Semi packaging... a good investment?
11/01/2000
By Mark Diorio
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I can't help but be amazed by the investment community's growing interest in semiconductor packaging. I would have thought that the packaging industry as a whole significantly lacks in glamour when compared to the high-flying (and fast-crashing) dot coms, and software, biomedical and pharmaceutical companies. In the shadow of device makers and front-end wafer fab segments, why packaging? Are there opportunities in packaging that we take for granted, or are others finally realizing what we have know for so long - that the future of semiconductor technology lies hidden in the realms of advanced packaging, assembly and test? Any increase in device performance must not only come from design innovation and new fab processes, but through a high-performance package by which to enable applications. A keen awareness of this bodes very well for investors.
The semiconductor assembly and test services (SATS) market has attracted the greatest attention within the investment community. With companies, such as Amkor, ASE Test and ASAT, going public in the U.S. market and with another six or eight SATS companies targeting public offering by the end of the year, the investment community is quickly becoming more educated about the role packaging plays and the critical need for packaging and test services by the semiconductor industry. Let's consider some of the reasons why financial groups are seeing SATS companies as good investments.
Strong Growth
The SATS industry is expected to achieve a 30 percent CAGR during the next three to five years. This trend is driven not only by the increasing market demand of packaged devices for a variety of new semiconductor applications in the wireless, internet and consumer segments, but also by the increase in outsourcing packaging assembly and test operations by semiconductor device manufacturers (IDMs). Add to this the growing rate of new manufacturing-less or fab-less companies that continue to emerge, coupled with their need and dependency on SATS companies, and this growth rate appears quite reasonable.
Reduced Cyclicality
It is interesting to note that the investment community feels that SATS are less cyclical than the governing semiconductor market. During the past 15 years when semiconductor sales dollars fluctuated greatly, the number of units manufactured never experienced a downturn (most CEOs of companies in the back end probably have never realized this; such a revelation takes away an excuse for poor financial performance). Regardless of pricing pressure or supply/demand situations, which can have adverse effects on an IDM and the industry at large, the number of devices that must be packaged, assembled and tested will not go down.
Incremental Investment
Unlike the wafer fab sector, where companies either build a new fab or they don't (there is no in-between), SATS companies can add output with relative speed and ease. The capacity in a SATS company is driven by customer or market demand, and capital investment can be gradual and less risk-oriented when compared to front-end counterparts (although I don't see any decline in wafer fab capacity demand). It is relatively easy to add 10, or even 100, wire bonders to gain capacity as compared to adding an additional 10,000 wafer starts. By controlling capital expenditures, SATS companies can control their cost structures and, thus, have the potential to maximize margins.
Technology Development and Time to Market
The inherent complexity of advanced packaging allows SATS companies to be competitive to their customer base because spreading the cost across a broad variety of customers allows for an increase in new package development and implementation. This drives package development down for customers, who are generally glad to have it outsourced rather than having to conduct this effort internally. And because package development is a core competency among SATS, the focus, expertise and execution allow customers to be competitive in bringing their products to market more quickly. The investment community sees this as an opportunity in promoting the outsourcing trend and, therefore, a boon to growth in the SATS arena.
While there is a generally positive aura surrounding the notion of investing in SATS companies, it's important to consider some of the potential risks, as well.
Overcapacity
When overcapacity occurs, prices plummet (regardless of the increase in demand for total units). Usually, this does not occur across the board but only in selective areas. For instance, one year ago, pricing for BGAs was at 1.0 cents a pin or better. With the increase in BGA capacity installed by a variety of SATS, we have seen this fall to as low as 0.7 cents per pin. Clearly, such degradation in package cost can adversely affect the profitability of a company.
Lack of IP
SATS, in general, possess no intellectual property (IP) or proprietary technology that binds the customers or the market to them. Most of the leading SATS have the same or similar package offerings. Customers or IDMs may change from one SATS source to another at any time without impact to ultimate technology or application because SATS are exactly what their name denotes: service companies that depend solely on their ability to service the market. While we could say that it is often too difficult or expensive for an IDM to qualify a new SATS source, this scenario occurs all the time. IDMs will not hesitate to qualify a new source, or shift their production to a new location, for a variety of reasons but not technology. If a SATS company has 10 customers accounting for 80 percent of its revenue, one of these customer changes could have a significant impact to business.
In a Nutshell
Perhaps I've oversimplified my characterization of SATS companies. But, in general, there are several good reasons to invest in SATS...and a few cautionary notes. Do I think SATS are a good investment? Yes, I think they can be. I believe that there is strong up-side potential for SATS companies based on industry growth factors. Then again, I think that many IDMs and semiconductor equipment companies are prudent investments, too (though the market has not rewarded me lately).
What is the criterion by which to invest in these companies? Well, what tends to work for me in the long term is to find credible, even laudable, management. Management of any company is key, but never is this more critical than in a service sector such as SATS. Good service is dependent on good people who need to be driven by good management. Regardless of the product manufactured or the price incurred, it all comes down to management. Invest wisely.
MARK DiORIO, chief executive officer, can be contacted at MTBSolutions Inc., 1630 Oakland Road, Suite A102, San Jose, CA 95131-2450; 408-441-2173; Fax: 408-441-9700; E-mail: [email protected].