For quite a while we have been reporting on the various aspects of change affecting the global semiconductor and electronics industry supply chain. The reason for the continued discussion is that the changes we see happening are not just the result of concentrated change based on demand, devices, or localized changes, rather the current wave of change affects all levels of the global supply chain and all types of relationships – this topic is featured in Smith's upcoming MarketWatch Quarterly due out mid-July to (free) subscribers.
Driving a lean and competitive supply chain
The internal supply chain drivers behind the current, pervasive shifts are many but importantly are together pushing the global supply chain in a new direction. Over the recent years since the global economic recession, companies have increasingly been streamlining operations to trim margins through the implementation of lean inventory management and purchasing strategies. In-house versus outsourced services have also been keenly reviewed with decisions made based on costs, returns, and especially expertise and core competencies while allowing for diversification opportunities.
The external drivers, those coming from the marketplace, we see the traditional push for new technologies and architectures which is driving node and wafer advances to both improve feature and functional capabilities for new devices while also improving manufacturing costs. The rapid market adoption of smartphone and tablet PC devices is now extending as cost-barriers are lowered due to OEM diversification into lower-priced devices and developing market sectors simultaneously. The ability to present these smart, low-priced devices rests, of course, on the internal supply chain alignments and strategies to reduce costs all along the manufacturing and assembly process, keeping component costs aggressive and inventory holdings to a minimum.
The results are successful at the end-device point, we are seeing significant proliferation into once niche markets such as medical, automotive and industrial electronics thanks to high quality and lowered costs provided through customized and agile supply chain services. Smart devices are also expanding in new market demographics, both regional and price-tiers as new users have opportunities to access the internet and engage in the mobile economy through lower-priced smart devices.
The global supply chain shifts continue
With these new market opportunities we have seen an important reinvigoration of competition and resulting innovative strategies along the supply chain. There have been necessary and healthy consolidations as weaker competitors shift out of markets; companies have been engaged in a new merger and acquisition (M&A) period to bring in new strengths that strategically place them into competitive opportunities; and additional margin trimming and cost-aware repurposing or closures are reaching a peak. As IC Insights recently reported, nine fabs are slated to be closed this year. These closures are additional signals of pervasive supply chain changes as companies across the chain carefully consider core expertise and value alongside of return on investment (ROI). As the demand for lower-priced devices continues to rise, costs for producing the devices must be carefully managed, driving adoption of better priced components especially. One example of this ROI and pricing consideration is the shuttering or refurbishing of older fabs that had been operating at smaller and less efficient wafer sizes. The current cost of fab upgrades to 300mm (and soon to move to 450mm) are phenomenal, throwing up cost barriers too high even for major companies. As the IC Insights report details:
Since mid-2007, the IC industry has been paring down older capacity (i.e., ≤200mm wafers) in order to produce devices more cost-effectively on larger wafers. A few fabs have been refurbished for production using larger wafers or for production of "non-IC" products.
[…] As the cost of new wafer fabs and manufacturing equipment skyrockets, IC Insights expects several more companies to shutter older fabs and transition to a fab-lite or fabless business model in the coming years […].
As we have seen happen with the DRAM sector, where closures and consolidations have pared down the manufacturers to only three, we are continuing to see similar trends at the fab level, meaning that we are similarly paring down manufacturing of wafers. For DRAM, the consolidation has been extremely positive, despite creating an oligopoly which should raise concerns around price control and limited supplier concerns. As the industry moves to fab-lite or fabless models more generally, the question to be answered is will consolidation at this level prove successful as DRAM has to date, or will limited competition create new problems and access during a period of rapid and deep market expansion as the mobile economy and IoT truly takes off?