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A Study of the Foundry Industry Dynamics A Study of the Foundry Industry Dynamics by Sang Jin Oh B.S. Industrial Engineering Seoul National University, 2003 SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN MANAGEMENT STUDIES AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY ARCHVES JUNE 2010 MASSACHUSETTS INSTiUTE OF TECHNOLOGY © 2010 Sang Jin Oh. All Rights Reserved. The author hereby grants MIT permission to reproduce JUN 082010 and to distribute publicly paper and electronic LIBRARIES copies of this thesis document in whole or in part in any medium now known and hereafter created. Signature of Author Sang Jin Oh Master of Science in Management Studies May 7, 2010 Certified by (7 Michael A. Cusumano SMR Distinguished Professor of Management Thesis Supervisor Accepted by (I Michael A. Cusumano Faculty Director, M.S. in Management Studies Program MIT Sloan School of Management A Study of the Foundry Industry Dynamics By Sang Jin Oh Submitted to the MIT Sloan School of Management On May 7, 2010 In Partial Fulfillment of the Requirements for the Degree of Master of Science in Management Studies Abstract In the process of industrial evolution, it is a general tendency that companies which specialize in a specific value chain have emerged. These companies should construct a business eco-system based on their own platform to compete successfully with vertically integrated companies and other specialized companies. They continue to sustain their competitive advantage only when they share their ability to create value with other eco-system partners. The thesis analyzes the dynamics of the foundry industry. Through the top-down approach (how the semiconductor industry trends have influenced the foundry industry), the foundry market size is expected to grow continuously as the semiconductor industry becomes more horizontal due to exponential increase in IC manufacturing/design cost and focusing strategy on design or manufacturing capabilities. In addition, the bottom-up approach (how companies in the foundry industry compete with each other) indicated that previous key success factors such as time to market, economies of scale and learning curve effect are not necessary conditions any more in this industry. Rather, the success of a foundry company is mainly driven by successful management of eco-system partners based on leading process platform. However, sustainability of platform leadership in the foundry industry can always be threaten by continuous innovation in a technology driven industry, hold-up problem with eco-system partners and change of regulations. These factors are expected to make the foundry industry extremely dynamic despite first mover advantages. Thesis Supervisor: Michael A. Cusumano Title: SMR Distinguished Professor of Management Acknowledgements This thesis cannot be made possible without a variety of sources of supporters. I would like to thank all of my supporters in this section. First and foremost, I would like to express my sincere appreciation and gratitude to my thesis advisor, Professor Michael A. Cusumano, for the patient support throughout the process and various inspirations that started from the fall term classes. In addition, I would like to appreciate all my fellow classmates and faculty members for the sincere advices which formed the foundation of this thesis. Especially, I would like to thank my classmates of Sung Jin Choi, Joonkyu Kang and Duck Hee Won who always have been together in and out of class for two years. And I would like to thank Samsung Electronics for providing me the great opportunity for participating Master of Science in Management Studies program in MIT Sloan. Lastly and definitely not least, my gratitude goes to my wife, Miso Park, for her love and devotion to me during married life. And I would like to thank my two beloved children, Hyunji and Hyunseo, for growing healthy in the U.S. Sang Jin Oh Cambridge, Massachusetts May, 2010 Table of Contents A b s tra c t .................................................................................................................................... 2 Acknow ledgem ents .................................................................................................................. 3 Table of Contents....................................................................................................................... 4 Chapter 1 Introduction .............................................................................................................. 6 1.1 Background ..................................................................................................................... 6 1.2 Research O bjective and Method ................................................................................. 9 1.3 Thesis O rganization ................................................................................................... 9 Chapter 2 Literature Review ................................................................................................. 10 2.1 Analysis of Business Models .................. ............ ............. 10 2.1.1 Business Model's Definition and Elem ents ......................................................... 10 2.1.2 Framework to Analyze Business Models ..................................... ...... 12 2.2 Platform Business ......................................................................................................... 15 2.2.1 Overview of Platform Business ................................ 15 2.2.2 Key Features of Platform Business ....................................................................... 16 2.3 Strategic Alliance ........................................................................................................... 18 2.2.1 Overview of Strategic Alliances .......... ..................... .................. 19 2.2.2 Success Factors for Strategic Alliances .............................................................. 20 Chapter 3 Analysis of the Foundry Industry ................................... .................................... 22 3.1 Overview of the Sem iconductor Cs ........................................................................... 22 3.2 Major Trends in the Sem iconductor Industry ..................................................... ....23 3.2.1 Dem and Side .......................................................................................................... 24 3 .2 .2 Su pply Sid e ............................................................................................................. 2 7 3.3 Semiconductor value chain ....................................... ....34 3.4 Overview of the foundry industry ........... ......... ............ ....... 38 3.5 Competition in the foundry industry .................... ................. 41 Chapter 4 Analysis of Business Models ............. .................... ...................... 45 4.1 TSMC's Business Model ............................................................................................ 45 4.2 CPA 's Business Model ............................................................................................... 53 4.3 Interaction between Two Business Models ...... ......... ........... ...... 58 4.4 Result of the com petition ............................................................................................. 60 3.2 .1 T S MC 's strength ................................................................................................. 6 1 3.2 .2 CPA 's w eakness ................................................................................................ 62 Chapter 5 Outlook for Foundry Industry Dynamics . ............................ 65 5.1 Foundry Market Size ................................................................................................. 65 5.2 Foundry Market Leader ............................................................................................. 68 3.2.1 Risk Factors for TSMC ........................................................................................ 68 3.2.2 Risk Factors for CPA ........................................................................................... 71 Cha pte r 6 Co nclusio n .............................................................................................................. 73 Bib lio g ra p h y ............................................................................................................................ 7 5 Chapter 1 Introduction 1.1 Background According to the product life cycle model, industry evolution typically follows four stages: introduction, growth, maturity and decline. It can be depicted as an S-shaped curve which has the points of inflection reflecting the change of industry revenue growth, due to innovation and diffusion of the product. Among the four stages, the maturity stage has some characteristics in which the industry market size increases at a decreasing rate, profit margin decreases with overheating competition, and the industry value chains become horizontal. However, even in this situation, some companies with competitive advantages within a specific industry value chain can earn more significant profits than other companies. A typical case is that of the computer industry that came to the maturity stage in the 2000's, decreasing the revenue growth rate and profit margin of some companies. IBM, which had adopted the horizontal open standard strategy to win over Apple in the PC hegemony war in the 1980's, lost its comparative advantages
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