How IC packaging and assembly houses have refined their business model.
Semiconductor analysts and industry participants agree that on
balance business will be positive in 2006. Demand remains strong for
mobile phone handsets and many consumer products. While PCs still drive
dollar volumes, the former two segments are the major drivers for
semiconductor unit volume. Most companies expect the third and fourth
quarters to be good, but somewhat slower than the first quarter.
Capacity utilization has been tight this year, yet the major
semiconductor assembly and test service (SATS) providers are reluctant
to speculate on the future and make excessive investments in capacity.
Many of these companies remain haunted by the ghosts of excessive
capacity expansion in 2000 that brought near financial disasters with
the recession in 2001. Gone are the days of testosterone-driven
management decisions focused on gaining market share at the expense of
sound business practices. Today's SATS business leaders are a group of
smart, financially savvy individuals that understand the importance of
maintaining profit margins in order to stay in business.
Some of the major SATS companies report capacity utilization rates
of greater than 90% for most of their production lines. While the
tightness started easing slightly in the middle of May, ASE, Amkor and
SPIL recently announced reductions in capital expenditures for the
remainder of the year. This will permit these companies to maintain
high levels of capacity utilization as the market softens. Figure 1
shows combined capex expenditures by the top four SATS companies (ASE,
Amkor, SPIL and STATSChipPAC) since 2004. (ASE's capex for substrate
production has been removed from the calculation in order to provide a
view of the spending purely on assembly and test.) Historically, these
companies have expanded production lines as demand increased, but the
data clearly indicate the companies are in no mood to return to the
overcapacity experienced not so long ago.
Generally, one expects to see assembly price declines as the market
softens. However, things may be different this time. While companies
such as SPIL have reported pricing pressure on low pin count products
driven by customer demand, many of the advanced packages continue to
see firm prices. The top two assembly and test suppliers (ASE and
Amkor) have no intention to cut prices in order to spur business.
New Business Model
The first and second quarters of this year were difficult for many
small fabless semiconductor companies. With capacity utilization high,
many companies had difficulty finding subcontractors willing to
assemble their wafers. While the situation has improved slightly for
many fabless semiconductor companies, the fact that packaging and
assembly have become the limiting factor in shipping product is a new
experience. While silicon prices have fallen dramatically over time (Figure 2),
shrinking geometries have pushed up I/O counts and ultimately the cost
of the package. In many cases the cost of the package can be minimized
with the chip layout. Smart companies are learning the importance of
co-design of the silicon and package. One of the key factors that
influences price is volume. Just as with the foundry business,
discounts are based on volume. There are other lessons from the foundry
business. The SATS industry is moving to adopt the foundry business
model where companies begin to purchase capacity in advance. No longer
will the SATS industry make investments based on speculation. Will this
new model hold if things continue to slow in the third and fourth
quarters of 2006? Today's assembly and test houses tell us it will.
'Lower Cost' Luncheon
The
Fabless Semiconductor Association is hosting a luncheon on Lowering the
Cost of Assembly in the New Business Era. The luncheon takes place Oct.
26, from 12 - 2 p.m., at the Hyatt Regency Newport Beach, 1107 Jamboree
Rd., in Newport Beach, CA. For more info: fsa.org.
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E. Jan Vardaman is president of TechSearch International, Austin, TX; jan@TechSearchInc.com. Her column appears semimonthly. |
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