Are foundries trying to inflate wafer prices?

[B3D News]

A couple of weeks ago, TSMC and UMC announced that their capital spending in 2008 would be much more limited than this year, as less new equipment would be purchased for capacity expansion. Many had expected this to be related to expected productivity enhancements and deployment of equipment bought in 2007. But now another theory has surfaced...

Read the full news item

 

[Geo]

Hahhaha. . . good old law of unintended consequences. It's really classic economics in my book. Less competition means higher prices. And "asset light" means less competition.

 

[Voltron]

I don't really think this is anything new or unusual in the foundry business. Any manufacturing company is looking to maximize capacity utilization.

The foundries became much more cautious after the tech bubble burst in 2002/2001. These companies need to be highly profitable in order to continue to reinvest in future capacity. TSMC's margins are huge, which is pretty rare for a manufacturing company, particularly a contract manufacturer. Compare them to circuit board makers and you will note a dramtic difference. Everybody understands that semi plants and equipment are a different ballgame and that high margins are required for a sustainable business. Anyhow, they really spent a lot on capacity just prior to the bubble bursting and they got caught with their pants down. Capacity utilization fell from over 100% to below 50% pretty much overnight. That just killed profits and put some of the foundries' long-term futures at risk. Anyhow, since then the fabs have been very cautious about over spending and have frequently adjusted capex down. Plus they can always get better at doing more with less, just as NVIDIA has with its wafer usage.

 

[Arun]

Well, fundamentally the reason why the gross margins and the operating margins are so large at these companies is that the majority of their costs are capital spending. So it's only visible in net income and through amortization charges etc.

Even after taking amortization into account, it is true that foundries are getting pretty good returns already though - or at least, TSMC does. UMC's returns are decent, and Chartered's are subpar but at least they've been improving in recent years.

Obviously everyone is expecting foundries to increase capacity next year, mostly through "doing more with less" as you said. However, the point is that growth in capacity doesn't look like it'll match growth in demand, despite utilization rates being already very high. So either foundries are expecting the market to be worse than everybody else, or they know their strategy will likely result in supply restrictions for their customers.

And if the answer is that they do know this will result in supply restrictions (which is what McLean implied, and the point of this article), then it means foundries are realizing they are in a position of power next year and will be able to slightly increase wafer prices this way with no real consequence.

Nothing unusual in the manufacturing world overall, but clearly that isn't what happens every year (and especially not in the semiconductor foundry business) so it's still very noteworthy, IMO.

 

[Voltron]

Operating margins include dep and am, unless specified as EBITDA. In all accounting systems I am familiar with it is always included in operating expenses on the income statement. This is neither here nor there, but if a capital intensive company didnt include dep in gross margins they would really be through the roof. Anyhow, the foundries have high net profit margins for a manufacturing business which is obviously what I was referring to in the context of reinvestment.

As far as capacity next year, you may have noticed these companies continually revise their spending plans up and down. This goes with what I said in my original post. They learned a harsh lesson after the tech bubble and are much better at adding capacity quickly and as needed. This is just common sense when you have equipment that costs this much. And if you get better at adding it as efficiently as possible you run a better business in the long-term for you and your customers.

TSMC does not want its customers to be supply constrained. That is for sure. It is obvious they are very customer centric. Ask anyone in the industry. But it is impossible to be perfect in manufacturing planning, Prior to the tech bubble they were adding capacity as fast as possible and it bit them very very badly. So now they are more cautious. And they have been for the past 6 years.

 

[INKster]

Well, fundamentally the reason why the gross margins and the operating margins are so large at these companies is that the majority of their costs are capital spending. So it's only visible in net income and through amortization charges etc.

Even after taking amortization into account, it is true that foundries are getting pretty good returns already though - or at least, TSMC does. UMC's returns are decent, and Chartered's are subpar but at least they've been improving in recent years.

Yet, i can't figure out exactly why did Phillips bail out of TSMC.

 

[silent_guy]

Yet, i can't figure out exactly why did Phillips bail out of TSMC.

Because all electronics companies are doing it...
The investments are still increasing and lock up in credible amounts of capital. If fabs aren't your main business and they don't give a clear competitive advantage and you think you can deploy the capital more efficiently somewhere else, it's the logical thing to do.

 

[Arun]

Operating margins include dep and am, unless specified as EBITDA. [...] Anyhow, the foundries have high net profit margins for a manufacturing business which is obviously what I was referring to in the context of reinvestment.

Ah yes, this is completely my mistake - sorry for claiming somethin that ridiculous on my previous post, I don't know what I was thinking

TSMC does not want its customers to be supply constrained. That is for sure. It is obvious they are very customer centric. Ask anyone in the industry. But it is impossible to be perfect in manufacturing planning

Obviously they don't want to massively limit anybody's capacity. However, one way to look at this might be that in the last few years, they probably were shooting for 80-90% utilization so as to be able to capture new share if the opportunity arose. Next year, they look to be aiming at 95-100%, and if the upside happens, well wafer prices will go up a bit and margins will be even more optimal.

I don't think anyone is claiming any drastic change in strategy here, but AFAICT, small changes can result in interesting results. And I don't think anyone could deny TSMC and UMC are being rather conservative for next year - and while spending plans do change rapidly, capacity doesn't get installed overnight, so what they predict today does matter for tommorow, IMO.

 

[Voltron]

I think this article might provide a little more incite than the Electronics Weekly piece. I wouldn't take TSMC's claims of productivity improvements as hot air. Plus, because of certain previous outlays, they might not have to spend as much to boost capacity on relatively short notice. Obviously TSMC wants to run as close to max capacity as possible, but much of their success is clearly due to their long-term focus and I really doubt that they would want to constrain customers in order to achieve a few more dollars.

http://www.fabtech.org/content/view/5641/