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.

E. Jan Vardaman is president of TechSearch International, Austin, TX; jan@TechSearchInc.com. Her column appears semimonthly.

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