Chip shaker: TSMC, Samsung to flex foundry muscle
TAIPEI (Reuters) - Morris Chang, the father of Taiwan's chip sector, once shrugged off Samsung Electronics' entry into the foundry business - making private-label semiconductors under contract for others. Now, he calls the South Korean group the industry's "700-pound gorilla" with formidable financial firepower.
Samsung's rise highlights the rapid changes in one of Asia's top industries - where speed, creativity and deep pockets count in a race to make chips smaller, but smarter, to keep up with a consumer shift from computers to mobile gadgets such as Apple Inc's iPhone and iPad.
While U.S. firm Intel remains the dominant player, with as much as a two-year lead in process technology, the chip industry is going through its biggest shakeout in a decade, and the less well-known contract makers, or foundries, are set to emerge strongest.
Once-dominant Japanese firms have been battered by rising costs and the investment clout of Samsung and Chang's Taiwan Semiconductor Manufacturing Co (TSMC).
The Japanese have the technology, but the likes of Elpida Memory, a maker of DRAM memory chips for computers, and Renesas Electronics Corp, the world's leading maker of microcontroller chips for automobiles, just don't have the money to plough into the constant plant and technology upgrades.
"As technology moves forward, companies simply can't afford to individually build advanced fabs. The foundry model of aggregation is very good for addressing the cost issue," said Len Jelinek, director and chief analyst of semiconductor manufacturing at research company IHS iSuppli.
While the word conjures up images of red-hot steel and pounding metal, a chip industry "foundry" is a company that makes chips for others in large, modern and ultra-clean plants, or fabs, that cost billions of dollars to build.
IHS predicts revenue from the foundry business will jump to $42 billion by 2015 from around $30 billion this year, pushing up its share of the total chip industry to 10.8 percent from 9.1 percent. Foundries will account for almost a quarter of total chip capacity by 2015, up from a fifth currently.
The world's top foundries are Taiwanese: TSMC and United Microelectronics (UMC).
TSMC, founded by Chang in 1987, had revenue last year of $14.5 billion and a 49 percent market share, about four times the size of UMC, according to industry researcher Gartner. Then come GlobalFoundries, the former manufacturing arm of Advanced Micro Devices (AMD), which is backed by the Abu Dhabi sovereign fund and had revenue last year of $3.58 billion, China's SMIC and Israel's Towerjazz.
The foundries' workload is dictated by rapid technological change as consumer hunger for mobile devices means chips must be smaller and lighter yet do more and use less power. This means a bigger focus on logic or system chips, which make such devices work.
"For the first time in semiconductor history, the most leading-edge technology is not being driven by computers, but now mobile processors need it, too," said Samuel Tuan Wang, chief analyst for semiconductor manufacturing at Gartner.
The key for foundries is to perfect that technology, and shrink the space between the transistors on a chip that make it work, so more of them can be fitted on. Currently, the thinnest TSMC and other top makers are able to produce at is the 28 nanometer (nm) level - meaning the gap between the transistors is several thousand times thinner than a human hair, and tens of millions of transistors can fit on the head of a pin.
Intel's latest Ivy Bridge chips are produced at the 22nm level. Both TSMC and Samsung are working on 20nm technology, but this has so far proved unstable. A 28nm fab costs around $5 billion.
Samsung, which has a near-50 percent share of the memory chip market, is converting lines to non-memory chips to boost production of mobile processors used in Apple products and its own mobile devices such as the Galaxy smartphone and Note tablet-phone. In non-memory, it competes with Intel, Qualcomm, Broadcomm and specialist chip designers such as ARM.
Samsung's foundry business, ranked 9th globally with a 1.6 percent market share, is set to grow as it pushes into these logic chips. The firm is one of very few with the money and capacity to seriously challenge TSMC in advanced technologies. It already has foundry clients such as Qualcomm, and increased capacity could see it win more clients such as Texas Instruments and Nvidia away from TSMC - which is itself struggling to keep up with demand for chips in 28nm.
In January-March, non-memory chips accounted for nearly 40 percent of Samsung's total semiconductor revenue, and the group's investment in non-memory chips is expected to overtake memory chips for the first time this year.
"In future, Samsung will take a bite out of the orders that foundries get," said Clark Tseng, senior manager of market analysis at chip industry association SEMI, who sees TSMC and Samsung dominating the top-tier foundry business, with UMC and GlobalFoundries forming a second-tier and the rest trailing.
But Samsung does have an Achilles heel: it competes in some product areas such as mobile phones with potential foundry clients, raising the question of whether firms would feel comfortable handing over their technology to a rival.
Its recent dispute with Apple over mobile patents while at the same time being a supplier of chips to Apple shows the sensitivity and complexity of such arrangements.
And the smaller foundries aren't giving up just yet.
UMC has broken ground on an $8 billion expansion of a plant in Taiwan, and U.S.-based GlobalFoundries, with its Middle East backing, has been linked with a bid for Elpida. [ID:nL4E8GL6R8] SMIC, too, has big backers - the Chinese government - keen to develop high-value-added industries in a country better known for low-margin assembly work.
Now in his 80s and showing no signs of stepping down from an industry he created, TSMC's Chang is up for the challenge.
"I'm not afraid," he told a recent youth gathering in Taipei. "If I were, I wouldn't be doing this."
(Additional reporting by Argin Chang and Clare Jim in TAIPEI; Kim Miyoung in SEOUL, Mari Saito in TOKYO and Noel Randewich in SAN FRANCISCO; Editing by Ian Geoghegan)
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