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The Challenges ahead of Foundry Businesses in 2016

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Challenges for foundry business in 2016

In the previous part of the series, we saw that the foundry business is expected to witness better growth than the overall semiconductor market. We’ll now look at the possible challenges these opportunities bring with them.

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Oversupply

Foundries are transitioning to 14nm[1. Nanometer]/16nm and 10nm. While the transition to the lower node brings its own cost benefits, it could create excess supply and ignite a price war. In 2015, there was an oversupply of DRAM (dynamic random access memory) as foundries increased their production due to a shortage in DRAM supply in 2014. Micron (MU) is shifting DRAM production to the 20nm node to compete with Samsung (SSNLF). This could further add to the oversupply and lower DRAM prices.

High cost

The design cost rises with every reduction in the node. For instance, designing a 14nm chip entails a cost of $200 million. Not all companies would be able to switch to a lower node given the high cost of transition.

When the industry transitions to a 7nm node in the future, it would require EUV (extreme ultraviolet) lithography to simplify and reduce the cost of patterning. It would also require production-level features that support EUV.

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Consolidating customer base

Apart from the roadblocks on the production front, foundries face the major challenge of consolidation. According to Dealogic, $100.6 billion worth of M&A (mergers and acquisitions) deals have been announced in the semiconductor space in 2015. This would mean fewer customers for foundries. If this consolidation frenzy continues, it could trigger consolidation in the foundry market in 2016.

Competition from China

While advanced technology does bring benefits, it doesn’t always deliver good returns. Recently, there were rumors of Global Foundries being an acquisition target of Chinese (FXI) investors. The foundry is on par with Samsung and IBM (IBM) in terms of technology but reported a net loss of $1.5 billion in 2015.

If Global Foundries is acquired by China, then it would get access to the company’s intellectual property, the one thing that has been holding back the country from becoming a key competitor in the semiconductor space. However, this would benefit TSMC (TSM) in the short term as its major competitor will be acquired.

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