|Is fab tool business model broken?|
1/18/2011 12:19 PM EST
HALF MOON BAY, Calif. – Despite a sudden rise in capital spending, the IC equipment industry possibly faces another dreaded downturn in 2011.
The probable slowdown is expected to accelerate the ongoing shakeout in the fab tool industry, leaving some to wonder about the overall health of the business. Some believe the fab tool business model is simply broken. Over the years, fewer fabs have been built, causing massive consolidation in the equipment sector.
Fewer choices in the equipment vendor base could cause higher tool prices, less innovation and monopolies in some tool segments, such as ion implantation, lithography and metrology. Still others believe that fab tool vendors must consolidate and pool their R&D resources to tackle the next-generation technology nodes, the extreme ultraviolet (EUV) lithography supply chain, and the potential shift to 450-mm fabs.
Two big fab tool buyers-Intel Corp. and GlobalFoundries Inc.-have markedly different views about the subject.
Consolidation in the industry has put the fab tool supply chain in peril, because there are ''not enough choices’’ in the various segments in the vendor base, said Norm Armour, vice president and general manager for the Fab 8 project in New York state for GlobalFoundries, the foundry spinoff of Advanced Micro Devices Inc. (AMD).
Robert Bruck, vice president of the Technology and Manufacturing Group at Intel, has a different viewpoint. ''Last year at (a SEMI event), Bob Bruck posed the hypothesis to me that consolidation (in the fab tool sector) was good for customers,’’ wrote VLSI Research CEO G. Dan Hutcheson, in a recent report.
''Being an economist, firmly grounded in anti-trust teachings, my gut pushed back. But Bob came up with a good point: fewer competitors means less duplicative R&D, which makes the equipment industry more efficient, which should translate into lower cost,’’ Hutcheson wrote.
In any case, the fab tool industry has undergone a sea of change. During the early days of the IC industry, chip makers built their own fab tools, because there was little or no semiconductor equipment business to speak of.
Then, starting in the 1950s and 1960s, a new crop of independent semiconductor equipment maker burst onto the scene. Chip makers began to buy tools from a plethora of new startups in the arena. The fab tool business prospered in the 1980s. In 1981, there were over 300 vendors that sold equipment to 300 or fewer chip makers, many of which had wafer fabs, according to VLSI Research.
At the time, there were multiple vendors in each fab tool segment, giving chip makers a viable choice. For example, in the mid-1980s, the lithography market included ASAT, ASML, Canon, Eaton, GCA, Nikon and Ultratech. Another firm, Micronix, was developing an X-ray stepper. IBM and Japan Inc. were separately devising large-scale, synchrotron X-ray systems for next-generation devices.
In the same decade, the fab tool business model began to fall apart. In 1987, pure-play foundry Taiwan Semiconductor Manufacturing Co. (TSMC) emerged, propelling the fabless industry. Since the emergence of foundries, this model has not only propelled a new crop of fabless chip makers, but it also forced integrated device manufacturers (IDMs) to re-think their fab strategies.
Over time, a growing number of IDMs moved towards the fab-lite model. In 2001, for example, there were 16 logic IDMs that had fabs. ''Intel, Samsung, and potentially STMicroelectronics will be only IDMs with production wafer capacity at 22-/20-nm in 2012/2013,’’ said Handel Jones, an analyst with International Business Strategies Inc.
Over time, only three foundries-TSMC, Samsung, and GlobalFoundries-will have the resources to build new fabs and keep up with Moore’s Law. In memory, Samsung and Toshiba will survive over the long haul. Beyond that, there are questions in the current memory landscape.
Fewer fabs, coupled with the cyclical downturns, have lead to considerable consolidation in the fab tool arena. In 2011, there are estimated to be some 140 tool vendors that sell equipment to only 20 customers with fabs, according to VLSI Research.
Good news, bad news
This year, the IC equipment business is expected to hit $46.3 billion in terms of sales, down 5 percent over 2010, according to the firm. In 2010, the business hit $48.8 billion, up a whopping 99.7 percent over 2009, according to the firm.
On the bright side, capital spending is on the rise. Just in the last week, GlobalFoundries doubled its capital spending in 2011. Intel recently said that its capital spending budget would hit $9 billion, plus or minus $300 million, in 2011, implying 73 percent year-over-year growth.
''With Intel now on the offensive, and including recent capex updates from Samsung and GlobalFoundries, our 2011 capex model moves to plus 12 percent year-over-year verses 5 percent’’ in the original forecast, said C.J. Muse, an analyst with Barclays Capital, in a report.
Still, despite an uptick in spending, the tool supply chain is under duress. Not long ago, chip makers had a choice between five or more vendors in each fab tool segment, said GlobalFoundries’ Armour. Today, ''there are not enough choices,’’ he said. ''Usually, it’s a two-horse race. Maybe three.’’
If that wasn’t enough, Armour is also concerned about soaring tool costs and an ''under-investment in R&D.’’
During a panel discussion at ISS, Intel’s Bruck appeared to be less concerned about the shrinking supply base. ''You can get to the duo-poly’’ in terms of the IC fab tool vendor base, he said.
In a report, VLSI's Hutcheson elaborated on Bruck’s so-called C3 Rule. ''VLSI’s data shows that revenue, R&D, and SG&A per platform have risen three orders of magnitude over the last three decades. What cost tens of thousands to do in 1981 now costs tens of millions. Lithography has risen four orders of magnitude over the last three decades,’’ Hutcheson wrote.
''Consolidation in the semiconductor industry would mean less duplicative SG&A for the equipment industry as well. Hence, tools would be less expensive and semiconductor capital efficiency would be greater,’’ he wrote.
''If the semiconductor equipment industry had not consolidated, R&D would between 50 percent and 100 percent of industry revenues. In order to sustain such an R&D load would mean the equipment industry would have to be sized similar to today’s total IC sales. But that’s not the half of it. Without consolidation, SG&A would approach 10,000 percent, taking the sustainable revenue level to more than $30T, which is more than an order of magnitude larger than the entire electronics industry! In other words, Moore’s Law would have been broken long ago,’’ he said.
Still, there are some alarming trends, especially in lithography, which is turning into a one-horse race on the optical side. In 2009, according to Gartner Inc., ASML held 51 percent of the lithography market, followed by Nikon (39 percent) and Canon (9 percent). Last year, Barclays Capital estimated ASML's current share of the leading-edge, 193-nm immersion market at a whopping 80 percent, leaving Nikon and Canon in the dust.
Canon has already exited the leading-edge lithography business. Nikon, which once filled 100 percent of Intel’s leading-edge lithography requirements, took a body blow from ASML last year when the Netherlands-based vendor won half of Intel's leading-edge lithography business at the 22-nm node. Some believe that ASML could grab Intel’s entire leading-edge lithography business-at the expense of Nikon.
Nikon is falling further and further behind, as it struggles to ship its 193-nm immersion tools. As a result, ASML is commanding a premium for its scanners, partly due to the lack of competition from Nikon.
For the last year or so, ASML has also experienced trouble in terms of keeping up with customer demand, causing some chip vendors-namely second-tier memory makers-from getting their tools on a timely basis.
Clearly, this is not a healthy scenario for chip makers. Simply put, Nikon needs to play catch-up or must join forces with another vendor. One possible idea is a joint lithography venture between Nikon and Applied Materials Inc. Another possibility is that Nikon will need a bail-out from the Japanese government.
Nikon will clearly need help if or when chip makers move towards EUV. Right now, ASML is grabbing most-if not-all of the EUV scanner business. If Nikon can’t deliver EUV, ASML will become the sole source in the arena-a nightmarish thought for chip makers. A production-worthy EUV tool from ASML could soon cost $125 million per unit. And without competition, tool costs could go even higher.
There are other red flags in the EUV arena. Right now, there is an urgent need for the inspection and metrology equipment for EUV. The industry is looking for separate EUV-based reticle inspection, mask blank and metrology gear. But for the most part, there are not enough R&D funds to support multiple vendors in each segment. So, the various equipment in each sector will likely come from a single vendor, warned Daniel Armburst, chief executive of Sematech, during a presentation at ISS.
Another tool concern is ion implanters. ''On our end, we estimate Varian’s overall share growing incrementally from ~77 percent in 2009 to ~78 percent in 2010 and ~79 percent in 2011, with risk to the upside,’’ said Barclay’s Muse in a recent report. In 2010, Nissin was projected to have 9 percent share, followed by Sumitomo (8 percent) and Axcelis (6 percent), according to the report.
In 2008, Sumitomo-along with private-equity firm TPG--launched an unsolicited and hostile bid to acquire ion-implanter specialist Axcelis. Axcelis rejected the offer in 2008, but the implanter firm could be a takeover target in 2011, observers speculated.
Sumitomo may make another bid for Axcelis. Applied, which exited the implanter market several years ago, may want to make a bid for Axcelis, observers speculated.
At the backend, meanwhile, ATE is currently the subject of consolidation. Recently, Verigy Inc. moved to buy rival LTX-Credence Corp. The combined company will be called Verigy. Verigy itself was formerly part of Agilent Technologies Inc. Agilent spun-out the ATE unit several years ago, thereby forming Verigy. Several years ago, LTX Corp. bought ATE rival Credence Systems Corp., forming LTX-Credence.
Then, last month, Japan’s Advantest Corp. made an unsolicited bid to acquire U.S.-based rival Verigy for $12.15 per share in cash. That deal is worth $735 million. Advantest has since increased its offer. To date, however, Verigy has not accepted the bid.
''This is all about market share and in a shrinking market where there are few moves left to acquire strength. In my view, Advantest’s bid to acquire Verigy is a bold move to regain the number one ATE market position from Teradyne. But, as we have seen before, it could backfire and customers could migrate to Teradyne,’’ said Ron Leckie, owner and president of Infrastructure Advisors, in a report.
''So, what happens to LTX-Credence? They can continue to go alone or could certainly be another acquisition target for Advantest, but that would pose additional integration challenges,’’ he said. ''It has long been said that Teradyne and LTX could never merge due to cultural and historical clashes stemming from when staff originally left Teradyne to form LTX. But, that was a long time ago - never say never.’’
Unlike litho and implanters, ATE is in need for consolidation. ''Over the last decade while semiconductor revenues have grown by 50 percent from $200 billion to $300 billion and unit volumes have more than doubled, the ATE market has shrunk from $6.6 billion to $4.2 billion,’’ Leckie said. ''Over time, consolidation has reduced the number of significant players down from over 30 to five. I forecasted that the five players would reduce to three over the next two years, but it is happening much faster.’’
On the other hand, fab tool consolidation is expected if or when the industry moves to costly 450-mm fabs. ''There’s a lot of activity going on in the back channel around 450-mm to indicate that some big news will break next year,'' said VLSI's Hutcheson. ''The equipment suppliers have stopped resisting it and most have some level of effort underway. Moreover, those that don’t are no longer being painted as defiant realists. The thinking has moved from ‘Over my dead body’ or ‘I’ll retire before 450’ to either ‘We’ll have to do it if our competitors move’ or ‘You’re falling behind if you’re not doing it.’ This is a big change.''
Don't expect to see 450-mm until 2015 or later, however. ''While 450-mm would significantly lower the cost per unit and increase the output of a fab, the equipment suppliers are not making the investments needed to move to larger diameter wafers. The equipment suppliers did not realize an acceptable ROI on their R&D investment in 300-mm tools and they are hesitant to fund development of 450-mm wafer capable tools. While we believe that 450-mm will eventually move to production, this is unlikely to occur in the next five years,'' said Gus Richard, an analyst with Piper Jaffray.