The battle for the "center position" in the chip industry is hot for Fabless

2021 is undoubtedly a good year for global semiconductor companies.

According to IC Insights, due to the change in habits caused by the Covid-19 pandemic and the subsequent economic rebound, the global semiconductor market is expected to grow by 23% in 2021, semiconductor unit shipments will increase by 20%, and the average total selling price (ASP) of semiconductors will also increase by 3%. The 23% increase will be the second largest increase in the global semiconductor market since 2010, when the growth rate was 33%, which was the recovery after the 2008 financial crisis, which caused global semiconductor sales to soar.

This week, IC Insights released its forecast rankings for the top 25 chip companies in the world in terms of sales growth.

Among the 25 chip companies, IC Insights predicts that 10 companies will see chip revenue growth of more than 30% this year, and 23 are expected to achieve double-digit revenue growth. However, in a year when global semiconductor sales are expected to grow by 23%, the world's second-largest chipmaker Intel's revenue is expected to fall by 1%. Sony, the world's 18th-largest chipmaker, expects revenue to fall by 3%.

The top four companies, AMD, MediaTek, Nvidia and Qualcomm, performed the best. AMD is expected to top the list with a 65% sales growth, MediaTek is expected to achieve a 60% revenue growth this year, Nvidia's revenue growth will reach 54%, and Qualcomm's sales will jump 51%.

From this list, we can see that there is no traditional IDM manufacturer among the top five. The top four are Fabless companies, and SMIC (Semiconductor Manufacturing International Corporation) ranked fifth is a foundry.

Among the five manufacturers ranked in the second camp (6th to 10th), although four are IDMs (only GlobalFoundries is a foundry), three of them are the world's top three memory companies. They can rank in this position mainly due to the booming memory market in recent years. As a commodity in the chip market, the long-term supply and demand imbalance and high prices of memory have enabled these three companies to "win without doing anything."

It is worth mentioning that Renesas Electronics, which ranks ninth, has not performed well in the past few years, with average rankings and revenue. The high growth rate this year is largely due to the global automotive chip shortage, which has greatly increased the revenue of this traditional automotive MCU manufacturer.

Among the manufacturers ranked after 11th, there are very few Fabless companies, most of them are IDMs, with two foundries in between.

Although the overall performance of the 25 manufacturers is good, the four with the highest growth rates are all Fabless, and their growth rates are significantly higher than those of the following manufacturers. In addition, the four pure wafer foundry manufacturers TSMC, UMC, GlobalFoundries and SMIC are also ranked relatively high.

Thus, although the overall situation is good, the performance of IDM is relatively poor, especially the traditional overlord Intel, which is expected to have a negative growth rate this year. This further highlights the rapid growth trend of Fabless.

Combined, the combined sales of the four largest fabless companies are expected to grow from $54.8 billion in 2020 to $85.4 billion in 2021, a 56% increase! Amazingly, the four companies are expected to see a combined sales increase of $30.6 billion this year, accounting for 31% of the $97.4 billion growth expected in the global chip market this year. In addition, the major foundries that produce chips for the fabless companies are also set to see strong sales growth.

Therefore, this is an era of Fabless and wafer foundry. The two are a perfect match and complement each other, while IDM is somewhat dwarfed by comparison.

In the early days of the global semiconductor industry, there was no division of labor in IC design and manufacturing. There was only an IDM model. As the market and industry developed, some smaller manufacturers, due to limited financial resources, could not afford their own wafer fabs. Therefore, they would hand over the designed chips to the more powerful IDMs for manufacturing. This was the earliest foundry model. However, in the early days, in the absence of awareness of patent protection, handing over the designed chips to other IDMs for manufacturing posed a greater product security risk, that is, competitors were likely to have access to your chip information.

Thus, the wafer foundry model came into being. In 1987, TSMC was founded, ushering in a new era. Since then, with the development of the market and industry, the number of fabless companies has increased year by year, bringing huge profits to wafer foundries. As a result, more foundries have emerged. However, compared with the increasing number of fabless companies, the number of foundries is still relatively limited, and it remains so today. After all, due to the characteristics of heavy assets and high technology intensiveness, it is much more difficult to set up a foundry than a fabless company.

The biggest feature of Fabless is flexibility. Compared with IDM, it has a more sensitive nose for the development of technology and market applications. It is easier to turn around when the boat is small. This advantage will be doubled in the period of rapid change and development of technology and applications. In recent years, it is a period of rapid change and development of technology and applications, such as the rapid development of smartphones, the rise of AI, and the surge in the markets of CIS, TWS, OLED, etc., which have provided excellent development opportunities for the corresponding Fabless. NVIDIA, Qualcomm and MediaTek, as well as many Chinese Fabless companies in the start-up stage, have caught up with this period and their revenue has soared. It is difficult for IDM to do this because both subjective and objective conditions do not allow it.

For Foundry, due to its long-term focus on wafer foundry business, it has a clear positioning and can persevere; in addition, the multi-customer, multi-product line, and multi-process characteristics of this business model are more substantial and diverse than IDM and Fabless. To some extent, its risk resistance is stronger.

In addition to their own characteristics, Fabless and Foundry can deliver outstanding performance, and the annual compound growth rate in the next few years is likely to be higher than the industry average. There are also many market factors, including the following: the annual increase in the use of chip components in terminal equipment; the increase in IDM chip manufacturing outsourcing business; the increase in self-developed chips by equipment and Internet manufacturers, etc. Most of the chips in these major incremental markets need to be produced by wafer foundries, so the performance of foundries in the next few years is worth looking forward to.

The biggest feature of IDM is its solid technical foundation, which is an advantage in the era of stable industrial development. However, it becomes a disadvantage in the period of great technological and application changes, especially when the pace of change is accelerating. The limelight has gradually been snatched away by Fabless and Foundry.

At a time when new technologies and applications are emerging frequently, IDM production lines are relatively old, while foundry production lines are much newer. In the face of a rapidly developing market, old production lines are at a competitive disadvantage compared to new production lines, especially in the most advanced process technology. TSMC's all-out investment and development of cutting-edge chip manufacturing technology has been fully rewarded in recent years.

In contrast, IDMs, under pressure from market demand, new technologies and production efficiency, have been forced to eliminate old production capacity, especially 4-inch and 6-inch silicon process production lines, most of which are concentrated in IDM factories.

According to IC Insights, in the past 10 years (2009-2018), global semiconductor manufacturers have closed or rebuilt a total of 97 wafer fabs. Among them, 42 150mm (6-inch) wafer fabs and 24 200mm (8-inch) wafer fabs were closed, while the number of closed 300mm wafer fabs accounted for only 10% of the total number of closures.

From a regional perspective, Japan has the largest number of closed wafer fabs, and this happens to be the gathering place of IDMs. Globally, the advanced semiconductor market mainly includes North America, Europe, Japan, South Korea and Taiwan, China. Among these major regions, Japan has the highest proportion of IDMs. The IC design and wafer foundry industries here are very weak, and chip component companies are mostly in the form of IDMs.

IC Insights predicts that as the cost of building new fabs and manufacturing equipment soars, more and more IC companies will focus on wafer foundry or fabless model in the future, and more and more inefficient fabs will be closed.

Texas Instruments currently has 15 wafer fabs in nine countries, including obsolete production capacity that is about to be closed and newly built 12-inch production capacity. In April 2019, Diodes completed the acquisition of Texas Instruments' 6-inch/8-inch wafer fab (GFAB) in Greenock, Scotland, UK, which is also part of TI's strategy to gradually abandon obsolete production capacity.

In terms of closing obsolete production capacity, the major analog and mixed analog-digital chip IDM manufacturers in the industry have a general consensus. In addition to TI, another major manufacturer ADI also plans to close its 6-inch wafer fab in Milpitas, California in 2021.

As a result, outdated production lines have to be closed, new production lines are not ready yet, and the market is changing rapidly. Under such circumstances, the situation where IDMs are outshined by foundries in the next few years is likely to continue.

In addition, although IDMs have more accumulation in technology reserves and capacity optimization, they still seem to be unable to cope with the complex market changes, especially in terms of capacity, and have to seek help from wafer foundries. There are several main reasons for this: First, the market is in a period of change and changes rapidly. Once emerging applications and technologies are on the right track, explosive products or applications will appear, such as last year's TWS Bluetooth chips, CIS, and recent automotive chips, which have all experienced explosive growth in a relatively short period of time; second, IDMs are not as flexible as wafer foundries and are less efficient in responding to rapid market changes. After 30 years of development, wafer foundries, which are already very mature in terms of specialization and product line refinement and enrichment, are much more flexible in responding to market and application changes; third, black swan events, such as the emergence of the epidemic, have a great impact on the rhythm of industrial development and market demand. For example, when the epidemic was severe in the first half of 2020, people stayed at home, which led to a surge in demand for data centers and cloud services, as well as related chips for laptops, but the mobile phone market was relatively bleak. In the second half of the year, the epidemic eased, the economy recovered, and people went out of their homes. At this time, the mobile phone market began to rise again, while the data center market that was hot in the first half of the year began to weaken, and the corresponding processor and memory chip market conditions were obviously not as good as in the first half of 2020. Under the influence of these complex and unpredictable factors, compared with wafer foundry, IDM's performance is sometimes good and sometimes bad, and it seems less stable.

Therefore, IDMs are also seeking change, such as closing obsolete production capacity as mentioned above and building new 12-inch wafer advanced production lines. In addition, some IDMs are transitioning from traditional heavy assets to Fab-lite to improve flexibility, and others are simply vigorously developing wafer foundry business, such as Intel.

At present, Fabless and Foundry have overshadowed IDM, mainly because the companies with the highest growth rates are mostly Fabless and Foundry. Relatively speaking, IDM is weaker. But this does not mean that IDM is no longer viable. It can be seen from the top 25 list of revenue growth rates that most of them are still IDM. Both in terms of quantity and overall scale, they are still quite impressive. It’s just that they are no longer at the center of the stage like they were many years ago. Fabless and Foundry have replaced them.