Pure-play foundries can expect continuing strong revenue expansion this year, led by companies serving the fast-growing wireless market, according to an IHS iSuppli Semiconductor Manufacturing and Supply market tracker report from information and analytics provider IHS.
Global revenue this year for pure-play foundries is projected to reach $35.0 billion, up a robust 14 percent from $30.7 billion in 2012. This year's rise follows the heady increase of 16 percent in 2012, and two more additional years of double-digit expansion will take place in 2014 and 2015. Industry growth then moderates to a still-healthy 9 percent in 2016, by which time total pure-play foundry revenue is forecast to hit $48.5 billion.
The growth of pure-play foundries this year will depend on the steady improvement of global economic conditions as well as the agility of inventory management throughout the semiconductor supply chain. However, the industry also can count on another factor to drive expansion: the continued appetite of consumers for next-generation wireless devices. Smartphones and tablets, for instance, are far and away the preferred consumer gadget of choice, translating into reliable demand for wireless chips and steady business for wireless-focused foundries.
In general, foundries catering to wireless applications tend to be Tier 1 players with advanced lithography technologies, and players here can expect revenue growth in excess of the average. In comparison, foundries supporting the less dynamic consumer applications segment-mostly second-tier manufacturers-likely will see revenue increases below the industry average.
Last year for instance, foundries focused on wireless applications expanded their revenue by a notable 18 to 25 percent. Meanwhile, foundries engaged in producing legacy products such as discrete power management chips had a poor run, blamed on a weak market that caused a dramatic decline in that segment's manufacturing run rates during the second half of 2012.
The pure-play foundry segment includes companies that do not design chips but are engaged solely in semiconductor manufacturing, tapped by client fabless firms without their own production facilities. Pure-play companies are distinct from the much-smaller integrated device manufacturer (IDM) segment of the foundry business involved in both the design and manufacturing of semiconductors.
Straddling a fine line: fulfilling demand without accruing excess inventory
Despite solid growth prospects at present, manufacturers of semiconductors and components for smartphones and tablets face important challenges ahead, the most critical of which relates to the accurate forecasting of demand from clients needing wireless chips for their products.
At some point, demand for smartphones and tablets will slow down as the products saturate the market and growth rates begin to slow. For instance, once smartphones reach more than a 50 percent penetration rate among consumers-a threshold predicted to occur by the end of this year-the overall wireless market will begin to decelerate, pulling down other participants in the semiconductor supply chain, foundries included.
Careful inventory management throughout the chain also will continue to be critical. Across the industry, sufficient front-end manufacturing capacity exists to meet silicon demand. During the next two quarters as the industry returns to growth from a seasonally slow first quarter, foundry clients likely will request chip production to be expedited to ensure no sales are lost from product shortages. If this type of activity is not managed correctly, inventory could rise throughout the channel, leading to a significant reduction in manufacturing run rates in order to adjust for excess stockpiles, similar to what happened in the fourth quarter of 2012.
Yet foundry providers in general are facing the issue of needing additional manufacturing capacity to assure long-term revenue growth. As demand increases for additional components supporting wireless technology, most companies will be forced to undertake a strategic expansion in manufacturing. Decisions to add capacity, under such a scenario, will require not only significant capital expenditures but also a thoughtfully formulated plan for specific market penetration, IHS iSuppli believes.
The biggest pure-play foundry last year was Taiwan Semiconductor Manufacturing Company, whose $16.9 billion in global annual revenue accounted for more than half of pure-play foundry industrywide takings. At No. 2 was California-based GlobalFoundries with $4.2 billion; followed by UMC, also of Taiwan, in third place with $3.6 billion.