The nation's two leading wafer foundries, Taiwan Semiconductor Manufacturing Co. Ltd. and United Microelectronics Corp., are among the most famous in the high-tech industry. While less well known, the integrated circuit packaging and testing sector also plays an important role.
IC packaging refers to the process of wrapping silicon wafers in plastic material for protection. IC testing uses electric currents to check the functionality of a chip.
In addition to major players such as Advanced Semiconductor Engineering Inc. (ASE), Siliconware Precision Industries Co. Ltd. (SPIL) and King Yuan Electronics Co. Ltd., other companies recorded impressive profits, including Powertech Technology Inc., Phoenix Precision Technology Corp. and Kinsus Interconnect Technology Corp.
Packaging and testing companies have been in the news, partially because of the financial crisis of U.S.-based Amkor Technology Inc., the second-largest company of its kind in the world. Due to Amkor's failure to submit its 2006 second quarterly report on time to the U.S. Securities and Exchange Commission, creditors demanded that the company repay its debts. Amkor later submitted the report, averting bankruptcy.
In contrast to Amkor, two Taiwanese packaging and testing companies, ASE and SPIL, enjoyed thriving business from 2004 to 2006. Three factors contributed to the sector's prosperity. First, wafer foundries, also known as integrated device manufacturers, turned to the 90-nanometer and 65-nanometer process technologies, leading to increasing demand for high-level packaging and testing services. Second, in 2005 and 2006, the four leading packaging and testing companies did not invest sufficient capital in mid-level packaging and testing technology, so growth was limited. Third, the major companies maintained their dominant position in the market, garnering most of the orders for packaging and testing services.
The year 2005 was dramatic for the sector, driven by wafer manufacturers converting to nanometer technology. For example, the personal computer chips that generated the most growth in the semiconductor sector--including CPUs, chipsets and graphics chips--were made using the 90-nanometer and 65-nanometer process technologies from the second half of 2005. The number of nanometers refers to the average size of features on chips. When chipmakers make those features smaller through more advanced manufacturing processes, they usually boost performance and reduce energy consumption. To take advantage of the innovations, manufacturers of cell phone chips quickly adopted 90-nanometer technology. The core chips in the Xbox 360 game console were also made this way. The rising number of products using these kinds of chips created a boom in packaging and testing.
While the chip market was in a phase of rapid development, it was not easy to develop the packaging and testing sector. A production line capable of manufacturing 2 million chips a month, for example, required an investment of US$30 million. Small companies were forced to withdraw from the core packaging and testing market and turned to other niche markets, such as memory chips, liquid-crystal display IC chips and analog IC chips. ASE, Amkor, SPIL and Singapore's STATS-ChipPAC Ltd. remained to share out the lucrative market resulting from the nanometer process technology.
As these new chips flourished, packaging and testing companies seemed unable to meet demand. The biggest reason was that the sector needed large-scale capital investment. This showed that the packaging and testing sector lacked adequate funding from 2004 to 2006, while it transformed from being labor-intensive to capital-intensive.
The four leading packaging and testing companies generated over US$6 billion in revenues in 2004 and US$8 billion in 2006. At the same time, they invested less and less. Their capital expenditure to sales ratio decreased during those years, from 31 percent in 2004 to 14 percent in 2006.
The packaging and testing sector grew slowly in the fourth quarter of 2006, due to excess wafer inventory. Compared to wafer manufacturers, the packaging and testing sector expanded, however. Moreover, the cell phone chips produced by Qualcomm Inc., Broadcom Corp. and Texas Instruments Inc. were also made employing 65-nanometer technology. This type of chip became predominant, and this trend would create more demand for packaging and testing.
Amkor seemed unable to increase its chip output in 2006, after experiencing a series of financial crises. At the same time, ASE and SPIL set maximizing output their priority, making them less likely to undertake substantial investment before their output was running at full capacity. Taking a more conservative stance, STATS-ChipPAC would expand output only after receiving orders.
Companies explored new opportunities to increase output in the first quarter of 2007. Even though the sector did not have explosive growth in 2006, companies were still optimistic.
The idea that international integrated device manufacturers should expand outsourcing of packaging and testing was constantly discussed in past years. Between 2001 and 2004, "fabless" IC design companies--those without their own wafer foundries--fueled the growth of packaging and testing firms. It was not until international IDMs underwent restructuring in 2005 that packaging and testing companies began to receive contract orders from IDMs.
In recent years, the entire semiconductor sector grew slowly because of the lack of innovative products in the market. It was not like the years before 2000, when average annual growth rates were around 15 percent. The semiconductor sector grew after 2004 because of the immense demand from emerging markets. Compared to Europe and the United States, these markets were more sensitive to the prices of electronic products. This forced IDMs to reduce prices for chips, in a bid to cash in on the demand from developing economies.
As the manufacturing processes of IDMs changed, and the advantages of 12-inch wafer plants exceeded that of 8-inch plants, IDMs faced severe problems. First, they lost the cost advantage that 8-inch plants had for the previous decade. Second, while they needed US$2 billion to US$3 billion to invest in a new 12-inch plant, there might not be adequate production capacity to meet output targets. Third, the price of chips dropped drastically. The high-cost structure made it difficult for IDMs to maintain a high profit margin.
With these conditions, many IDMs launched restructuring plans and spun off their semiconductor divisions as independent companies from the second half of 2005. Freescale Semiconductor Inc., created out of Motorola Inc., and Royal Philips Electronics' NXP Semiconductors, were two new companies later purchased by private equity funds.
These new owners adopted a "fab-lite" strategy geared toward lowering production costs, which meant reducing the amount of manufacturing they did themselves. Whenever outsourcing was feasible, they contracted out work to wafer foundries and the packaging and testing sector.
While IDMs implemented this fab-lite strategy for three years, Japanese IDMs, including Fujitsu Ltd., Toshiba Corp. and NEC Corp., or European and U.S. IDMs, such as LSI Logic Corp., Freescale Semiconductor and Infineon Technologies, all believed that wafer foundries were still their most valuable assets. Moreover, the packaging and testing sector became less attractive, as it consumed more capital in order to match its output with the nanometer technology. This showed that IDMs invested less in packaging and testing, and more in wafer foundries.
In light of this long-term trend, IDMs started to increase outsourcing. Texas Instruments, for example, began assigning most of its packaging and testing to ASE and Ardentec Corp. from the second quarter of 2005. The packaging businesses of Freescale Semiconductor and NXP also relied on ASE and SPIL. Even large companies like Supermicro Computer Inc. and Intel Corp. started to outsource operations to Taiwanese firms.
Despite the increase in business, companies did not grow as rapidly as before in the fourth quarter of 2006. But the major players were expected to have a 20-percent growth in sales in 2007, because they had received many orders from IDMs. This explained why they held a more positive outlook on the packaging and testing industry this year.
--The preceding is the translation of two Oct. 19, 2006 reports in the Chinese-language Commercial Times.
Write to Allen Hsu at allenhsu@mail.gio.gov.tw