1. Sloan 2004 Annual Conference Outsourcing and Offshoring in the Semiconductor Industry David A. Hodges Robert C. Leachman Competitive Semiconductor Manufacturing Program UC Berkeley Sloan Industry Centers Annual Conference Atlanta, GA April 19-21, 2004

2. Sloan 2004 Annual Conference U.S. Integrated Device Manufacturers (e.g. Texas Inst., Motorola, Intel, …) Labor-intensive chip assembly work mostly off-shored since the 1960s Initially, plants served just one company Initially, plants served just one company More recently, independent assemblers and testing firms are serving multiple customers More recently, independent assemblers and testing firms are serving multiple customers IBM automated in the 1960s IBM automated in the 1960s Automation of assembly and testing now spreading industry-wide and world-wide Automation of assembly and testing now spreading industry-wide and world-wide

3. Sloan 2004 Annual Conference U.S. IDMs, 1960-1990 Capital-intensive wafer fabs were off-shored selectively: important aid market access Capital-intensive wafer fabs were off-shored selectively: important aid market access Cost of direct labor not a significant factor Cost of direct labor not a significant factor US ownership, international professional staff US ownership, international professional staff Hazards: weak infrastructure, long supply lines, business and political climate Hazards: weak infrastructure, long supply lines, business and political climate Early examples: Texas Instruments (Japan), Analog Devices (Ireland), Intel (Israel) Early examples: Texas Instruments (Japan), Analog Devices (Ireland), Intel (Israel)

4. Sloan 2004 Annual Conference U.S. IDMs, 1960-1990 Skills-intensive process development and product design mostly remained in the US Skills-intensive process development and product design mostly remained in the US Firms sought advantages from proprietary technologies Firms sought advantages from proprietary technologies Few skilled professionals available abroad Few skilled professionals available abroad Some exceptions: Chip design centers in England (TI), Israel (Intel); typically devoted to specific products for worldwide markets Some exceptions: Chip design centers in England (TI), Israel (Intel); typically devoted to specific products for worldwide markets Sales, marketing, customer support efforts carried on world-wide Sales, marketing, customer support efforts carried on world-wide

5. Sloan 2004 Annual Conference Changing business models: IDMs forced to become specialists Intel, AMD: microprocessors Intel, AMD: microprocessors Samsung, NEC, Micron, Infineon: memory Samsung, NEC, Micron, Infineon: memory Texas Inst., STM: chips for cell phones Texas Inst., STM: chips for cell phones These are standard products, MM units; same designs purchased by many competing original equipment manufacturers (OEMs) These are standard products, MM units; same designs purchased by many competing original equipment manufacturers (OEMs) Above categories represent about ½ of total worldwide semiconductor production Above categories represent about ½ of total worldwide semiconductor production  What about the other half?

6. Sloan 2004 Annual Conference Factors leading to “foundries” Competitive modern wafer fabs cost $2-4B Competitive modern wafer fabs cost $2-4B employ ~ 1000 people (total for 7 x 24 operation) employ ~ 1000 people (total for 7 x 24 operation) Annual revenues > ½ fab cost for profitability Annual revenues > ½ fab cost for profitability Worldwide standardization of mfg. process Worldwide standardization of mfg. process Innovative design firms require only a fraction of one fab’s capacity Innovative design firms require only a fraction of one fab’s capacity Vastly different management skills: design vs. fab Vastly different management skills: design vs. fab IDMs rarely succeed in serving fabless firms IDMs rarely succeed in serving fabless firms Foundries were established to serve this need Foundries were established to serve this need  Leadership of Morris Chang!

7. Sloan 2004 Annual Conference Fabless-foundry business model Fabless firms define, design, & market chips Fabless firms define, design, & market chips small investment, quick response small investment, quick response $300-500K revenue/employee $300-500K revenue/employee ~50,000 well-paid U.S. jobs; ~13,000 ROW ~50,000 well-paid U.S. jobs; ~13,000 ROW Asian foundries fabricate chips for many firms Asian foundries fabricate chips for many firms huge investments; fixed costs ~75% of total huge investments; fixed costs ~75% of total ~15,000 factory jobs, well-paid by local scales ~15,000 factory jobs, well-paid by local scales highly automated for tight process control highly automated for tight process control short production cycle short production cycle timely intro of new technology generations timely intro of new technology generations excellent customer service excellent customer service some niche specialists with old technology some niche specialists with old technology

8. Sloan 2004 Annual Conference Outsourcing, Offshoring? Fabless design centered in the U.S. Fabless design centered in the U.S. MS, PhD grads of top U.S. universities MS, PhD grads of top U.S. universities U.S. is #1 (78% of ‘03 revenues) U.S. is #1 (78% of ‘03 revenues) Taiwan is #2 (11% of ’03 revenues) Taiwan is #2 (11% of ’03 revenues) Equivalent design skills very rare elsewhere Equivalent design skills very rare elsewhere Most silicon foundries are in Asia Most silicon foundries are in Asia Many process development jobs in Asia Many process development jobs in Asia Many grads of top US universities Many grads of top US universities Weak U.S. domestic investment (except Intel) Weak U.S. domestic investment (except Intel)

9. Sloan 2004 Annual Conference “Food chain” for semic. industry Semiconductor production equipment & raw materials are supplied mainly from U.S., Japan, and Europe Semiconductor production equipment & raw materials are supplied mainly from U.S., Japan, and Europe U.S. leads in key areas: U.S. leads in key areas: MS & PhD education MS & PhD education Computer-aided design for semiconductors Computer-aided design for semiconductors University-industry cooperation University-industry cooperation Climate for innovation Climate for innovation Market for advanced technology Market for advanced technology Government support is strongest in Asia Government support is strongest in Asia

10. Sloan 2004 Annual Conference Factors influencing location for manufacturing investments Trophy value of semiconductor fabs Trophy value of semiconductor fabs (Think about the steel industry in the 1960s) (Think about the steel industry in the 1960s) Trophy sought by gov’ts worldwide: tax incentives! Trophy sought by gov’ts worldwide: tax incentives! China is the current leader in incentives China is the current leader in incentives Most capital comes from outside PRC Most capital comes from outside PRC Fading concerns about investment risks Fading concerns about investment risks Weaker controls on U.S. equipment export Weaker controls on U.S. equipment export Commodity status of manufacturing technology Commodity status of manufacturing technology Return of expatriates; spread of higher education Return of expatriates; spread of higher education Protected IP less important than know-how Protected IP less important than know-how Improving infrastructure in China, other nations Improving infrastructure in China, other nations

11. Sloan 2004 Annual Conference Chinese competition for foundry business Semiconductor Manufacturing Int’l Corp. (SMIC) Semiconductor Manufacturing Int’l Corp. (SMIC) largest, most advanced Chinese foundry largest, most advanced Chinese foundry founded in 2002; 3 8” fabs in Shanghai founded in 2002; 3 8” fabs in Shanghai purchased Motorola’s 8” Tianjin facility purchased Motorola’s 8” Tianjin facility 12” fab in Beijing under construction 12” fab in Beijing under construction 3/17/04: $1.8B IPO in HK & NY; -12% as of 4/6/04 3/17/04: $1.8B IPO in HK & NY; -12% as of 4/6/04 U.S. filed WTO complaint re: China’s lower VAT for locally designed or manufactured semiconductors U.S. filed WTO complaint re: China’s lower VAT for locally designed or manufactured semiconductors China remains far behind in chip design capability China remains far behind in chip design capability China establishes unique domestic standard for cellular telephony; Chinese partners required China establishes unique domestic standard for cellular telephony; Chinese partners required

12. Sloan 2004 Annual Conference 2003 Foundry revenue leaders 1. TSMC (Taiwan)$5.9 billion + 26% 1. TSMC (Taiwan)$5.9 billion + 26% 2. UMC (Taiwan) 2.7+ 27% 2. UMC (Taiwan) 2.7+ 27% 3. Chartered (Singapore).73 + 49% 3. Chartered (Singapore).73 + 49% 4. IBM (U.S.-IDM).56 - 27% 4. IBM (U.S.-IDM).56 - 27% 5. NEC (Japan-IDM).43+ 33% 5. NEC (Japan-IDM).43+ 33% 6. SMIC (China).37 +630% 6. SMIC (China).37 +630% 7. Hynix (Korea-IDM).34+ 39% 7. Hynix (Korea-IDM).34+ 39% 8. DongbuAnam (Korea).33+ 27% 8. DongbuAnam (Korea).33+ 27% 9. Jazz (U.S. ex-Rockwell).19+ 16% 9. Jazz (U.S. ex-Rockwell).19+ 16% 10. HHNEC (China).17+ 13% 10. HHNEC (China).17+ 13% 11. SSMC (Singapore).16+ 82% 11. SSMC (Singapore).16+ 82% 12. X Fab (E. Germany).13+ 27% 12. X Fab (E. Germany).13+ 27%

13. Sloan 2004 Annual Conference Survival strategies of U.S. IDMs Intel: heavy investments; try new markets Intel: heavy investments; try new markets Texas Inst: limit investments + use foundries Texas Inst: limit investments + use foundries IBM: partnered with Chartered, Infineon IBM: partnered with Chartered, Infineon AMD: more German incentives in Dresden AMD: more German incentives in Dresden Micron: innovation; more cost reductions Micron: innovation; more cost reductions Motorola: divesting semiconductor business Motorola: divesting semiconductor business National: product focus; use foundries National: product focus; use foundries Analog Devices: limit investments + foundries Analog Devices: limit investments + foundries

14. Sloan 2004 Annual Conference Conclusions for semiconductor industry It’s a fully globalized industry It’s a fully globalized industry Microprocessors: Intel unchallenged Microprocessors: Intel unchallenged Memory is a commodity; Samsung leads by far Memory is a commodity; Samsung leads by far IDM business model is dead for other products IDM business model is dead for other products U.S. leads in innovative chip design U.S. leads in innovative chip design U.S. unchallenged in design software U.S. unchallenged in design software design & software skills are bound to spread! design & software skills are bound to spread! Asia leads in foundry manufacturing Asia leads in foundry manufacturing U.S. is not a serious competitor; poor ROI U.S. is not a serious competitor; poor ROI TSMC, UMC are likely to remain leaders TSMC, UMC are likely to remain leaders Overcapacity looms; SMIC payoff is uncertain Overcapacity looms; SMIC payoff is uncertain