Why SATS consolidation needs to happen October 12, 2012 - The advent of leading-edge semiconductor packaging technologies dictates efficient use of capital, and only the top-tier companies will have the financial wherewithal to develop required expertise and capacity. That means consolidation needs to happen in the semiconductor assembly and test services (SATS), according to a recent report from Gartner. IDMs started moving packaging plants into the Asia-Pacific region in the 1980s, and by the early 1990s outsourced packaging had bloomed, and gained speed with the emergence of the fabless/foundry model, explains Gartner analyst Jim Walker in a recent report ("Competitive Pressures Will Bring Consolidation to the SATS Market"). Over the past 10 years outsourcing has accelerated with proliferation of customized, application-specific packaging demand, and today the market has quintupled since 1997 to $25B, with nearly all the 130 SATS companies still in the greater Asia-Pacific region (including Japan). Right now the SATS market is on a 8% CAGR trajectory from 2011-2016, but growth on an annual basis is slowing, Walker notes. The top five SATS companies currently comprise 50% of the market and will expand to nearly 60% by 2012 — that’s five out of more than 130 suppliers. The top 20 SATS companies comprise more than three-fourths of the market. Top 10 SATS companies in 2011, sales as a percentage of total market. (Source: Gartner) Consolidation is not only inevitable, it is sorely needed. Several factors will push these firms together: Slower growth, due to market saturation. Crossing the 50% outsourcing saturation mark in 2011 implies that the total market available for packaging services from IDM, OEM, and fabless companies is shrinking, and will be more tied to industry unit growth and new business sectors. Increasing competition at leading-edge technology nodes, and in niche markets. The process node migration continues (28nm, 20nm, 14nm, eventually 10nm and below), as does increased demand for mobile devices, which together necessitate more packaging technology and capacity for capabilities including WLP, flip-chip, through-silicon via (TSV), and redistribution layers. Those who can stomach the capital requirements for these, will stay on top — and those who cannot will find themselves on the losing end. Similarly, as the outsourcing sector aligns to industry unit growth, SATS companies focusing on specific markets (e.g. memory) are more exposed to narrow, commodity-like and price-sensitive market forces. Such companies need to expand on their own into other markets, or consolidate with bigger and broader SATS companies. See recent expansion/divestment news from PTI, Power ASE, SPIL, and ChipMOS. (In fact this trend could spell the end of memory-specific packaging and test services market, Walker notes.) Continued efforts by IDMs and OEMs to outsource backend processes. Technology investments and capacity additions are a hard sell when utilization rates are low (or aren’t at full strength). The proliferation of packaging options (Gartner cites >2000 unique packages) is forcing OEMs/IDMs to rethink sharing capital investments, deciding to leave it to the outsourced "experts." Increasing importance of a China market strategy. Most top 10 SATS companies have at least one Chinese manufacturing facility, initially taking advantage of cost savings and incentives. But now, recognizing China’s swelling appetite for electronics components and systems, SATS firms want and need those domestic capabilities to satisfy demand. ASE, for example, has led the way in defining a strategy that straddles operations in both Taiwan and China, including $1.2B to build up operations in Shanghai and Pudong. Continued emergence and development of wafer-based packaging process technologies requires both wafer fabrication and semiconductor packaging manufacturing equipment, processes, and expertise — meaning foundries can do some of them too, such as wafer bumping and underbump metallization. Similarly, 3D package stacking, embedded components, and system-in-package (SiP) devices require both processes and technologies for packaging and printed circuit board assembly — and technologies such as system-on-package will further blur these roles. SATS firms should expect to see increased competition from the foundry market, Walker notes. They also need to expand their services to include test capabilities, package design, and module offerings. And perhaps most importantly, they need to get virtual or vertical — develop an acquisition plan or partnerships/joint ventures with foundries, EMS/ODM firms, and/or materials and equipment companies, he advises.