Fab Spending Tapers in 2008

Prices for memory, especially DRAM and flash, have experienced a shocking decline since the beginning of 2007. Price pressure continued in the third quarter of 2007 with spot and contract prices declining to new lows. Consumers are happy and, not surprisingly, demand for memory is looking good. Demand forecasts for memory predict skyrocketing numbers, as we are just at the dawn of a huge growth market. Back in May 2007, forecasts showed that the NAND flash demand will grow from 737 billion MB in 2006 to 33.5 trillion MB in 2011. This is a 114% compound annual growth rate (CAGR).

As low prices also accelerate demand, some companies cannot keep up. In September 2007, Toshiba (Yokohama, Japan), for example, was unable to meet demand for its NAND flash memory devices, reportedly sold out through December 2007. The company expects NAND bit growth to jump 120% in 2008 and 115% in 2009. Although unhappy with the lower sale prices, Toshiba is planning a huge ramp-up to meet soaring demand. In addition, Korean chipmakers will shift production capacity from DRAM to NAND.

On top of all of this, memory companies are fueling the market with even larger fabs, dubbed "megafabs," with some reaching monstrous dimensions. Many in the industry fear that this will accelerate a further decline in average selling price (ASP) to gain market share in an already soft pricing environment. Concerns about oversupply are surfacing. For example, iSuppli Corp. (El Segundo, Calif.) recently reported that "oversupplies push memory markets in the dumps."

The market takes its toll

As the market starts taking its toll, companies react in various ways. Some companies are trying to meet forecasted demand, while others must cut back their capital spending (capex). Only a few have plans to expand.

Some companies respond by cutting spending, restructuring or accelerating efforts to increase productivity and reduce costs while others announce huge layoffs. Most recently, Samsung (Seoul, South Korea) cut 1630 jobs and Conexant (Newport Beach, Calif.) cut 20% of its workforce, while Micron Inc. (Boise, Idaho) cut ~10%.

Companies have announced tremendous cuts in capex for 2008. For example, ProMOS (Hsinchu, Taiwan) will cut its capex from $1.8B to $800M. Foundry UMC (Hsinchu, Taiwan) announced "significant cuts," as did Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC, Hsinchu, Taiwan). Qimonda (Munich, Germany) admitted being below their fiscal year (FY) 2007 capex plan, and stated that their FY2008 capex will be even lower than FY2007.

However, not all companies are cutting. As mentioned earlier, Toshiba is planning a huge ramp-up to meet soaring demand. Samsung has traditionally increased spending mid-year in a downcycle when many other companies need to make spending cuts. Samsung increased its capex plan of $6.9B (including Austin) at the beginning of 2007 to a high-spirited $8.35B. Although in smaller dimensions than Samsung, Winbond (Hsinchu, Taiwan) is more than doubling its 2008 capex to $587M, compared with $245M in 2007.

Fab construction

Overall capex cuts directly impact fab construction projects and the money spent on equipping fabs.

Capex for fab construction is an indicator for capacity coming online in the future. The outcome of these expenditures can typically be seen in about 1–2 years out when the fab begins to ramp up capacity.

After an 8% year-over-year (YoY) increase in 2007, spending growth on construction projects will drop to negative single digits in 2008 (Fig. 1). Spending on equipping fabs may experience an even sharper decline, from ~8–10% growth YoY in 2007 to -7 to 10% in 2008 (Fig. 2).

1. Companies plan to spend less in 2008 than they did in 2007 on fab construction projects. (Source: Fab Capacity Report Interim, November 2007)

2. Fabs will be equipped at a much slower rate in 2008 vs. 2007. (Source: Fab Capacity Report Interim, November 2007)

Japan, Taiwan and South Korea are the leading regions in terms of money spent on fabs equipping for both 2007 and 2008.

Although most regions show declining growth rates for money spent equipping fabs, some regions thrive. In 2007, Taiwan and China showed the highest growth rates YoY (with ~50% and 40%, respectively) for equipping new or existing fabs. In 2008, Southeast (SE) Asia is expected to take first place for highest growth in equipment spending with ~30%, followed by Europe and the Middle East (including Israel) with ~16%.

How changes in capex affect capacity

The recent capex cuts announced in late 2007 will not have an immediate impact on capacity (front-end capacity), but may affect capacity later in 2008.

About 24 high-volume fabs are expected to start construction in 2008. They represent a maximum capacity of 235,000 wpm (in 200 mm equivalents). We will see some of these fabs begin to ramp in 2009.

Figures 3 and 4 illustrate shares of capacity by region in 2000 and 2007. In 2000, Japan had about one-third of the total fab capacity. However, in the past seven years, Japan has maintained only modest capacity growth compared with the other region, and is now responsible for almost a fourth of the worldwide capacity. Since 2000, South Korea's capacity has increased by ~330% and is now second in installed capacity, followed by Taiwan with 240% growth in capacity to represent 18% of the world's total. Although China has a relatively small capacity at the moment, it has the largest growth rate, with over 800% in the past seven years (Table).

3. Japan and the Americas dominated fab capacity in 2000. (Source: Fab Capacity Report Interim, November 2007)

4. By 2007, South Korea and Taiwan had gained share. (Source: Fab Capacity Report Interim, November 2007)

Tiny Singapore flexes its 300 mm muscles

As George Burns of Strategic Marketing Associates (San Luis Obispo, Calif.) has already pointed out, Singapore has experienced an amazing growth rate in capacity. Its fab capacity has increased 310% above the 2000 capacity levels. This growth is mainly driven by 300 mm fabs.

In Singapore, Micron's Tech Semiconductor, IM Flash (a joint venture [JV] between Micron and Intel [Santa Clara, Calif.]), Chartered Semiconductor Manufacturing and Qimonda contribute to the growth in SE Asia. This is impressive for a small country like Singapore, considering the competition from other regions whose governments offer large incentives.

In the Europe and Middle East sectors, Intel in Israel and AMD in Germany account for the most growth on expenditures for fabs equipping in 2008. The governments of these regions support the companies with hefty incentives.

Russia awakes from winter sleep, Brazil starts to simmer

New attention focuses on two regions from which we have not heard much in the past. Russia recently made headlines with two 200 mm fab announcements. JSC Mikron (Moscow) is pushing ahead with its cooperation with STMicroelectronics (Geneva, Switzerland), and expects to begin operation of its 200 mm fab in 2008. Angstrem (Moscow) is refurbishing an existing building in Zelenograd with equipment from Advanced Micro Devices's (AMD) fab in Dresden. The fab is expected to start production in 2009. Russia also announced tentative plans for their first 300 mm fabs with Tronic JV, Kedah Group and Sitronic. These fab plans are further out in time, but if governmental incentives continue to support the industry, we may see a 300 mm fab in Russia in by 2010 or 2011.

In the Americas, Brazil has joined the semiconductor arena. Ceitec (Porto Alegre) has completed construction of Brazil's first 150 mm semiconductor wafer fab. The $130M fab is expected to begin operations on a small scale in mid-2008. Companhia Brasileira de Semiconductors is also working on securing funds for their planned 200 mm fab in Minas Gerais.

Foundries cope with market situation

We expect the top four pure-play foundries — TSMC, UMC, Semiconductor Manufacturing International Corp. (SMIC, Shanghai) and Chartered — to cut capital spending but maintain or increase utilization rates. TSMC, UMC and Chartered together are expected to reduce 2008 capital spending by at least 10%. Spending on the SMIC fabs, including the ones it manages, depends on plans by its partners and other funding entities.

UMC announced that capex for 2008 will be significantly reduced, although it will invest to enhance productivity of certain critical and capital intensive equipment and expand capacity by focusing on converting capacity from older process technologies to more advanced processes. We also expect UMC to slow down its Fab 12B project and begin equipping it by the end of 2008 (12B is currently under construction). In 2008, TSMC may slow down its capacity expansion plan a bit. They will complete the ramp of Fab 14 Phase 2 and may begin ramping Fab 14 Phase 3. Each is estimated to have a maximum capacity of 40,000–45,000 wpm. SMIC and Chartered announced tight management of upcoming capex pending market demand.

In 2008, nine foundries (including IDMs with some foundry capacity) will begin operation, while six memory fabs will come online. These foundry fabs represent a maximum capacity of over 400,000 wpm (in 200 mm equivalents), compared with memory fab capacity at 700,000 wpm. Six out of the nine new foundry fabs will be in China.

Memory fabs keep fueling the market

Despite cuts in capex, Samsung, Hynix Semiconductor Inc. (Icheon, South Korea) and other memory companies keep fueling the market. Both Flash Alliance Ltd. (Yokkaichi, Japan) and Rexchip Electronics Corp. (Taichung, Taiwan, a DRAM JV between Powerchip Semiconductor Corp. [Hsinchu, Taiwan] and Elpida Memory Inc. [Tokyo]) continue to push heavily into the market.

Flash Alliance will most likely accelerate the ramp of its megafab or "monster fab" Fab 4 (the largest in the world, with 210,000 wpm maximum 300 mm capacity) and possibly start construction of their Fab 5 (also 210,000 wpm) by the middle of next year. Rexchip started production this year with a 70,000 wpm capacity 300 mm fab. This is only the first of four planned fabs, with the second fab starting construction in July 2007 and expected to begin operations in the second half of 2008.

Qimonda will start construction of its 60,000 wpm 300 mm fab in Singapore at the start of 2008. With STMicroelectronics, Hynix ramped its 80,000 wpm 300 mm DRAM/flash fab in Wuxi, China, to full capacity in 2007. Hynix will also convert Fab M10 in Icheon, South Korea, into an 110,000 wpm 300 mm fab.

Monster fabs baring fangs

In this time of larger and larger fabs, once equipped, less than half the number of planned 300 mm fabs (73) will have more capacity than all the 200 mm fabs (182) combined. The capacity of 300 mm fabs will surpass the capacity of the 200 mm fabs in 2008 (Fig. 5).

5. An 11% increase in fab capacity is expected in 2008. (Source: Fab Database Reports Interim, November 2007)

Samsung and Hynix, for example, have ramped up most of their 300 mm memory fabs to reach 80,000–110,000 wpm (in 300 mm). Flash Alliance is building the largest fabs ever, with over 200,000 wpm (450,000 wpm in 200 mm wafer equivalents). These fabs may cost about $9-10B each, reaching monstrous dimensions in both capacity and costs.

300 mm fabs are ramping up their capacity very quickly. Figure 6 shows the ratio of capacity (in 200 mm equivalent wpm) to the number of fabs for volume fabs. As 300 mm fabs ramp up and increase capacity, the ratio increases. This measure also indicates that the average size of a 300 mm fab is steadily increasing.

6. Growth in average fab size. (Source: Fab Database Reports Interim, November 2007)

The first 300 mm fab was SC300 in Dresden, Germany, a JV between Infineon Technologies AG (Neubiberg, Germany) and Motorola (Schaumburg, Ill.) in 2000. In 2001, four additional fabs started to ramp up: Intel with D1C, Renesas Technology (Tokyo) with Naka 2-1F, UMC with Fab 12A and TSMC with Fab 12 Phase 1.

For awhile, 300 mm fabs could be called "megafabs," with most built to produce memory chips. As they grow even larger, the megafabs of the past are dwarfed by "monster fabs." For example, in the past, a traditional 300 mm fab with 20,000–30,000 wpm (in 300 mm) cost about $3-$4B. Now, these "good old times" are over as the semiconductor industry enters an era of mass production of over 200,000 wpm (in 300 mm) capacity fabs costing $9-$10B. Because of the expected increase in demand for memory chips (mainly flash), this trend will not be held back by slowed capex in 2008.

This is a very competitive market. The one who comes first cashes in first. It remains to be seen if the new generation of megafabs will lead to oversupply, thus accelerating further declines in device ASP.

Although our indicators show slowing in 2008 for money spent on fab construction projects and equipping, this may change. A more mature semiconductor industry reacts much more quickly than in the past, when the market shows signs of improvement.