The end of innovation? Not possible.
Things are looking up for chipmakers. The top 20 semiconductor suppliers saw their sales surge 21% in 2Q09 from the prior quarter, and a 37 point swing from 1Q vs. 4Q. Not only does that suggest the stormy downturn/collapse hit its worst in 1Q, but that the sun is coming out ??? inventories are now being rebuilt, just in time for seasonal demand in 3Q (IC Insights projects 8% sales growth). By 4Q09 growth will likely get back in line with the global economy and electronic system sales.
It may sound like a new wave of prosperity is here, but there’s a catch. A significant movement is underway in the semiconductor industry and it’s all about capital spending ??? or lack thereof. Capital spending as a percent of semiconductor sales reached a record low of 16% in 2008, according to Bill McClean of IC Insights. The ratio is forecast to move even lower, to only about 12% this year, with only three companies (Intel, TSMC, and Samsung) dedicating $1.0 billion or more for capital equipment in 2009. These three companies will account for $11.5 billion in capital spending this year, or 43% of total industry spending, IC Insights predicts.
McClean sees this as a “power play” where these large companies are intentionally cutting back on adding capacity ??? even though the underlying demand is growing ??? in an effort to drive up prices. As a result, he sees much stronger IC average selling prices (ASPs) beginning in 2010 and extending through 2012.
This power play, if it continues, poses some interesting issues. “The concentration of manufacturing power in just a handful of companies has grave consequences for the pace of innovation across the industry in years to come,” notes Eric Auchard, a Reuters columnist. “It will vastly increase pricing power for a handful of manufacturers, and this will slow the seemingly relentless decline in chip prices over recent decades. The leaders will have fewer incentives to differentiate their products, while the laggards will lack the means.”
Auchard also notes that companies with cash to invest in the next cycle of technology stand to reap huge benefits. “Companies with cash to invest in the next cycle of technology stand to reap huge efficiencies that come from multiplying capacity on otherwise similar fixed costs. Such profits drop nearly straight to the bottom line. Companies caught short of cash or credit in the downturn will be unable to compete at the cutting edge of new technology, and risk becoming also-ran suppliers of commodity products.”
The problem with this whole scenario, in my opinion, is that it doesn’t take into account the important role that equipment suppliers play in developing and deploying new technology. The impact on the already beleaguered semiconductor manufacturing equipment community is going to be substantial. If companies are buying significantly less equipment, there’s obviously going to be less spent on R&D. Chipmakers rely heavily on the supply chain for new innovation, so the odds of tackling the infamous “red brick wall” of challenges defined by the International Technology Roadmap for Semiconductor (ITRS) become significantly lessened. How realistic is it to expect a “next cycle” of technology if the companies responsible for developing that technology have been cut off at the knees by the capex reduction power play? It’s not.
The semiconductor industry is still massive and evolving and is still the oil of the IT industry. Do Intel, TSMC, and Samsung have a lock on exactly where it’s going? Doubtful. “More than Moore” is just a catchphrase at the moment but I think that’s where there’s potential for tremendous growth. Higher levels of integration made possible through 3D chip stacking, and other advanced types of packaging, will be where the action is. There will be new kinds of devices, new companies, new opportunities, and new technologies. The best presentation at SEMICON West was from Proteus, Intelligent Medicine: Helping to Solve the Healthcare Crisis with MEMS and ICs. “First there was the Apple on your desktop, next there was a Blackberry on your belt. Now there will be a raisin inside you,” said Andrew Thompson, president and CEO, co-founder, Proteus Biomedical, talking about ingestible sensors that monitor body functions. Food-based ICs? Now that’s something I can swallow!