Consolidation Hits OSAT Biz

The outsourced semiconductor assembly and test (OSAT) industry is undergoing a new wave of acquisition activity that will dramatically reshape the packaging and test services markets.

OSATs have seen a considerable amount of consolidation over the years, but the industry needs a scorecard to keep track of the recent deals and the resulting fallout. One OSAT deal involves an unprecedented hostile takeover. Others involve the Chinese government’s multi-pronged push into this market.

“Consolidation started a long time ago (in the OSAT market),” said Jim Walker, an analyst with Gartner. “But now, you are seeing a crescendo and there’s a new player in town. That, of course, is China.”

In fact, China recently launched an initiative to expand its IC-packaging efforts. Chinese-backed firms already have acquired one OSAT, and want to invest in three others in Taiwan, a move that potentially threatens Taiwan’s position in the OSAT market.

There is other acquisition activity as well. Here is a sampling of recent OSAT deals:

• Jiangsu Changjiang Electronics Technology (JCET), China’s largest OSAT, last year acquired Singapore’s STATS ChipPAC, a move that propelled China into the upper ranks of the OSAT business.
• Taiwan’s Advanced Semiconductor Engineering (ASE), the world’s largest OSAT, recently launched an unsolicited bid to acquire a controlling stake in Taiwan’s Siliconware (SPIL), the world’s third largest OSAT.
• China’s Tsinghua Unigroup is in talks to invest in SPIL, but it has also taken stakes in two other Taiwanese OSATs.
• Amkor recently increased its ownership in J-Devices, Japan’s largest OSAT, from 65.7% to 100%.

To be sure, the industry is still trying to get its arms around the recent events in the complex and fragmented OSAT market. But clearly, there are too many OSATs chasing after a shrinking customer base. In total, there are 150 OSATs in the market, according to Gartner. Of those, 10 to 15 vendors are considered mid- to large-sized players.

And if that isn’t enough competition, some foundry vendors, namely Intel and TSMC, are expanding their efforts in IC-packaging. “The bigger threat is not the consolidation of the OSAT guys,” Walker said. “The bigger threat is from the foundry guys.”

In total, the OSAT market is projected to grow a mere 3% to 4% in 2016, according to Gartner. The overall IC market is expected to reach $344 billion in 2016, up 1.9% over 2015, according to Gartner.

Indeed, it’s a complex market. To help the industry gain an understanding of the dynamics, Semiconductor Engineering has taken a look at several facets of the OSAT business—what’s driving the consolidation, what’s changed, and what’s next.

Driving forces
In the early days of the IC industry, many chipmakers had their own chip packaging operations. Then, starting in the 1970s, vendors began moving their packaging operations to low-cost labor sites in Asia. At the time, several OSATs began to emerge.

The first wave of consolidation in the OSAT industry started in the 1990s, when many U.S.-based chipmakers divested their packaging operations as a means to reduce cost, according to Walker. IDMs sold many of those operations, and handed their packaging businesses, to the OSATs.

Many Japanese chipmakers followed the same trend. Intel, Samsung, TI and others did not, maintaining their own IC-packaging operations as a key competitive advantage. But enough packaging was outsourced to cause an explosion in the OSAT business in the 2000s. OSATs benefited from the divestitures by the IDMs, but they also experienced booming growth with the rise of the fabless IC industry.

For years, though, OSATs have been under pressure. For one thing, customers want the OSATs to reduce their packaging prices by 2% to 5% every year, according to Gartner.

While the OSATs have experienced margin pressures, many also have seen an increase in R&D costs and capital spending in recent times. For example, chipmakers recently moved from wirebonded packages using gold wires to copper wiring. Copper wiring lowered IC-packaging costs, but it also forced OSATs to spend millions of dollars to buy new copper-based wirebonders.

In addition, the industry is developing a number of new and advanced package types, such as 2.5D/3D stacked die and wafer-level technologies.

“Wafer-level packaging requires a level of investment that is significantly higher than what the OSATs have been required to invest in the past,” said Ramakanth Alapati, director of packaging product management, strategy and marketing at GlobalFoundries. “There is the risk of investment without a return.”

Over time, fewer OSATs can afford to make the necessary investments for both mainstream and advanced packages. There is only a finite amount of R&D dollars to go around amid a shrinking customer base. The result is continued consolidation.

“The top three OSATs’ R&D and CapEx spending intensity has been flat for a number of years,” Alapati said. “Consolidation will help focus the R&D spending on fewer technology variants, enabling faster time to market as well as to build sufficient scale to address capacity needs of the top customers and compete with the silicon foundry backend offerings.”

Indeed, the OSATs may need to consolidate for other reasons. Foundries such as Intel and TSMC are expanding their chip-packaging efforts. Armed with R&D dollars and technology, foundries may give the OSATs a run for their money, at least in the high-end of the business.

All told, many agree that consolidation makes sense for the OSAT industry. “It will bring additional benefits to the end customers,” said Tien Wu, chief operating officer of ASE. “Given that the industry customers are consolidating, and the potential differentiation requirements and escalating costs, I believe it is the right thing for the OSATs to have accelerated consolidation.”

Consolidation makes sense for other reasons. “You are seeing overall consolidation from all corners. With this consolidation, you have to ask yourself what’s the basic driving force? The driving force is there will be more competition in a slower growth environment,” Wu said. “For any company who wants to have longer sustainability, and in lieu of the growth environment and the potential competition, they have to figure out how to differentiate themselves. The differentiation means you have to have better economic scale. You must have better control of your P&L baseline. You have more R&D dollars to do future investments. You have a better attraction to the talent pool.”

But there also is a downside, especially for equipment and EDA tool vendors. “That will mean fewer OSATs to sell EDA tools into,” said John Park, market development manager at Mentor Graphics. “However, (the OSATs) major added value is differentiated technology. So, more EDA tools are needed as designs get more complex and OSATs offer additional services for their customers. OSATs will need to concentrate on improving their packaging technology to provide that differentiation.”

What’s changed?
Still, there is room for a number of OSATs in the market. The IC industry requires a multitude of packaging types for a growing number of applications. No OSAT can do everything. But at the same time, the market can’t support all 150 OSATs. In fact, there is already a shake-up among the top-tier players, which appears to be fueled by China.

China always has lagged in IC technology, but that is not for lack of trying. The most recent attempt to rectify this problem is an initiative called the “National Guideline for Development of the IC Industry.” As part of the plan, China created a $19.3 billion fund to invest in domestic and foreign IC firms.

China’s plan is designed to accelerate the nation’s efforts in several areas, such as 14nm finFETs, advanced packaging and memory. Packaging is a priority in China. For years, China has been a hub for IC-packaging, and many OSATs have factories inside of China. Until recently, though, China’s domestic OSATs were smaller players.

So with financial help from the Chinese government, China’s JCET acquired STATS ChipPAC, the world’s fourth largest OSAT. With the deal, JCET jumped from sixth to fourth place in the worldwide OSAT rankings in terms of 2014 sales, according to Gartner. In the rankings, ASE is still the largest OSAT, followed by Amkor and SPIL, according to Gartner.

The JCET-STATS deal also propelled China into the advanced packaging market. Generally, JCET provides commodity packages. STATS ChipPAC focuses on advanced packaging. “This positions us much more strongly to compete with the other tier-one OSATs,” said Scott Sikorski, vice president of product technology marketing at STATS ChipPAC, a subsidiary of JCET.

China was by no means finished with its efforts in IC-packaging. Late last year, China’s Tsinghua Unigroup, a state-run asset management company, took separate 25% stakes in two Taiwan OSATs—ChipMOS and Powertech. Both OSATs specialize in memory packaging and test. It still unclear how those investments will impact ChipMOS and Powertech.

Still, the moves by China set off alarm bells in Taiwan. Clearly, China is encroaching on Taiwan’s position in IC-packaging. In total, Taiwan-based OSATs provide about 50% of the world’s IC-packaging and test services, according to Gartner.

“There is the issue of Taiwan and protecting one of its key industries,” Gartner’s Walker said. “It’s really a strategic issue, in my mind, of a market that is very crucial to Taiwan and its GDP.”

Taiwan is concerned for other reasons. China, according to industry sources, provides subsidies to its domestic OSATs, which could tilt the playing field. Plus, there are fears that China’s OSATs may replicate what the nation did in LCDs, LEDs and solar. In those markets, China built up too much capacity, creating oversupply and causing price declines.

Meanwhile, seeking to protect its turf, Taiwan’s ASE last August launched an unsolicited bid to acquire a 25% stake in SPIL. This would essentially give ASE a controlling interest in SPIL.

Initially, SPIL rejected ASE’s offer. To fend off ASE, SPIL attempted to form alliances with Foxconn and Tsinghua Unigroup. The deal with Foxconn fell through. SPIL’s talks with Tsinghua Unigroup are pending, according to a SPIL spokesman.

In September, ASE completed its first tender offer for SPIL. Then, without the blessing of SPIL, ASE launched a second tender offer, which would give it a 49.7% stake in the company. This transaction requires approval by Taiwan’s regulatory agency.

Over time, ASE hopes to acquire a 100% stake in SPIL. With SPIL, ASE would expand its advanced packaging efforts. The combined ASE-SPIL duo would also have a 30% share of the OSAT market, according to Gartner.

The proposed deal makes sense on several levels. “If the industry players can consolidate, it will bring more R&D dollars to the mid-range, high-end and ultra high-end,” ASE’s Wu said.

“In the ultra high-end, we are talking about large investment dollars. To do that, you must have resources and dollars,” Wu said. “In the high-end, you have copper pillar, panel, fan-out, PoP and others. The industry is looking for additional R&D dollars to make performance and cost one step higher than the existing state. Even in wirebond, people are looking for what is the next step. Then it goes to the leadframe, QFN, QFP and BGA.”

What’s next?
Indeed, the OSAT market is changing. But what will the business look like in the next one to five years?

In the future, the industry in the future will continue to require a multitude of different package types, including legacy, mainstream and advanced technologies. “Wirebonding is not dead. Leadframe is not dead,” Gartner’s Walker said. “If IoT is indeed a market driver, we believe it will use a lot more systems-in-package and multi-chip packaging. You can do that with existing wirebonding.”

All told, the future OSAT market will likely resemble today’s landscape. It will remain fragmented and split into three groups—advanced vendors, specialty players, and the sunset group, according to Walker.

“You won’t have one giant packaging house equivalent to TSMC,” he said. “The (niche players) may consolidate somewhat. They won’t disappear.”

Time will tell if China and the foundries will make a dent. The OSATs will continue to handle the bulk of the IC-packaging requirements for customers, but there might be fewer players over the long haul.

“Long term, small and midsized OSATs might be acquired by large OSATs with enough money in their pockets,” said Steffen Kröhnert, director of technology and technical marketing at Nanium, a wafer-level packaging specialist.

“On the other hand, customers like diversity. They like to have a choice of OSATs to work with, and not being dependent on a small number of players only,” Kröhnert said. “Customers are looking for proprietary solutions to differentiate them from their competitors. They don’t want to get all their packaging done by the same big OSAT.”