometime in mid-January 2011. The EC has reportedly awarded the contract for the report.
It's not certain that actions like this can stem the tide of high-tech manufacturing outsourcing to places like China, but people like Future Horizon's Penn, a veteran with almost 50 years experience in the industry, believe very strongly that the West must at least conduct a review into the current and long-term effects of production relocation on its competitiveness.
If you ask Penn to give his opinion, it's clear the facts would have to be undeniably strong to convince him giving up manufacturing by western companies was a smart move. “No one seems to have made the connection that if you give up manufacturing, you set up your economy for deficit financing,” he said. “You cannot grow your economy only on services: You have to do some manufacturing. You don't make money out of research, either. It's good for the brain but not for the pocket.”
Here are the six myths identified by Penn and his rather terse commentary on each one. The myths are in bold followed by Penn's comments in italics. I will explore these individually in future articles, but I would like to know what you think of them. Please post your comment in response to this column.
- Fabs have no strategic value.
- Average selling prices will keep on falling.
- Foundry wafer prices will be cheap and freely available.
- Multiple foundry sources will keep the foundry business honest.
- It's OK to focus on your core business more than on Moore competence.
- The semiconductor market has matured, and [long-term] industry growth will average 7 percent per annum.
“Until you haven't got one and you have no control over your business.”
“Just like house prices kept on rising?”
“Just like cheap debt? Whoops, TSMC is already raising prices.”
“Multi-sourcing at less than 22nm is going to be interesting.”
“Today's more Moore is tomorrow's more than Moore.”
This is the natural outcome of 4 percent falling average selling prices and 11 percent unit growth. However, prices cannot keep falling forever and have been rising over the last six or seven quarters.