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Seismic shift hits foundries

31 October 2007 | By Mark Osborne | Editor's Blog

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The top four pure-play foundries (TSMC, UMC SMIC & Chartered) have now all provided their latest quarterly results with one very important underlying trend! 

Capital spending taps have basically been turned off for 2008 and beyond, even though utilization rates have recovered to the point when capital spending would historically have kicked in to further increase available capacity.

TSMC guided that CapEx would be significantly reduced in 2008 and that the ratio of CapEx to sales would be set at a lower level going forward. UMC said the very same thing while highlighting that spending would focus on its existing tool installed base by migrating more of its current capacity to smaller geometries.

SMIC and Chartered have guided that a tightly managed CapEx-to-demand ratio would be maintained, indicating that spending in 2008 will be at best comparable with 2007.

We haven’t seen this level of spending cuts since the dotcom bust, yet all the foundries are seeing high utilization rates at leading-edge nodes as well as at trailing-edge!

The increasing move on the part of IDMs to adopt an asset-lite business model would have given the impression that the last thing we expected was for the foundries to cut CapEx. However, it is quite apparent that asset-lite moves take several years to pick up momentum and 2007 was definitely not a momentum year!

But, on the current face of it, 2008 doesn’t look that much better!

We also have new 300mm fabs under construction at TSMC and UMC while SMIC will manage two new 300mm fabs for provincial Chinese Government agencies. With respect to TSMC and UMC, it now looks like these fabs may see little or no activity in 2008!

I would welcome readers’ views as to why the major foundries are reacting this way, as it does not seem to make sense to me.

Here are my current speculations:

One aspect may be down to the very slow adoption of 65nm. The capital spending, especially this year by most foundries, has been allocated to 65nm technology and capacity tool buys, while the customers stayed away. Although things are improving, Chartered doesn’t expect an improved 65nm ramp environment until the second half of 2008!

Another is the underlining wafer price that has seen ASPs decline in 2007, while tool depreciation costs have risen and utilization rates were low (1H07). The ROI issue is more acute at Chartered and SMIC compared to the other two foundries, but TSMC has highlighted that it does not expect to grow above the industry average and indeed is expecting flat growth for 2007.

However, I am sure there is something missing from this reasoning and look forward to your comments.

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