SHIFTING SANDS THE FUTURE FOR SEMICONDUCTOR FOUNDRIES By Enrique Duarte Melo and David Michael New dynamics are combining with historical efficiently. Companies such as Taiwan determinants of success to reshape the Semiconductor Manufacturing Company semiconductor sector. The first article in our (TSMC), Global Foundries, and UMC have series on these “shifting sands” explored how grown into major players alongside the challenges of managing scale, dealing with integrated device manufacturers (IDMs) market volatility, and innovating at the speed such as Intel, Samsung, and Texas Instru- of Moore’s law increasingly share space on the ments (TI). As we move further into the strategic priority list with the demands of the post-PC era, however, foundries—as well growing mobile-device market, a fragmenting as design companies and IDMs—face big universe of devices with short life cycles, and changes and choices in how they do new technologies to support sophisticated business. Major shifts in product mix, big applications such as advanced graphics. technology challenges, and increasingly Nowhere are these challenges coming together demanding economics will cause foundries in a more concerted fashion than for found- to rethink their basic value proposition. ries. The long-term revenue outlook is strong for foundry companies as a group. Individual- Foundries face broader strategic options ly, however, they face major shifts in both and imperatives than ever before in terms technology and marketplace demand, necessi- of the products they manufacture and the tating a comprehensive reexamination of technologies they employ. At the same strategies and business models if they are to time, the mushrooming cost of construct- perpetuate the same levels of growth that ing new, advanced technology capacity have propelled their rapid rise. heightens the financial pressure to make the right bets. Only the biggest companies, emiconductor foundries were such as TSMC, will have the ability to serve Sborn out of the need for the fast-grow- a wide array of customer segments. For ing semiconductor sector to construct and others, new capabilities, in addition to manage manufacturing capacity more scale and utilization, will rise in impor- For more on this topic, go to bcgperspectives.com tance, especially as large, deeply resourced grown in size and has also been carved into competitors, such as Intel and Samsung, a greater number of slices. seek footholds in the foundry market. Intel, for example, has recently contracted The long-term outlook remains strong, but to manufacture Altera’s field-programma- it will continue to be fueled by varied ble gate array chips using its 14-nanometer forces: the explosion in digital devices with tri-gate transistor technology. These differing power consumption needs, the dynamics have ramifications for the entire rising demand for low-cost systems and value chain, from design companies to devices in emerging markets, the need to original equipment manufacturers. process ever more vast quantities of data, and the continuing penetration of semicon- Foundries will have to develop the ability ductors throughout other major sectors of to assess end-user—often meaning consum- the economy. Gartner projects the semicon- er—demand and needs. Which products ductor market will grow at about 6 percent will generate new sources of revenue? a year—approximately twice the rate of Which technologies are the best fit? Which GDP growth—to more than $400 billion in design customers and IDMs can a foundry 2016. Demand at foundries will increase best work with in order to meet this even faster. Revenues grew more than 7 demand? percent from 2011 through 2012 and are expected to increase more than 7.5 percent This is no small challenge. Big, integrated in 2013 to some $37 billion. companies such as Intel and TI have very different strategies, priorities, and needs Fabless design companies, long the biggest from those of younger designers such as customer segment, will drive some three- Broadcom, Qualcomm, Marvell, and quarters of demand at foundries, but MediaTek. Companies that straddle much increased outsourcing at IDMs will also be of the value chain, such as Apple and responsible for a significant share. The top Samsung, have their own competitive ten fabless design companies and the five dynamics. Working hand in glove with the largest outsourcing IDMs are expected to right partners to establish a strategy and generate approximately half of foundry vision for the future will become critical in revenues. This customer concentration will creating value for many foundries. become an increasingly important industry dynamic. (See the exhibit “Foundries Face a Significant Concentration of Revenues.”) From Standardization to Proliferation Managing scale and productivity and As the PC era took off, rising demand for keeping pace with Moore’s law are still key faster, more powerful computers and more strategies for foundries. So, too, are meeting and more memory put a premium on scale demand for a widening array of semicon- and high rates of capacity utilization in the ductors with varying features and capabili- chip-manufacturing process. PC architec- ties, such as sophisticated graphics and ture converged around a few design power management, and adapting to longer standards, and foundries enjoyed rapid and R&D timeframes and shorter product life profitable growth as a result. In recent cycles. The biggest driver of demand will be years, however, the sources of demand have the exploding number, and changing nature, proliferated to include sophisticated new of digital devices. Computing and consumer consumer devices such as smartphones and electronics represent 60 percent of the tablets, as well as industrial applications end-user market for chips. Recent BCG such as embedded processors in automo- research in the U.S. found that consumers biles. These devices and applications have today own an average of 2.9 digital devices different processor needs from those of (including computers, smartphones, and PCs, a phenomenon that has resulted in the tablets), almost twice as many as three years increased use of architectures such as ARM- ago, and they are likely to own 4.1 such based design. As a result, the device pie has devices in three years’ time. | Shifting Sands 2 Foundries Face a Significant Concentration of Revenues Semiconductor revenue Foundry revenue composition composition, 2010 ($billions) Texas Instruments Top-ten fabless 39 Revenue from fabless Toshiba design companies STM Other fabless 26 Renesas Other IDMs Outsourcing IDMs 91 Revenue from IDMs Others1 143 2 Tota l 299 Revenue from OEMs 0 100 200 300 Sources: Gartner; BCG analysis. Note: IDMs = integrated device manufacturers; OEMs = original equipment manufacturers. 1Includes Intel ($42 billion), memory companies ($33 billion), IDMs that run foundry services ($31 billion), and IDMs with minimal outsourcing ($38 billion). 2Includes a small contribution to the foundry segment and is not a focus of this analysis. The Shifting Economics of Power nanometers to an estimated 18 months for Technology issues and financial constraints 28 nanometers and beyond. complicate the strategic choices further. The market continues to expect process The inevitable result is diminishing pay- technology advances (such as decreases in back on ever-bigger investments—a size from 45 nanometers to 32 nanometers difficult prescription for value creation. to 22 nanometers and beyond) that simul- Foundries also face increasing complexity taneously consume less power and provide in design with the advent of 3-D integrated increased performance. This puts a premi- circuits and the transition to larger wafer um on precision tooling (particularly diameters (from 200 millimeters to 300 lithography) and yield optimization, which and 450 millimeters). Several key technolo- is leading to exponential growth in capital gies are approaching the limits that physics costs for advanced technology nodes. places on further advancement. Most companies cannot keep up with A new, big bottom line looms: as the market leader Intel, which already has amount of capital required to fund devel- 22-nanometer chips in production and is opment of advanced nodes grows, only a working toward the production of 14-nano- few of the biggest players have the balance meter chips in the near future. Three of sheet capacity to lead in process develop- the next-largest players trail significantly. ment. Some current leaders soon will be- At the same time, the rising cost of invest- come followers, and companies used to win- ment in each new generation of technolo- ning on technological edge will need to look gy makes it harder to create the necessary for new sources of competitive advantage. returns. In addition, while the market expects faster ramp-up cycles to meet the introduction of new products, the time New Capabilities for an from “tape out” to initial production for Evolving Marketplace foundries expands with advanced nodes— The net impact for just about all foundry from 12 months for 65 nanometers and 45 companies will be the need to rethink | Shifting Sands 3 options and magnify bets. Not all found- ing of customer needs, which include the ries have evolved equally, of course. With following: 2012 revenues of $16 billion, TSMC is the market leader by a considerable margin; • Process technology needs (technology the next two largest players, Global nodes and transistor characteristics Foundries and UMC, and are about such as gate materials) one-quarter its size. Each company has its own strengths in technology and manufac- • Intellectual property needs (such as turing, but most do not have the resources specific input-output or I/O, physical to serve every design company or IDM or design or PHY, and analog technologies) to develop the intellectual property necessary to meet the increasingly varied • Markets served—such as logic, embed- technological demands of a fragmenting ded software (including all its subcat- market. They will have to make choices, egories), and memory based on their current market position, technological capabilities, financial • Business interface needs, including strength, and customer relationships.