Foundry forecast: Bottoms up to a 2002 recovery!
06/01/2002
Total foundry wafer demand declined by 39% in 2001. That's a far cry from the 40% growth foundry players experienced in 2000, but Semico Research Corp. is still bullish on their continued growth. From 2002-2006, foundry wafer demand will grow at a compound annual growth rate (CAGR) of almost 23%, much higher than the 14% CAGR expected for the overall industry, Semico predicts.
Foundry demand
Fabless companies demand more wafers from foundries than integrated device manufacturers (IDMs) or system houses. This trend will continue until 2004, when IDMs will finally demand most foundry wafers. Commitments and joint ventures that IDMs made in 2000 indicate a significant ramp-up of IDM demand at foundries as this cycle recovers. The full impact of this will not be seen until 2003-2004, however, when foundries begin to ramp volume production of 300mm wafers and IDMs begin to feel the pinch from capital reductions that were taken in 2001.
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In 2001, wafer demand declined in process technology categories from 0.25μm and larger. Wafers processed at 0.18 and 0.13μm
geometries increased compared to 2000. Although TSMC and UMC have begun production on 0.13μm designs, more than 50% of all foundry wafers were still processed at 0.35 and 0.25μm linewidths in 2001. Faster migration to 0.18 and 0.13μm designs will occur in the next few years.
Foundry supply
In 2001, foundries suffered through the worst downturn in their history, but foundry supply continued to expand, albeit slowly. Dedicated foundries continued to expand capacity for 300mm wafer production and new companies, both dedicated foundries and IDMs, entered the foundry supply arena. Most foundries are using more advanced process technologies at accelerated rates. The table shows the details of expanding capacity.
Dedicated foundries maintain more than 50% of total foundry capacity. Although a few IDM suppliers have entered the foundry business with large capacity, the dedicated foundries are adding capacity at a faster pace. Also, dedicated foundries are more apt to announce expansion plans vs. an IDM. By 2006, dedicated foundries will provide more than 62% of total foundry wafers. New players and additional capacity from the top three dedicated providers will continue as the main source of growth (Fig. 1).
 Figure 1. Dedicated foundry players' % of revenue (2001). |
The ramp of 0.13 and 0.10μm capacity is best performed with state-of-the-art lithography equipment and 300mm wafers. IDMs with older fabs will be faced with a major capital investment decision when trying to move to 0.13μm and beyond. By 2003, foundries will offer very competitive wafer prices for these technologies, making it more attractive to contract out than build or retrofit an old fab (see Fig. 2).
 Figure 2. Foundry supply by process technology. |
Supply/demand
Foundry wafer supply and demand has changed over the last year. In addition to more foundry supply from new players in China and Korea, the downturn has changed the makeup of the companies demanding foundry services. They are now designing new products for the new processes available at a number of foundries. Shortages will occur at certain technology nodes, mainly at 0.13μm, with a major tightening in 2004, as shown in Fig. 3. We expect to see capacity loosen up in 2005, when the overall industry experiences a slowdown.
 Figure 3. Foundry supply and demand, 0.13μm linewidth. |
Foundries have historically dropped their wafer prices to stimulate wafer demand. This worked in 1997, but failed during the 1998 economic slowdown. Lowered prices also had another effect: Foundries had a hard time increasing prices in subsequent years.
Semico receives foundry wafer prices from both the supply and demand sides of the market, including foundry suppliers, fabless companies, and IDMs, as both foundry suppliers and customers. Although wafer prices dropped in 2001, the average quarterly drop was only 2.6% (see Fig. 4). Also, during 3Q and 4Q01, wafer prices declined at a much slower pace than in the previous three quarters. We remain optimistic that we're seeing a market stabilization.
 Figure 4. Wafer price comparison (<1000wpm). |
Over the past 10 years, the foundry market has steered clear of some industry down cycles by avoiding the highly volatile memory market. Foundries process a large number of logic wafers, specifically for microcontrollers, chipsets, and microperipherals, such as communication and graphics chips, as well as programmable logic. Unfortunately, the current downturn impacted all product markets and severely affected the communication market.
Foundry outlook
Several factors will influence the future foundry market, including the effects of the 2001 downturn, when total semiconductor revenues declined by 32% and unit shipments by 21%. This has spilled over into foundries.
Fabless demand in 2003 will not grow as fast as the foundry market overall due to the way that companies are classified in the foundry model. We expect more mergers and acquisitions in 2003/2004, which means some fabless companies will be integrated into IDMs. The data show that IDM foundry demand grows at a faster rate than fabless demand. A major portion of that growth is a result of a cutback in capital spending by IDMs, but also of IDMs buying out fabless companies.
Foundries are a source of leading-edge process technology that provides more efficient manufacturing for the customer and higher margins for the foundry. There are risks, however, such as the cost and rate of adoption by mainstream customers. We still believe that the foundries' key strength is providing manufacturing services to the "sweet spot" of the industry in order to reap the benefits of economies of scale.
Due to the explosive growth in 2000, some fabless and IDM customers entered into joint venture relationships to accommodate the growing need for capacity. Most of these activities occurred in the nonvolatile memory category, represented by companies such as Sandisk and Toshiba. Some of these relationships will begin to deliver in 2002, causing isolated overcapacity problems by 2003.
Semico's recovery scenario appears to be emerging in conjunction with an overall economic recovery. Continued growth is expected in some of the key end-use market applications served by foundries, i.e., microcontrollers, including DSPs, and programmable logic.
Nancy Winters is an analyst at Semico Research Corp., PO Box 9850, Phoenix, AZ 85068; ph 602/997-0337 ext. 112, fax 602/997-0302, e-mail [email protected].
This article includes excerpts from Semico's reports "Foundry Forecast: Bottoms up to a 2002 Recovery" and "Foundry Wafer Pricing: Fourth Quarter 2001." Contact the author for additional information.