ISS: Major consolidation concerns as R&D rift deepens
Attendees at the week's Industry Strategy Symposium (ISS, Jan. 10-13, Half Moon Bay, CA) heard plenty of good economic news: forecasters predict two or more good years of strong growth for the semiconductor industry.
Along with this buoyant optimism, however, came new from multiple sources that the semiconductor is undergoing a fundamental change in structure that will leave only a handful of companies producing devices at the leading edge. Bob Johnson, VP of research at Gartner, described several economic forces at work that could derail Moore's Law due to lack of R&D funding. One factor is the number of major IDMs that are moving from a full manufacturing position to an asset-light or fabless position. "The number of companies that are actually participating in the leading edge is shrinking," Johnson said. "If you look forward about five years, you come to the very realistic assumption that there are going to be at most 10 companies doing leading edge manufacturing. By leading edge, I mean the two most advanced process nodes. Right now, that would be 45nm and 32nm. By 2014, it would be 22nm and 15nm. How many of those companies will be operating at the absolute leading edge, in other words 15nm, by 2014? Just cut those numbers in half," he said. "You've really got about five companies out there that are really going to be seriously considering manufacturing in accordance with the Moore's Law pace."
Handel Jones, CEO of International Business Strategies, also predicts significant changes over the next 5-10 years. By the time the 22nm generation rolls around in 2012, he predicts there will be only three IDMs: Intel, Samsung and STMicroelectronics, and in terms of foundries working at 22nm, he thinks TSMC and GobalFoundries (which recently acquired Chartered Semiconductor) will be around. The fate of Samsung, which recently entered the foundry business, will depend on the success of their model, he said, adding that SMIC is an unlikely participant, and the capacity of UMC is "unclear."
A similar situation exists in the memory market. "What we see today is a number of companies in the DRAM, NAND flash and NOR flash businesses, but if you look out two to five years, you're going to have one or two companies and that's it," Jones said. Samsung will again be a major player, with a projected 50% of the DRAM market and 60% of the NAND flash market. "What we see now is Samsung moving ahead very rapidly and the others falling behind. The gap is widening," he said. Toshiba is a distant second, at least in NAND flash, where Jones expects them to garner 30% of the market.
Johnson said the higher costs of leading edge technology also means that companies must target only very large markets. At the 32nm mode, he said those markets needed to be about $2 billion. "The idea of being able to build a leading edge device that might target a $100 million market... those days are gone," he said. "If we look at our current forecast and take it out to 2013, there are really only about five major markets that qualify for the greater than $2 billion TAM. That's PCs, cell phones, video games, TVs and set-top boxes. That includes all the new things we're seeing coming out of the CES show," Johnson said.
Another trend that affects the ability of the equipment industry to fund R&D is capital intensity. Long term the trend in capital intensity—simply capital spending as a percent of revenue—has been declining, Johnson noted. In part, this is because people know how to build fabs more efficiently, but it's also because the industry's growth rate is declining. Once at 17% CAGR, Johnson said we're realistically looking at a long term growth rate in the 5%-7% range. "It takes less capital to keep that going," he said. — P.S.