Foundry Models In Transition

By Jeff Chappell
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.

Fabless 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.