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Outsourcing and Offshoring in the Semiconductor Industry. David A. Hodges Robert C. Leachman Competitive Semiconductor Manufacturing Program UC Berkeley Sloan Industry Centers Annual Conference Atlanta, GA April 19-21, 2004.

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Outsourcing and Offshoring in the Semiconductor Industry

David A. Hodges

Robert C. Leachman

Competitive Semiconductor Manufacturing Program

UC Berkeley

Sloan Industry Centers Annual Conference

Atlanta, GA April 19-21, 2004


U.S. Integrated Device Manufacturers(e.g. Texas Inst., Motorola, Intel, …)

Labor-intensive chip assembly work mostly off-shored since the 1960s

  • Initially, plants served just one company

  • More recently, independent assemblers and testing firms are serving multiple customers

  • IBM automated in the 1960s

  • Automation of assembly and testing now spreading industry-wide and world-wide


U.S. IDMs, 1960-1990

  • Capital-intensive wafer fabs were off-shored selectively: important aid market access

    • Cost of direct labor not a significant factor

    • US ownership, international professional staff

    • Hazards: weak infrastructure, long supply lines, business and political climate

    • Early examples: Texas Instruments (Japan), Analog Devices (Ireland), Intel (Israel)


U.S. IDMs, 1960-1990

  • Skills-intensive process development and product design mostly remained in the US

    • Firms sought advantages from proprietary technologies

    • Few skilled professionals available abroad

    • Some exceptions: Chip design centers in England (TI), Israel (Intel); typically devoted to specific products for worldwide markets

  • Sales, marketing, customer support efforts carried on world-wide


Changing business models:IDMs forced to become specialists

  • Intel, AMD: microprocessors

  • Samsung, NEC, Micron, Infineon: memory

  • Texas Inst., STM: chips for cell phones

  • These are standard products, MM units; same designs purchased by many competing original equipment manufacturers (OEMs)

  • Above categories represent about ½ of total worldwide semiconductor production

    • What about the other half?


Factors leading to “foundries”

  • Competitive modern wafer fabs cost $2-4B

    • employ ~ 1000 people (total for 7 x 24 operation)

  • Annual revenues > ½ fab cost for profitability

  • Worldwide standardization of mfg. process

  • Innovative design firms require only a fraction of one fab’s capacity

  • Vastly different management skills: design vs. fab

  • IDMs rarely succeed in serving fabless firms

  • Foundries were established to serve this need

    • Leadership of Morris Chang!


Fabless-foundry business model

  • Fabless firms define, design, & market chips

    • small investment, quick response

    • $300-500K revenue/employee

    • ~50,000 well-paid U.S. jobs; ~13,000 ROW

  • Asian foundries fabricate chips for many firms

    • huge investments; fixed costs ~75% of total

    • ~15,000 factory jobs, well-paid by local scales

    • highly automated for tight process control

    • short production cycle

    • timely intro of new technology generations

    • excellent customer service

    • some niche specialists with old technology


Outsourcing, Offshoring?

  • Fabless design centered in the U.S.

    • MS, PhD grads of top U.S. universities

    • U.S. is #1 (78% of ‘03 revenues)

    • Taiwan is #2 (11% of ’03 revenues)

    • Equivalent design skills very rare elsewhere

  • Most silicon foundries are in Asia

  • Many process development jobs in Asia

    • Many grads of top US universities

    • Weak U.S. domestic investment (except Intel)


“Food chain” for semic. industry

  • Semiconductor production equipment & raw materials are supplied mainly from U.S., Japan, and Europe

  • U.S. leads in key areas:

    • MS & PhD education

    • Computer-aided design for semiconductors

    • University-industry cooperation

    • Climate for innovation

    • Market for advanced technology

  • Government support is strongest in Asia


Factors influencing location for manufacturing investments

  • Trophy value of semiconductor fabs

    (Think about the steel industry in the 1960s)

    • Trophy sought by gov’ts worldwide: tax incentives!

    • China is the current leader in incentives

    • Most capital comes from outside PRC

  • Fading concerns about investment risks

  • Weaker controls on U.S. equipment export

  • Commodity status of manufacturing technology

  • Return of expatriates; spread of higher education

  • Protected IP less important than know-how

  • Improving infrastructure in China, other nations


Chinese competition for foundry business

  • Semiconductor Manufacturing Int’l Corp. (SMIC)

    • largest, most advanced Chinese foundry

    • founded in 2002; 3 8” fabs in Shanghai

    • purchased Motorola’s 8” Tianjin facility

    • 12” fab in Beijing under construction

    • 3/17/04: $1.8B IPO in HK & NY; -12% as of 4/6/04

  • U.S. filed WTO complaint re: China’s lower VAT for locally designed or manufactured semiconductors

  • China remains far behind in chip design capability

  • China establishes unique domestic standard for cellular telephony; Chinese partners required


2003 Foundry revenue leaders

  • 1. TSMC (Taiwan)$5.9 billion+ 26%

  • 2. UMC (Taiwan) 2.7+ 27%

  • 3. Chartered (Singapore) .73 + 49%

  • 4. IBM (U.S.-IDM) .56 - 27%

  • 5. NEC (Japan-IDM) .43+ 33%

  • 6. SMIC (China) .37 +630%

  • 7. Hynix (Korea-IDM) .34+ 39%

  • 8. DongbuAnam (Korea) .33+ 27%

  • 9. Jazz (U.S. ex-Rockwell) .19+ 16%

  • 10. HHNEC (China) .17+ 13%

  • 11. SSMC (Singapore) .16+ 82%

  • 12. X Fab (E. Germany) .13+ 27%


Survival strategies of U.S. IDMs

  • Intel: heavy investments; try new markets

  • Texas Inst: limit investments + use foundries

  • IBM: partnered with Chartered, Infineon

  • AMD: more German incentives in Dresden

  • Micron: innovation; more cost reductions

  • Motorola: divesting semiconductor business

  • National: product focus; use foundries

  • Analog Devices: limit investments + foundries


Conclusions for semiconductor industry

  • It’s a fully globalized industry

  • Microprocessors: Intel unchallenged

  • Memory is a commodity; Samsung leads by far

  • IDM business model is dead for other products

  • U.S. leads in innovative chip design

    • U.S. unchallenged in design software

    • design & software skills are bound to spread!

  • Asia leads in foundry manufacturing

    • U.S. is not a serious competitor; poor ROI

    • TSMC, UMC are likely to remain leaders

    • Overcapacity looms; SMIC payoff is uncertain


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