Merchant Photomask Makers Remain Relevant

They still have roles to play, but economies of scale may force further consolidation in the long run.

For many years the trend in the semiconductor industry with regard to photomasks and chipmakers was to shed captive mask operations in favor of merchant photomask suppliers. This reflected a larger trend all along the supply chain with many companies moving away from vertical integration as, consequently, the foundry model grew.

Semi Engineering“This was mainly driven by cost considerations,” said Franklin Kalk, CTO of merchant photomask supplier Toppan Photomasks. “The cost of R&D to stay current made it difficult to justify maintaining an internal (photomask) business—that really was the impetus for consolidation into large mask merchants.” It was only natural for merchant photomask suppliers to flourish.

Over the course of the last several industry cycles, however, a converse trend has emerged as leading-edge production technology has become ever more complex and costly. Captive mask shops have become a competitive necessity among first-tier device makers, which tend to be more vertically integrated.

“Now there are so few semiconductor companies at the leading edge, and they have scale,” Kalk said. “Those companies have enough scale to justify having a captive mask shop.” These large companies—IDMs like Samsung and Intel or foundries like Taiwan Semiconductor Manufacturing Co. (TSMC) and GlobalFoundries—all use huge numbers of masks. They have the economies of scale to maintain what has become a differentiator between first- and second-tier chipmakers.

So what are the implications for the merchant photomask industry? More consolidation? As the industry closes in on the 10nm node at the end of the decade will it still need merchant mask suppliers?

The answer is, as it always is in the semiconductor industry, an educated guess at best. But it’s clear that the big three photomask suppliers, Toppan, Photronics Inc. and Dai Nippon Printing Co. Ltd., aren’t going away anytime soon.

Leading edge drives merchant photomasks

Semiconductor Equipment and Materials International (SEMI) has forecast the worldwide photomask market to reach $3.5 billion in 2014. After reaching a market peak in 2011, the photomask market contracted 4% in 2012 to $3.2 billion. SEMI anticipates the market to grow again by 3% this year and another 3% next year, driven by advanced technology (sub-45nm manufacturing) and the growth of manufacturing in Asia-Pacific, namely Taiwan.

Meanwhile, photomask suppliers are seeing the uptick in the second half of 2013 that is being reported elsewhere in the supply chain. In reporting its quarterly earnings for the fiscal quarter ended April 28, Photronics CFO Sean Smith said the company was accelerating the installment of advanced photomask production tools in North America and Asia as the result of projected demand for advanced photomasks in Q4 of this year and into 2014.

“We are very optimistic as we get into Q4 about our growth prospects as a result of the high-end capacity, the leading-edge IC products coming online and with new opportunities for node migration and increased share,” Smith said. “And we expect that to continue into 2014.”

Toppan’s Kalk said his company was observing similar trends. “There appears to be traction out of the recent semi industry downturn,” he said. “I would say we’re optimistic about the second half of the year. It seems like what people thought was an upturn at the beginning of the year has pushed out a little bit.”

Kalk noted that today the merchant photomask business tends to mirror the chip industry in general much more closely than it did before. Driven by design starts, in the past photomask industry cycles tended to lag the chip industry by six months or more to as much as a year. “Now what we see is that the supply chain has become much tighter; people don’t let their inventories stretch as much as they did in the past.” Consequently, mask business cycles are both more moderate and much closer in terms of timing to those of chip manufacturing, due partly to the capital-intensive nature of industry in general and leading-edge photomasks in particular.

Size—and proximity—matter

It is this capital-intensive nature of manufacturing at the leading edge, perhaps more than anything other factor, that has caused the reversal of captive and merchant mask trends. But coupled with this is the changing nature of end markets, namely an increasing reliance on consumer devices, which puts pressure on development and manufacturing cycle times.

Over the last two years, both leading foundry and logic companies have invested heavily in and expanded their captive operations quite rapidly, said Amitabh Sabharwal, general manager for mask etch products at Applied Materials. With the cost of a 45nm mask manufacturing line costing anywhere from $200 million to half a billion dollars, these are mammoth investments. “It’s not something you do on a whim,” he said.

Therefore having the economies of scale that Kalk mentioned, not to mention the deep pockets of companies such as Intel or TSMC, makes it easier for them to invest in mask production.

Then there are the pressures on turnaround times in a tight supply chain. Even as market pressures demand the time from design to tapeout to be as short as possible, mask production times are a continuing headache for the industry. Extending optical lithography has required increased resolution enhancement techniques for more and more layers in devices, which consequently impacts mask write times, and not for the better.

Thus it further behooves leading-edge device makers to have a captive shop to provide masks for critical layers. EDA vendor Synopsys devotes a lot of time and effort in optimizing and reducing mask write times at their customers, according to Tom Ferry, the group’s senior director of marketing. When it comes to working with a captive mask shop at a chipmaker, given the complexity and the enormity of the data involved, the turnaround time in mask production is quicker when everything is handled in house; with an outside merchant mask shop more challenges arise.

“Clearly the captive model…is a more beneficial model for them,” Sabharwal said of the large IDMs and foundries that maintain captive mask operations. He further noted with regard to cycle times that chipmakers with captive mask shops gain an edge when it comes to testing new mask sets. “A merchant can produce it but can’t test it. That’s a huge capability that captives have,” he said. “The cycle time is rapid with a captive.”

Merchants still have roles to play

At first glance it might seem there is a dwindling place for merchant photomask makers at the leading edge, given the cost involved and the competitive benefits a captive mask operation provides. But this isn’t really the case, and the big three, Toppan, Photronics and Dai Nippon, aren’t likely to consolidate or otherwise leave the market anytime soon.

“What role do the big mask merchants have? I would say we have two roles,” said Toppan’s Kalk. One role is to provide standard photomask sets, he explained. The bulk of chip production, even on leading-edge devices, still involves non-critical layers with features above 45nm. Device makers consequently still find it cost-effective to rely on merchant shops for these standard mask sets; this part of the market remains solidly in the province of merchant suppliers.

The second role is that of partner. It’s a matter of strategy—the so-called earthquake strategy, as Kalk put it. Or to use a much older metaphor, chipmakers don’t want to have all their eggs in one basket. Thus the industry has seen a number of close strategic partnerships in recent years among merchant photomask suppliers and chipmakers—Photronics and Micron and Toppan and IBM, for example—spreading the development of leading-edge photomasks economically as well as geographically.

Having a merchant supplier capable of supplying photomasks for critical as well as non-critical layers—a second source—provides two primary benefits for chipmakers with captive mask shops. First, it provides the ability to handle capacity overflow. Second, it provides a source of photomasks should something catastrophic happen to their captive operations. Given the global nature of the chip industry, having a second source clearly makes sense. Moreover, it’s arguably essential in terms of business strategy.

But production won’t get any easier…or cheaper
So merchant photomask suppliers still clearly have roles to play. But with each technology node the number of leading-edge chipmakers dwindles, even as the remaining ones grow larger still. As the industry closes in on the 10nm node at the end of the decade, will there still be room for three major mask merchants? Or will the industry see further consolidation?

Toppan’s Kalk characterized the answer as coming down to who can afford to play at the leading edge. He noted that for the last decade or so, with every succeeding technology node, one or more companies drops out, choosing to go fabless. Assuming this trend continues, at 10nm there may be as few as six chipmakers with their own leading-edge production fabs, split between between foundries and IDMs.

How many will remain at the 7nm node? “Who knows, but the number is dwindling rapidly,” Kalk said.

This begs a further question: Will there still be a need for three merchant makers at 10nm and beyond? The last major consolidation in the merchant photomask space occurred in 2005, when Toppan merged with DuPont Photomasks. Then, as now, the question came down to economic scale.

“Is the scale enough right now, and does each company have the scale required to supply the market? That’s the question,” Kalk said. He further noted that while leading-edge mask technology is already expensive, if extreme ultraviolet technology proves commercially viable, the related mask technology will be more expensive still.

“If you don’t have scale, you’re less attractive to a semiconductor company as a potential partner.” If that proves to be the case for one of today’s big mask merchant companies, then just as we see the number of companies involved at leading-edge production dwindle, further consolidation could be coming for merchant photomask companies.

Editor’s Note: As explained at length elsewhere on this site this is a news story written by me for another publication. This originally appeared on Semiconductor Engineering; it holds the copyright, of course.

Trickle Down Equipment Economics

Is the long downturn finally at an end for used equipment vendors? And what does that mean for everyone else?

By now, with the rise of China as a center of manufacturing, everyone in the chip industry has no doubt heard of the supposed Chinese curse, “May you live in interesting times.” It’s practically cliché. The thing is, the next two industry cycles may indeed prove interesting for the used equipment market.

Semi EngineeringAt the moment, everyone is tired of interesting times, and those in the used equipment sector are no different. The current industry downturn has been one of the longest ones in recent memory for them.

It’s difficult to express how bad things have been in terms of numbers for the used chip equipment market. The sector is fragmented, and much of the buying and selling is between brokers—often for specific customers. But one thing is clear: Times have been tough.

“This has been the longest sustained downturn in the used equipment market in the 16 years that I’ve been in it,” said Julian Gates, managing director for AG Semiconductor Services. AG is one of the largest, if not the largest, suppliers of used semiconductor capital equipment and services in the industry.

“We’ve seen worse, but this one has been sustained for a long time and has had a real negative impact on everyone in the used equipment market,” Gates said. It is a sentiment voiced by others in the market, whether they’re based in the United States, China or Europe.

Even as some first-tier chipmakers are moving to add capacity, things are quiet among second-tier customers. “I haven’t heard of a second-tier scanner that was sold in the last three months,” remarked one sales executive from used equipment supplier SDI Fabsurplus LLC.

But there are signs of the proverbial light at the end of the tunnel. Just as there has been talk of capacity expansion in the chip industry, consequently there are signs the market for used equipment may be picking up. One of the few notable bright spots this spring for purveyors of refurbished semiconductor capital equipment and services has been in the packaging front, where 3D packaging and related newly-developing technologies are proving drivers in the chip industry as a whole. In terms of equipment, that means a need for wet processing, plating, physical vapor deposition (PVD), photolithography and etch equipment.

This technology-driven expansion is coupled with the fact that companies in the backend are also looking to move packaging and test operations to mainland China. The market for analog and power devices also has remained strong, as has demand for memory to some extent, all driven by consumer electronic devices. And all this has helped drive what business there is of late in the used equipment sector.

But as a whole the entire market, in terms of geography, is really quiet, used equipment providers say—even China, where the only projects of any notable size currently underway are being driven by the government, as opposed to the private sector. As one Fabsurplus sales executive tersely quipped of the Chinese market, “It’s not hot.”

But recently interest on the part of customers has picked up across much of the used chip equipment market. As one Shanghai-based equipment sales executive noted with regard to China and packaging, no one is doing through-silicon vias (TSVs) just yet, but everyone there is talking about it. Whether or not all this interest translates into actual orders in the latter half of the year remains to be seen. Historically, however, increased activity in the backend, i.e. packaging, usually presages a broader rebound, and used equipment vendors are cautiously optimistic.

“We are seeing definite signs of an uptick,” said AG Semi’s Gates. “For the first time in a year and a half, people are broadcasting their intent to invest. Our hope is that it will be sustained … and not just an initial hype that we see sometimes.”

He characterized this interest as potentially large expansions in Asia, Brazil and India, where companies are looking to invest in entirely new—to them, at least—manufacturing lines. North America and Europe are still quiet, he said, but these markets usually follow as interest builds elsewhere.

At least one used equipment company that is focused on the European market is anticipating an uptick of orders in Q4, however. Some European device makers are currently planning to convert fab lines to what is, for them, next-generation technology, said Tony McKie, CEO of memsstar.

UK-based memsstar is focused on the market for deposition and etch equipment and related support services for both semiconductor and microelectromechanical systems (MEMS) applications. McKie noted the company recently has done several wafer-size conversions for customers, upgrading fab lines from four- to six-inch wafer processing and from six- to eight-inch.

In terms of a Q4 uptick there are a number of standard pureplay semiconductor companies in Europe looking to place orders at the end of the year, but there has been keen interest in the MEMS market as well, not to mention power devices. “Right now we’re seeing quite a bit of interest in power applications,” McKie said, noting that European power device makers are seeing intense competition from Asian device makers at the moment.

Will used 300mm equipment represent strategic opportunities?

If the industry is on the edge of a current up-cycle, it also may precede interesting times in the next cycle, as the market for used 300mm equipment continues to develop. The market for refurbished 300mm tools is relatively small and new, compared to the used equipment market as a whole.

It’s also been busy, of late and will likely continue to be so. But refurbished 300mm tools are the sole province of first-tier IDMs and foundries, for the time being.

It’s no secret that capacity is tight at the leading edge and near-leading edge nodes, and yet companies need to shave costs wherever they can. This means demand for used 300mm tools at top-tier device makers—core systems that can be refitted or otherwise refurbished for other applications—has remained strong even as the market for used 200mm tools has been ghostly quiet for most of this year.

A primary example of this is financially beleaguered DRAM maker ProMOS’ sale of a 300mm fab in Taiwan earlier this year. Foundry giant GlobalFoundries snatched that up. “From what I’m seeing in their forecasts, GlobalFoundries is a major player,” said a FabSurplus sales executive. The foundry expects to buy some $150 million of 300mm tools and services in 2014, for both backend and frontend expansion in 300mm fab lines.

There just have not been any second tier chipmakers, be they IDMs or foundries, making a play or even expressing much interest in used 300mm tools—yet.

But what if there were? Could a second-tier chipmaker theoretically jump into a market dominated by first-tier players by upgrading a fabline with used 300mm equipment and consequently offer a cost-effective alternative product?

“If one of those second tier companies had decided to go after, say Promos facility … their cost of equipment capital would have been lower” than that of a company investing in a brand new fab line, said Gates. “We haven’t seen it happen, but that’s not to say it couldn’t. It’s really been the first-tier customers that have taken advantage of the 300mm equipment in the used equipment market,” he said, but noted that AG Semi has actually seen some tentative interest from second-tier customers.

Certainly it is a possible scenario for a European chipmaker. Memsstar’s McKie noted that European companies are well established and comfortable with manufacturing devices using refurbished 200mm tools; they would not be averse to adding 300mm capacity with used systems. The real issue is the availability of core manufacturing systems; as with Promos’ fab sale noted above, used 300mm tools tend to get bought up very quickly in today’s market.

So this scenario is highly unlikely in the current cycle—assuming that the industry is on the edge of an upturn. But it’s a distinct possibility in the next cycle. Perhaps with the low-power needs of the end market driving things such as finFETs in the front end and TSVs in the back end, there will be an opportunity for a second-tier player to jump into a market dominated by first-tier players as the 300mm market matures and more systems become available.

There is definitely interest on the packaging side for used 300mm tools, refurbished tool brokers report. Many 300mm packaging lines that utilize advanced technology will be moving from pilot lines into production in the next cycle. Could this be a strategic yet cost effective opportunity for a second-tier company?

It is speculation, to be sure, but one thing is certain: A growing market for 300mm tools will be a boon for used equipment providers. As markets mature, original equipment makers don’t always find it cost-effective to offer service and support for used equipment. This provides an opportunity not just to broker and sell used tools, but service and support for those tools as well. In terms of the 300mm market and the related manufacturing complexity found in the accompanying technology nodes, there likely will be a strong demand for refurbished and repurposed tools and accompanying support services in the next cycle.

“The used 300mm equipment market is really now just developing,” said Gates. “We’re really going to see it come into it’s own.”

Editor’s Note: As explained at length elsewhere on this site this is a news story written by me for another publication. This originally appeared on Semiconductor Engineering; it holds the copyright, of course.

Back in the Freelance Writing Saddle

Writing About Semiconductors is Like Riding a Bike

Well, not quite. The last time I was writing specifically about the semiconductor industry was 2006, and a lot can happen in six years. When I was at GPS World, I would, on occasion write stories about new GPS recievers; my knowledge of chips would come in handy then — but it’s not the same as covering the industry on a regular basis.

Semiconductor Manufacturing and Design -- I'm freelance writing for these guys.
Which is why I was pretty jazzed about the opportunity to get back to covering the semiconductor industry. This time around it’s once again as a freelance writer and editor, albeit as a regular contributing editor gig. I was curious to see how things had changed in six years, having only kept abreast of the industry and the technology on a very casual basis.

Not to mention happy to be returning to freelance writing and editing.

But as I say, a lot can change in six years. Last time I had my hand in, chips built with 65nm design rules were the cutting edge, and most mainstream chips were still being produced with 90nm and 0.13-micron designs. Today the cutting edge is 28nm designs if we’re talking system-on-a-chip (SoC) or 22nm designs if you’re talking about CPUs. And unlike six years ago, when 3D transistor gates were still largely just a gleam in an R&D engineer’s eye — although they had been demonstrated as early as 2002 — they are in production today, albeit not widespread. However, that will be changing by the end of this year and on into 2014; indeed it’s changing literally as I write this.

Of course unless you’re involved in the chip industry, you have no clue what I’m on about.

That’s okay. Let it suffice to say, it’s good to have specialized knowledge and experience sometimes, even if you are rusty. Case in point: I updated my Linked In account recently; by update I mean I logged in for the first time in literally years. I had put out a few resumes here in Bangkok for writer and editor positions, but had not gotten any nibbles (I thought I would, given my experience, background and the fact that I’m on the ground already, but apparently not).

So I was thinking I would put out my shingle again as a freelance writer and editor; that would actually suit me better what with my language studies and whatnot. Plus, it’s been many years since I had to report to an office everyday. Granted, I had to put on a tie and report to a classroom five times a week for most of last year, but that’s not the same as a 9-5 office grind.

Semiconductor Manufacturing and DesignAnyway, it’s all about the networking. My old boss from my Electronic News days noticed I had logged in and updated my Linked In account, and emailed me wanting to know if I was available for freelance writing work, as he had some; he’s editor-in-chief of several industry-supported chip industry portals these days. It was a good fit — I needed the work and he knew I am familiar with the subject, as I had covered it for so long, even though I had some rust to knock off.

The end result of all this is a story about the changing chip foundry market in the semiconductor industry. And I’m already at work on another story for Semiconductor Manufacturing and Design.

All because I Linked In. I’ve had a habit of bad-mouthing social networking over the years; I still have to admit I loathe Facebook and don’t miss it at all. But maybe I’ve been quick to judge the entire gamut of social networks, particularly the professional ones.

In any event, I’m back in the freelance writing saddle once again. Booyah!

Foundry Models In Transition

Market forces have forced some foundries to the cutting edge—and left huge opportunities for others.

There may have been a time when AMD founder Jerry Sanders famous quote: “real men (i.e., real companies) have their own fabs” rang true, but in today’s business climate it seems quaint at best.

Semi EngineeringFabless or fab-lite business models are more popular than ever today, while some IDMs have turned back the clock, so to speak, looking to improve capacity utilization and revenues by offering foundry services—Intel and Samsung among them. Then there is the fact that the third-largest chipmaker in 2012, in terms of revenue, was a pure-play foundry.

As the 28nm node capacity ramp continues in the foundry market in 2013, following unexpected demand and capacity bottlenecks in 2012, today’s foundry market is the end result of market trends and forces with old roots. But those trends and forces have been compounded in modern times by extreme financial and market necessities, not to mention technology.

In one sense, however, at its core, the foundry market hasn’t changed since Taiwan Semiconductor Manufacturing Co. (TSMC) launched as the industry’s first pure-play foundry in 1987: Chip companies look to foundries, either as a customer or as a provider, to maximize productivity and thereby minimize costs. That part of the game hasn’t changed, whether it involves a component supplier designing power modules with 0.18-micron design rules for manufacturing on 200mm wafers, or one of the two GPU giants producing their next-generation graphics processors based on the latest technology.

The trend for years now has been fabless or fab-lite; even Sanders’ own AMD spun out its manufacturing arm several years ago to create one of the world’s largest pure-play foundries, GlobalFoundries. This has naturally in turn spawned the growth of the pure-play foundry market from its birth some 26 years ago.

Indeed, last year the overall foundry market enjoyed revenues of $29.6 billion, managing year-over-year growth of 12%, which is three times that of the chip industry over all in 2012. That growth caught everyone by surprise including the foundries themselves; 28nm capacity was tight for much of the year, even as yields improved dramatically—so much so that it reportedly impacted some capital equipment purchases, in spite of tight foundry capacity.

But that illustrates the biggest and most obvious change in the foundry industry in modern times: The foundries themselves are involved directly with developing leading-edge semiconductor technology. In fact, with the industry looking at the end of planar CMOS at the leading edge for some devices with the advent of 3D transistor architectures and the high-k materials they require, leading foundries no longer can rely on a mix of conventional scaling, publicly available data and equipment and process technology suppliers to get their jobs done. Research and development now must be within their purview, at least for those playing at the leading edge.

“Historically foundries don’t do R&D, their clients do it,” noted Dean Freeman, a research vice president at Gartner Research. That’s not so, today.

Nothing illustrates that fact better than TSMC’s R&D budget. In 2012 the company spent 33.8 billion NT, or about $1.13 billion, on R&D—a quarter of its revenue. This year the company plans to spend 40.4 billion NT, or about $1.35 billion, which includes adding some 500 people to its employee headcount, bolstering its R&D staff from 3,400 people to 3,900.

Indeed, leading foundries have joined the leading IDMs and technology consortia as purveyors of—not just manufacturers of—advanced technology.

While TSMC and its foundry brethren in the first tier of the pure-play market—Globalfoundries and United Microelectronics Corp. (UMC)—continue to build out 28nm capacity, they are also hard at work on the 20nm node and the subsequent hybrid 14/16nm finFET based on a 20nm back-end of line process. In fact, TSMC just announced first tapeouts of an ARM A-57 processor, based on the 64-bit ARMv8 processor series and built with 16nm transistor technology, including finFETs. This followed their rival’s announcement of a few months earlier. In February, GlobalFoundries announced a “first implementation” of a dual-core ARM A9 processor using the company’s 14nm-XM FinFET transistor architecture.

Follow the money

Being on the very leading edge of technology is driving growth among the first-tier foundries.

Like many others in the industry, TSMC and its chairman and CEO, Morris Chang, are quite bullish on the continued demand for 28nm technology as well as the development of 20nm technology. In general, 28nm designs, with their combination of lower power consumption and speedier transistors, have consequently proven cost-effective for a chip industry currently driven by mobile devices—smartphones, tablets and ultra lightweight notebooks. During TSMC’s review of its 2012 results earlier this year, Chang said the company will continue to aggressively grow its 28nm capacity and output; 2013 capacity and output will triple that of 2012, he said.

“It’s all about lower power with functionality and no sacrifice on the power requirements,” observed Kathryn Ta, managing director of strategic marketing for Applied Materials’ Silicon Systems Group. The equipment and process technology supplier’s foundry customers are seeing a need to move to 3D transistor architectures with minimal leakage, she said, because of those power requirements.

Development will continue at 20nm and 16nm as well at TSMC and its rivals. This year, 88% of the 9 billion NT that TSMC will spend on capital expenditures will go to 28nm, 20nm and 16nm capacity; an additional 5% will be spent on additional R&D equipment. Chang predicted that by Q3 of this year high-k metal gate production will surpass that of standard oxynitride gates, a gap that naturally will widen in Q4 and beyond.

“Enough discussions have taken place with enough customers … to lead us to believe that in both its first and second year of production (2014 and 2015, respectively) the volume of 20nm SoCs will be larger than that of 28nm in its first and second years of production (2012 and 2013),” Chang said.

He further noted that this represented the state of the art, and not just for the foundry industry, but for the industry as whole. This may indeed prove to be true in a few years as those 20nm and 16nm/14nm SoC devices move into production. It’s a far cry from the days when foundries were traditionally technological also-rans.

But then the first-tier foundries at the leading edge are still playing catch-up in the meantime with those IDMs at the leading edge, namely Intel. The world’s biggest chipmaker has kept Moore’s Law on track on the CPU side of the ITRS roadmap, last year having brought its Ivy Bridge processors to market. These feature 22nm transistors replete with finFETs; Intel’s own roadmap calls for 14nm designs to be in production in 2014; in terms of mobile SoCs like those the foundries are talking about, the company has promised its 22nm Atom SoCs will be in production in 2015.

“Intel seems to be able to continue to shrink because they spend a fortune on R&D,” said Gartner’s Freeman. “The foundries are pushing hard to catch up,” He noted that while both GlobalFoundries and TSMC have 16nm/14nm chips featuring finFETs in development, they are taking a shortcut, so to speak, by employing 20nm metal interconnects. “It’s close to what Intel is doing. Intel’s design may be more sophisticated, but the lithography is the same.”

Plenty of room, and business, at the trailing end

But not everybody in the foundry market is playing at the leading edge. The same market and industry forces that have induced the bigger pure-play foundries to move beyond their historical roles also have created a two-tiered pure-play foundry market. In the first tier are those that have the deep pockets to play in this space: TSMC, Globalfoundries, UMC, and to a lesser extent China’s Semiconductor Manufacturing International Corp. (SMIC).

Then there are the second-tier companies, those that are still fulfilling a traditional foundry role—at trailing edge processes, but nevertheless needed or even essential semiconductor manufacturing technology and capacity. Indeed, many second-tier foundries do quite well with their particular market niches and technologies. In the world of mobile consumer gadgets, including but not limited to smartphones and tablets, there are still many components fabricated on established, trailing-edge technology, such as sensors, microcontrollers and power components.

Even in 2013, where CPUs with 22nm transistors and mobile SoCs with 28nm transistors represent the current state of the art, some 40% of all silicon used to manufacture chips goes into mature devices fabricated on 200mm wafers. That’s typically 0.18-micron designs or larger. And much, if not most, of that is coming from pure-play foundries.

At the top of that second-tier foundry market, Israel’s TowerJazz, for example, has found a relatively comfortable niche making high-speed devices for a broad range consumer applications utilizing 0.13-micron designs and larger. It also makes CMOS image sensors with 0.16- and 0.11-micron design rules. In terms of financials, this has translated to record revenues: last year TowerJazz posted revenues of $638.8 million, an increase of 5% over the previous year.

Freeman suggested there are plenty of opportunities for these second-tier foundries. The so-called “Internet of Things,” for example, is a major driver behind sensor applications, as it is for the controllers needed to coordinate the data these sensors produce—data that can be managed via mobile Internet devices. These supplemental and complementary applications typically don’t need cutting-edge technology.

As has always been the case in the foundry industry, as leading-edge technology becomes trailing-edge, there will be new opportunities for second-tier foundries, as well. Some of the larger second-tier foundries eventually may have the opportunity to compete with first-tier companies head-to-head with 28nm capacity if they have deep-enough pockets to invest.

In the bifurcated smartphone market, for example, low-end smartphones that originally utilized chips manufactured with 40nm technology soon will migrate to chips with 28nm technology, as capacity ramps and it becomes even more cost effective, said Applied’s Ta. Even as the leading-edge players are driven beyond the 28nm node and the adoption of 3D gate architectures, the industry could very well see an extended 28nm node, driven by this market for lower-end smartphones and other mobile devices, she said.

But What About …

Things rarely ever prove to be so clearly defined in the chip industry. With players such as Samsung, Intel and IBM among others flirting with the foundry business, and some of the larger first-tier foundries suffering the same financial headaches that have plagued the IDMs in the past—problems that drove some of them to a fabless model in the fist place—there are some significant unknowns.

While 3D, high-k metal gate architectures, i.e, finFETs and the like, seem to be the wave of the near future, there are still those in the industry that tout the efficacy of fully depleted silicon-on-insulator (FD-SOI) as either an alternative to complement to 3D gate technology, for example.

IBM and its technology alliance partners have considered FD-SOI as a possible outcome of the semiconductor technology roadmap in the near future, Ta noted. “We see most of the effort on the finFET/Intel approach, but some of our customers are still talking about SOI,” perhaps used in some combination with finFETs, she added.

Gartner’s Freeman noted that Intel’s finFET devices are already fully depleted devices, although SOI could conceivably provide a bit less leakage; as such it may be an option at future nodes. Given the transistor speed and power usage achieved by its 22nm Atom processors, which are manufactured on top of bulk silicon technology, that seems unlikely though for Intel and those choosing to follow its lead. Freeman further observed that GlobalFoundries, once a proponent of FD-SOI, has backed off somewhat, although some of its largest customers remain committed to an FD-SOI strategy for the foreseeable future. IBM, for one, has publicly stated it will use FD-SOI, finFETs and stacked die together at future nodes.

But what does this mean for the leading-edge foundries? As always they will have to be able to manufacture what their customers want. It may be that some chipmakers will choose to go the FD-SOI route and that could prove a competitive opportunity for any foundry.

Another wild card that the top-tier foundries will need to take into account is the overlapping of technology nodes, which may become more pronounced with the extension of the 28nm node coupled with the rush to get 20nm devices into production. “It’s happening faster than previous node transitions have happened,” Applied’s Ta, noting that it’s driven by the low-power promise of finFETs. In the past node transitions typically took two to 2.5 years; “This time we may see a 1.5 year transition to finFETs,” she added.

Another question mark in the foundry market itself is SMIC. While most would still classify the Chinese foundry as a top-tier foundry, it is in a very real way straddling the gap between first and second tier. The company, once relatively close behind TSMC and UMC, has foundered in red ink and legal woes in recent years. While it has subsequently experienced an impressive turnaround financially under the helm of current CEO Tzu-Yin Chiu in 2012, it’s capital expenditures fell dramatically, even as capacity utilization hit 95% in Q2, and it is well behind its rivals in terms of technology.

Customer tapeouts of 28nm devices won’t take place until the end of this year; One of SMIC’s largest domestic customers, Spreadtrum, already has been forced to move to rival TSMC to meet its current plans for 28nm devices.

SMIC’s Chiu has said that the company’s 28nm technology will include both standard polysilicon oxynitride devices and high-k metal gates, and that it has plans to manufacture finFET devices at the 20nm node. In the meantime, it has found a saving grace in applications typically manufactured by second-tier players: smart cards, CMOS image sensors and power management chips.

Which way will SMIC go? Will it continue its impressive turn around by abandoning the leading edge or will it continue to play technological catch up? Or perhaps a little bit of both?

Time will tell. But it’s certainly an interesting time for the foundry business, and certain that for the foreseeable future the pure-play foundries will have to work hard at the cutting edge of semiconductor technology.

Editor’s Note: As explained at length elsewhere on this site this is a news story written by me for another publication. This originally appeared on Semiconductor Engineering; it holds the copyright, of course.

Venture Capitalists Have Eyes on China

Travelling the Silicon RoadStartups all across China in the technology sector are looking for seed money and second-and third-round investments, and are courting foreign as well as local investors, particularly U.S.-based venture firms.

But are the American VCs interested? Do they share in the buzz, the excitement about China?

They most certainly do; the answer is definitely yes. But it’s a qualified yes. American VCs aren’t just handing out money at the drop of a Chinese hat. While there is perhaps a bit of a gold rush mentality in the semiconductor industry with regards to China, perhaps the VCs remember the aftermath of the last technology gold rush – the one that began with the letter “I” — and are treading a little more cautiously.

But that’s not to say that U.S.-based venture capitalists aren’t taking a long, hard look and China, because they are. And they are excited about what they see, and what the future holds.

Only a Matter of Time

Everybody is excited about China for one reason or another, and VCs are no different. While many, if not most VCs in the West are reluctant to invest directly in China-based startups, they often speak as if it’s only a matter of time. And it is a sure bet they are looking at their clients based outside of China and how they can help them do business in China. It is without doubt an important market.

They often cite the use of mobile technology in China, where a lack of a wired infrastructure coupled with an emerging middle class is opening opportunities that don’t exist in older and more developed Western markets, or have a much more limited demand here, such as Internet protocol television and bill paying by mobile phone.

“It’s obviously a great new customer area,” said Mark Gorenberg of Hummer Winblad. “We look at it today as much more potential for our customer base rather than investing for ourselves,” he said. “But we talk about it all the time.”

Dave Liddle, a general partner at U.S. Venture Partners, said his firm has been looking recently at several Chinese-based companies but so far hasn’t made that kind of direct investment. “But that’s just how it’s turned out,” he added.

What’s more common at this point for Western VC firms interested in China typically is to work with a Silicon Valley-based firm that actually has a few people on the ground in China, or has opened an office there, or they work with a U.S.-based company that has set up its manufacturing in China, Liddle said. In fact, China is a market that VCs are encouraging their startups to look at now, ahead of more traditional markets, like Europe, he suggested.

But that’s not to say that U.S. Venture Partners, Hummer-Winblad and others aren’t looking at investing directly in China.

But like any investment, the general rules apply: the market served has to be accessible, and it has to be a cost effective proposition, Liddle explained. “We track that a great deal,” he said of potential direct investments in China. The company maintains a lot of connections within in the U.S. entrepreneurial community that have ties to Taiwan or mainland China.

One firm that is investing directly in China right now — in what is perhaps an example of how the world of capital is changing, and not just with regard to China – is Big Blue, or rather its VC arm, IBM Venture Capital Group.

“The energy in China is just tremendous … all the legendary firms are very much focused on China right now,” said Claudia Fan Munce, a VP and the managing director of IBM’s VC Group. Incidentally, at the time she was interviewed for this article last month, Fan Munce had just returned from China where IBM had hosted a meeting of some 200 VC firms from around the globe.

Rather than make direct investments, IBM’s VC Group operates on what it calls a “give to get” strategy, focusing on relationships that will directly benefit IBM. But it works with other traditional VC firms that do make direct investments

Many foreign VCs are teaming up very quickly with local firms throughout the Asia/Pacific region, and many in China, Fan Munce observed. “Our drive is … what are the best companies and what are the best technology solutions? What kind of partner do we want to bring to market with us? How can our technology help them?”

Big Blue Puts the ‘e’ in YeePay

One of IBM VC Groups success stories in mainland China, and an example of the type of emerging market that exists in China thanks to a relative lack of existing infrastructure, is YeePay. Founded in 2003, YeePay (which translates into Mandarin as “easy pay,” according to the company) is an electronic payment service provider. It enables consumers and businesses to send and receive payments via the Internet, mobile and traditional wired telephones.

In November the two partners, IBM and YeePay, announced that in just five months after the partnership began, YeePay increased its financial transactions handling from just $120,000 per month to more than $1.2 million per month. A lot of that had to do with IBM’s association with the startup; IBM is a revered brand in China. In fact, IBM’s laptops are so venerated there that some Chinese consumers were not excited but worried when domestic PC maker Lenovo bought IBM’s PC unit, worried about the future quality and performance of the Thinkpad laptop.

But it wasn’t all just success by association, said Fan Munce. IBM provided servers and middleware to YeePay, helping them build an infrastructure based on open-standards hardware and software – not to mention access to a global infrastructure — and went with the company when it approached new customers. IBM isn’t a software applications provider; it doesn’t do industry-focused software, but needed a way to serve industry verticals, she explained. “Our mission has always been to identify a pipeline or partner,” Fan Munce said.

In a country that already has more mobile phone users than the entire population of the United States, and skyrocketing activation rates, YeePay was naturally attractive to Big Blue. There is a high risk, Fan Munce acknowledged, but huge potential for high returns. And that’s important for IBM, where more than half the company’s revenue is derived from services. And as Fan Munce observed, “We don’t really care who caries the brand.”

And there is a larger story beyond the IBM/YeePay, foreign-VC-success-in-mainland China story, and that story is the emergence of the corporate VC firm; IBM is far from the only big technology company to get involved in the venture capital game. Big Blue rival and fellow chipmaker Intel is a prime example; at the other end of the technology spectrum Cisco Systems is another.

The emergency of corporate venture capital as a means of growing a business and driving revenue is a definite trend that has emerged just within the ten years, Fan Munce agreed. And it has blossomed; just take IBM. When Fan Munce joined the IBM VC Group in 2000, it was involved with some 21 startups; as of last month, it was involved with 964 scattered around the globe.

Rules Still Apply for VCs with Regard to China

So what is the implication for China? In the future the technology industry is likely to see more partnerships a la IBM and YeePay, aside from interest on the part of more traditional VCs.

And as for VC firms looking to get involved in China, they face the same issues that anybody looking to do business in China faces, such as intellectual property protection, and establishing and maintaining the proper relationships needed to get things done. Both Liddle and Gorenberg acknowledged that while China’s government definitely seems to be stepping up its efforts on IP protection, it is still an issue to take into consideration.

“As a venture capitalist, I focus on companies where the IP has originated with the entrepreneur in China, or with these particular people,” Liddle said. “That’s different than taking IP originated in the U.S. and transferring it into China.”

IP protection is a problem that to some degree is culturally ingrained, Gorenberg observed, and that has to change. But he noted one recent example that it is indeed changing.

With the Olympics coming to Beijing in 2008, the central government has already gotten its marketing efforts well underway – and, in a somewhat ironic development, has had problems with local “entrepreneurs” selling knock-off souvenir paraphernalia, souvenirs that aren’t officially licensed, yet feature copyrighted logos and so forth. The government is already cracking down on this, and that’s a hopeful sign that it will become further involved in efforts to protect corporate IP, Gorenberg suggested.

Foreign VCs looking at China also face the age-old question they always do anywhere and anytime they become involved in a startup: how to pick a winner. This is compounded by the fact that many Chinese startups, not to mention established companies, are constantly turning to what’s hot and trendy at the moment. A year ago, for example, there were some 400 mp3 player manufacturers on the mainland.

“It is difficult,” Liddle acknowledged. Typically, VCs will categorize startups into “brave new world” companies, that have something new, or “faster, better, cheaper” companies, those that have a better product or better way of serving an existing market. In China, most of these fall into the latter category.

Because of that, it’s often not difficult to validate the market a startup wants to pursue; what is often difficult is determining the character of the team involved in a startup. In cases where an entrepreneur or executives in the fledgling company were educated or worked in the industry in the United States or Europe, evaluation is not so difficult. Where it becomes problematic is when the entrepreneurs have spent their entire career in China, Liddle observed.

“We don’t have the same type of references there,” he said. “The trickier thing is to evaluate the senior people in the firm then. That’s hard. It can be done, but it takes a lot of work and it takes a slow process”

Electronic News Travels to ChinaWhich is perhaps why so many VCs are either looking to take their fledgling companies from the U.S. and elsewhere into Asia/Pacific, and namely China, or looking to partner with people and companies already in China. Relationships are the critical element when it comes to doing business there.

“In China people believe — and it’s true by the way – you have to be tapped into the local ecosystem,” said IBM’s Fan Munce. “You have top know the right people.”

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.