The exploding costs of fabrication facilities, or fabs, combined with technical hurdles surrounding the design of the next generation of chips, are creating a bifurcation that will change the face of the industry, executives and analysts say.
On one side will be Intel and a select few that can afford their own fab plants--which will cost between US$2.5 billion and US$3 billion to build in 2003 and US$6 billion by 2007--and perform basic research on transistor design or new chip materials. These new fabs will process wafers with 300-millimeter diameters, larger and more complex to make than today's 200-millimeter variety. On the other side will be everyone else. They will have to share fabs, pool research, buy technology or rely more heavily on outside foundries, which in turn will have to seek help.
"It's becoming almost impossible for the smaller semiconductor companies--smaller being anything less than an Intel or a Texas Instruments or an NEC--to afford these 300-millimeter fabs on (their) own nickel," said Brian Halla, chief executive of National Semiconductor. "What you are going to see is more and more partnerships."
Historically, companies spend 20 percent to 30 percent of revenue on capital expenditures, meaning that a fab can be justified only if it costs about one-third or less of annual revenue. In 2002, only Intel and Samsung, with about US$23 billion and US$9 billion in annual sales, respectively, could spring for new fabs.
In this tough economy, even Intel has scaled back estimates for capital spending in 2003, a move that had repercussions far beyond the chip industry. Because Wall Street views Intel as a bellwether, stocks fell after the chipmaker announced its capital forecast even though the company beat analysts' revenue expectations in its quarterly report last week.
Other large manufacturers will need outside help to make their chips. TI and Infineon, the German memory maker, have said they will outsource some production to Shanghai's Semiconductor Manufacturing International. Motorola, ST Microelectronics (the world's third-largest chipmaker), Philips and Taiwan Semiconductor Manufacturing (TSMC), are collaborating on a wide variety of ventures: how to build 300-millimeter factories, designs for new types of memory and techniques for making 90-nanometer chips, among other projects.
"It takes a lot more horsepower to get these technology road maps to hit on target," said Alex Pepe, vice president and director of strategy for technology and manufacturing in Motorola's Semiconductor Products Sector, which is increasing its partnerships to cut costs.
Motorola's Austin, Texas-based chip division is in many ways emblematic of the trend. In 1998, the company operated 25 fabs and 15 sites for testing and assembling chips. By the end of the year, Motorola will have eight fabs and two test centres. Any future factories will be built jointly with others, while outsourcing manufacturing--around 20 percent now--will likely increase. Cooperative research and development will also become norm, Pepe said. Motorola will increasingly license its technology to start-ups, large companies and even equipment makers, for financial gain.
In this new era, Intel could gain an even greater opportunity to undercut opponents or enter new markets because of its unique self-sufficiency. Asian foundries such as TSMC, meanwhile, will grow in power, and IBM may become the de facto R&D department for an array of semiconductor companies. Other chipmakers may simply fade away.
"There is going to have to be some consolidation in the industry," said AMD Chief Executive Hector Ruiz, whose company obtained manufacturing techniques from IBM and will likely co-own its next factory with another company. "Outside of Intel, I don't know who could do it (alone). There has to be a coalition."
