IC foundry business model mechanism study Step 4: IC foundry business model forecast
Design business models for wafer foundries based on cutting-edge technology.
Step 5: Conclusions and recommendations
Discuss the results and formulate recommendation for future studies.
Table 1.1 Research steps and architecture industry operating model. Second, study semiconductor plants in Taiwan and overseas market niches; understand the entrance barriers for new companies and the purpose of a modified business model to enhance worldwide competences.
Chapter 2 Literature survey
In the Wealth of Nations, Adam Smith (1776) indicates that the country‘s wealth depends on its labor productivity. Labor productivity increases from the division of labor and professionalization from the perspective of industrial development and national wealth creation. The improvement in labor productivity occurs in the most profitable, fastest growing industries because these industries have access to the largest surplus through investment, which can naturally lead to further division of labor.
Stigler (1951) points out that the industry and ―vertical integration of the early formation of close‖ because after the development of the industry and the market scale, manufactures form specialized divisions of labor. Ming Chung Chang (2001) points out that the vertical division of labor in an industry according to the upstream and downstream processes is divided into several levels, each firm performs only one level of specialized work.
Hone Xiuwan (2002) observes that in the Taiwan semiconductor industry‘s vertical division of labor, the family home becomes the vertically integrated upstream vendors for the IC design companies, production of intermediate products and then downstream to IC manufactures and producing final goods.
Tirole‘s (1988) industrial organization theory of the downstream firms states that downstream of the IC design companies is the production of intermediate products, while downstream of IC manufactures is the production of the final goods. Tirole (1988) theory of industrial organization on downstream firms is defined as follows: the type of intermediate goods is converted into final goods after they are sold in downstream firms.
Huang MingFeng (2003) observed high-tech industries in Hsin-Chu Science park, the vertical division of labor, and the main products of companies outsourcing the production process required raw materials and components of its unit costs and other expenditures to measure the proportion of manufactures of vertical disintegration. Because the outsourcing model enables companies to engage in small-scale competition in the market, while also lowering market entry barriers, it will attract new entrants into the market.
Kuang-Cheng (2000) indicates that vertically integrated firms exhibit four characteristics. First, they eliminate completion in the market caused by finished products,
―combined elements of inefficiency‖, ―double marginalization‖, ―adapting to different customers‖, ―price discrimination‖, and ―vertical integration‖. Second, the instruction is not complete for vendors with specific asset resulting in high transaction costs and incomplete contracts, although vertical integration can reduce transaction costs to correct production of externalities. Third, vertical integration enables the expansion of production systems, and increase production costs, forming barriers to entry for potential competitors. Forth, vertical integration is a means of increasing competitors‘ costs to create their own competitive advantage, resulting in the market foreclosure phenomenon.
Taiwan‘s semiconductor industry is different from those of Europe, the United States, Japan, and Korea in using the semiconductor vertical integration model; in that it adopts an efficient and professional model for the vertical division of labor Xu Jin Yu (2001) points out that the vertical division of labor and vertical integration system is the biggest difference. The former is an open system, accepting different foundry technologies, products, customer orders and focusing on R & D and manufacturing production processes, while the surrounding support of upstream and downstream industries and the supply chain is quite complete, while as far as technology is concerned involves two issues: first, technological security and the second, payment for the rights, patents, and intellectual property. The foundry, TSMC sued SMIC 1992-1993 because of a number of patent infringements and thefts of trade secrets. Tirole (1988) notes the individual industries‘ development in the economic fields relative to the entrance barriers and incubation time.
Greenhut and Ohta (1979) study the access of upstream and downstream by Cournot competition. Downstream firms face a negative slope of the demand function of both final products and intermediate foods, when negotiating with customers. In this assumption, vertical integration is beneficial for manufactures of intermediate goods, and final good price variation, compared to non-vertical integration.
Salinger‘s (1988) model is based on the continuous development of upstream and downstream profits. If the intermediate goods and final goods are homogeneous, the vertical integration degree increase, causing an increase of intermediate goods and final products.
Wu, Ren and Wu ICP (1999) propose the theory of vertical restraints in trading restriction in different downstream behaviors. Based on their theory, the industrialization behavior of vertical restraints is based on the resources of the largest profits difference between the socially optimal choices are crucial.
Vertical restraints and vertical integration have similar behavior in an industry where manufactures are expanding the market in their territory. The biggest differences are in the vertical limits upstream and downstream firms create through market forces to restrain each other‘s behavior, such as price and manufacturer restrictions. The price competition can be divided into two forms: vertical price restraints and vertical flight price limit.
2.1 Market Development Strategy and Technology Innovation
Paul Miller presents two possible marketing strategies, including new scientific
developments and high technology business. The first one creates a proprietary technology for niche strategy that includes preventing competitors from entering the new niche market the company has created. The second is a broad technology innovation strategy through a solution that meets consumer needs.
2.2 Global Trend in Semiconductor Industry Development 2.2.1 Vertical Specialization
In recent years, the semiconductor industry has experienced rapid transformation in the complexity of product functions including precision in the fabrication process and rising costs for production. Therefore, many international integrated Device Manufactures (IDMs) are increasingly outsourcing as the logical alternative. Based on the analysis by the industrial Economics and Knowledge Center (IEK) of the Industrial Technology Research Institute of Electronics (ITRI), packaging and testing companies subcontracted half of their production volume in 2009. The dramatic change has caused IDM to develop specialized ―Fabless‖ and ―IDM-light‖ production models.
After a long development period, Taiwan‘s semiconductor industry has distinguished itself from other industry clusters by integrating process from IC design to manufacturing, to packaging and testing companies. The global industry companies are located primarily in HsinChu and Great Taipei. Most IC fabrication is scattered through Taoyuan, HsinChu, TaiChung, and Tainan, while the first-tier packaging and testing companies are in the central and southern parts of Taiwan. An analysis of the potential business of the semiconductor industry with its complete industry chain and strong technology indicates that Taiwan has many powerful global clients and networks DRAM companies. Samsung has set up its procurement hub and sales center in Taiwan. Some companies joint venture with other companies, such as Hynix and ProMosm Elpidia, PSC, Qimonda and Nanya Technology and Inotera Technology and Winbond.
In the mid-stream semiconductor foundry industry, we can take TSMC, the leading global company, as our example, more than half of the top 20% global semiconductor companies which are TSMC clients, including Intel, the leading foreign business. Eight of the 10 leading global IC design companies order from TSMC, demonstrating TSMC‘s significantly presence in the global semiconductor industry. Even the other two potential foreign businesses in IC design, Xilinx and Sandisk, also order from IC manufactures in Taiwan. These facts show that the Taiwan semiconductor industry has a widespread range of clients from IC manufacture in Taiwan. These facts show that the Taiwan semiconductor industry has a widespread range of clients from IC manufactures in Taiwan.
To address the gaps of the supply chain, the recommended foreign businesses fall into several categories: facility manufactures, like Applied Materials, Tokyo Electron, ASMI, KLA-Tencor, Lam Research, Advantest, Nikon, Novellus System, and Cannon; IC
design companies, like Qualcomm, Broadcom, Nvidia, SanDisk, ATI, Xlins, Marvell.
Altera, Conexant, Qligic, CSR, Silicon lab, SST and Solomon systems; IC manufactures, like intel, Samsung, TI, Toshiba, STM, Renesas, Hynix, NXP, Freescake, NEC, Micro, AMD, Infineon, Qimonda, Elpida and IC packaging and testing companies, like Amkor, Stats-ChipPAC, UTAC, Caresem, Shinko and ASAT.
The output value of Taiwan‘s semiconductor industry had reached the goal of NTD 1 trillion in 2005 and the output value is estimated to hit NTD 2 trillion by 2010. Taiwan is the second largest IC design center, behind only the United States. Taiwan‘s IC fabrication continues to grow rapidly with its outstanding performance in profitability and production capability. The silicon foundry service pioneer model, Taiwan Semiconductor Manufacture Company, provides fifty percent of the global market demand with the 65 nanometer (nm) process, and it advancing to the cutting-edge 45 nm and 28 nm process technology. Other than TSMC, United Microelectronics Corporation (UMC) is the second major foundry player in the market, and Powerchip Semiconductor Corp (PSC), ProMos technologies Corp, and Nanya technology Corp. are engaged in DRAM manufacturing production. In line with its very strong IC foundry industry, Taiwan has also risen into a leading position in the world‘s IC packaging and assembly arena. ASE (Advanced Semiconductor Engineering Inc.) group, the world‘s largest provider of semiconductor packaging and assembly services, develops and offers a wide portfolio of technology and solutions including BGA; and flip chip to wafer level packaging. Siliconware Precision Industries Co, (SPIL) holds the third position worldwide in semiconductor packaging and assembly business. The main clients include ATI, Qualcomm International, and Freecale. In IC design, Media Tek has performed impressively in China and is expected to replace Trident TO as a leading IC manufacturer in North America. Their clients include Samsung, LG and Phillips.
In conjunction with design and fabrication segments, upstream silicon-proven IPs, service and EDA tool technology are expanding into Taiwan‘s semiconductor supply chain. Global Unichip Corp. (GUC) which has a close investment partnership with TSMC. Fareday technology Corp., a member of the UMC group, SpringSoft Corp., and Integrated Service Technology Inc. are companies pursuing advanced technology development. In the masking and IC substrate business, Taiwan Mask Corp., Nanya Technology Corp and Phoenix Precision Technology Corp., are conducting business with outstanding performance.
2.2.2 Development of Taiwan's IC Industry
1. Infancy (1964~1974)
National Chiao Tung University established a semiconductor fabrication (hereafter.
fab) curriculum in 1964 and identified as primary academic focus. Semiconductor
knowledge cultivation in schools is the key to the success of Taiwan‘s IC industry.
General instrument set up factories in KaoHsing in 1966 for transistor packaging, the first packaging industry in Taiwan, opening the door for foreign investors, such as Texas instruments, Philips, and other factories in Taiwan. The General instrument facility thus laid the foundries for IC packaging, testing, quality control for IC packaging and downstream IC business.
2. Technology introduction (1974~1979)
In 1974, the government begins the development of the domestic electronics industry and continued to gradually transition toward technology-intensive and multi-evaluation businesses. The research center (formerly ITRI electronics research institute) established the IC demonstration plant. RCA technology was introduced from US companies and mask technology was introduced from US IMR (International Materials Research) companies to establish a 7.0 micron CMOS technology, expanding the IC manufacturing capability.
In 1976, the Executive Mr. Li Gounding promotes the science and technology development progress in the HsinChu Science Park, which serves as the ―Silicon Valley‖
in Taiwan IC industry.
3. Technological self-reliance and expansion (1979 to now)
Following the ITRI, the electronics industry established the first demonstration plant for IC projects in 1975~1979, revealing the second phase of the development plan in 1979 – 1983 and the final VLSI development project in 1983-1988. Industrial technology applied the Taiwan semiconductor technology to the stage of VLSI in 1980. UMC derived from ITRI became the first IC manufacturer and began four-inch IC manufacturing. Successful IC production was achieved after five manufacturers officially crossed over into technology development. In 1987, TSMC derived from ITRI began manufacturing six inch IC products. TSMC collaborated with Taiwan Mask Corporation in making the IC products prototype. The Taiwan IC industry in the first 15 years was focus on IC packaging and testing. The following 15 years, 4-inch plants had begun operations and the domestic IC industry began to flourish. From 1993 to 1995, the rise of 8-inch plants stimulated huge investment in IC business. In 2000, investment began in 12-inch plants, initiating the current period of the Taiwan IC industry‘s unprecedented success.
The significant difference between Taiwan and the overseas IC industry is Taiwan‘s adopting the vertical division of labor. In the rapidly changing industrial environment, this unique division of labor model aligns with the trend of rapid development to meet industry demands. The international factories operate in vertical integration models to make the most efficient use of labor has achieved good results based on effective management between upstream and downstream levels. Our business model includes specialized resources and technology orientation.
The wafer fabrication industry has been part of the semiconductor for some time.
Before 1995, integrated device manufactures (IDM), such as IBM, Toshiba and others
dominated the IC industry. These manufactures controlled the entire value barrier for outsiders existed due to technology and capital concerns, and so the leading IDM vendors dominated the IC business until 1987, when the professional foundry production model emerged. Our country‘s professional status foundries achieved the top position in the world after the establishment of TSMC and UMC, which expended the production capacity substantially through factory expansion and thus dramatically increased the scale of the Taiwan IC industry.
The riser of professional foundries leads the division of the structure of the semiconductor industry. The foundry masters the key technology, which enables fables IC design and fab light IDM to flourish. The success of structure division highlights the traditional integrated device manufactures‘ lack of flexibility in production design. After the economics depression of 1996, the IDMs reconsidered the pure-play foundry as collaboration partners. Then, in the 2001 global recession, the stagnant demand for the semiconductor industry highlighted the cost pressures of IC wafer manufacturing. To respond to market fluctuations, the professional foundry model is important and the pure-play foundry and fables IDMs are crucial structure in the IC industry.
Table 2.1 indicates the Taiwan IC industry value net
Taiwan wafer foundries have relied on IC designers in the past. Manufacturing IC chips carrier not only a large capital burden but also market risks. Since Taiwan foundries, in contrast, have high yield and low cost advantages, they can have endless business opportunities. Taiwan‘s two leading foundry companies, TSMC and UMC, use different business models. TSMC has a professional dedicated IC foundry, in a specific location, providing customers a full set of products and services with a single development strategy.
TSMC adopts the strategy of creating all aspects of the virtual wafer plant, while spreading the investment risks, and sharing the benefits of its operation with the alliance.
President Chang asserts that their IC manufacturing grows continuously but with two
major challenges, how to continue to grow and how to sustain profitability. UMC adopts the symbiotic relationship of IC design and foundry by setting the design element for its own products, controlling the testing departments and adopting a market segmentation strategy. UMC does not accept customers‘ design and commissions.
2.3 Advantages and Disadvantages of Foundries
1. Professional OEM advantages: (a) The OEM is not responsible for bearing the cost of product sales and R&D. Since OEMs do not have their own products, the customers are not concerned with technology loss. It is very unlikely that an OEM would become a competitor. (b) Virtual factory: the OEM can maintain a complete foundry plant for manufacturing their products supported by the commission of OEM customers. Their customers can take full advantage of the quality assurance and production status of orders.
On behalf of the factory, the foundry can share the operation benefits by joint or co-investment strategies to diversify investment risks.
2. Professional OEM disadvantages: because the OEM does not have listed products, it relies on close cooperation with customers for survival. The semiconductor process is highly complex, and its high entry barriers are also concerns. To achieve Moore‘s law criteria becomes challenging, which limits the foundry profit boundary and business expansion.
3. China foundry: The China foundry includes advanced semiconductor, Grace Semiconductor, Chip Technology, Shanghai Hua Hong NEC, SMIC and others. The mainland China semiconductor industry has achieved success in a very short time. Today, with rise of mainland China semiconductor companies, many firms have begun considering the impacts of global IC supply on the foundry business in the next five years.
The semiconductor industry trends are toward specialization. The successful of Taiwan IC industry indicates that the foundry is still the model of the semiconductor industry.
The China semiconductor industry has a unique division of labor structure with a strict division lines, the individual sector includes design, manufacture, packaging and testing divisions.
2.4 Factors Affecting Supply and Demand of the Foundry Industry
The main demand for foundry applications from the downstream market include information products, consumer electronics and communication products as shown below.
The factors affecting the supply chain and demands upon the foundry industry can be classified into the downstream markets. Table 2.1 lists the demand for IC applications. As shown in Table 2.1, PC and communication products are the major demand, consisting primarily of cell phones, PDAs, NTC, WLAMs, and other digital products.
Table 2.2 The demand of IC application
Information technology has always been the most important semiconductor application. With the popularity of the Internet and other information communication media, the development of related IT products is the main focus of the IC market. PCs and other IT products have provided the greatest growth momentum for the foundry industry in recent years, and most such items use foundries.
2.4.2 Communication with the IC Market
According to MIC statistics, communication applications using semiconductor manufacturing accounts for about 24 % of the global market, which is second only to IT applications. Communication products using semiconductor application include mobile phones, base stations, wireless transmission equipment, LAN, and broadband transmission and switching equipment.
The PC phone is the largest application consumer in the semiconductor market with the cumulative shipment of mobile PCs tripling in 2009. Mobile phones are a far different market from PCs considering PC peripheral equipment‘s volume of semiconductor consumption, including mobile phones and other functions. Although PC product marketing is shorter, it has a longer life cycle for operational maturity, since the process sectors include the parts suppliers, handset manufacturers, cognition, and the product inventory. PC phones can involve very complex factors including the progress of national/regional infrastructure and regional differences in customs and laws. The service providers or the service subsides can affect the demand for mobile phones. Before an acute hit on the expiration of the first wave of demand for fashion phones occurs, the industry has been waiting for so-called ―replacement wave‖ representation. The highly