The following is a regular column provided to SBN by analysts at Semico Research Corp., a market research firm in Phoenix. Jason Blackwell and Joanne Itow are analysts at Semico.
It appears the foundry business has broken the laws of economics. As supply goes up, prices go down. And as demand goes up, prices still go down.
A recent Semico Research Corp. foundry wafer pricing study revealed that wafer prices have declined every quarter for the last two years. Capacity utilization at the foundries has increased compared to last year; however, prices still dropped in third quarter 2002. The decline was only 3.1% but it was still a drop.
Prices are supposed to rise when a product is scarce. And aren't prices supposed to go up when demand increases?
The drop in demand in 2001 was so severe that the rise in demand in 2002 is still not enough to fill the foundry fabs to optimum levels. Prices are still dropping because capacity utilization is still not maximized and technology moves on.
In addition, the foundry market is not a commodity business and prices are driven by more than just supply and demand. Price can be determined by a number of different factors. And the foundry market is characterized by two really big players, a number of niche markets and a highly capital intensive base.
The Semico study, "Foundry Wafer Pricing Q3 2002," reports that wafer-pricing trends vary greatly for different process technologies. In the third quarter, there was no change in pricing for wafers processed at 0.13-micron geometries. Wafer pricing for 0.25-micron process technologies experienced the biggest decline, while 0.35-micron wafers held their own. Why such a variance?
Recent reports from the foundries, on third quarter results and fourth quarter outlook have also varied. Some players are beginning to see a turnaround, and others are reporting slower order rates for the second half of 2002. It appears that inventories were replenished in the first half of the year and manufacturers are wary about the remainder of 2002.
Have and have nots at 0.13-micron
At present, meanwhile, the foundry market is now very much divided by suppliers who have leading edge technology and those who don't. Chartered, TSMC, and UMC are the three dedicated foundries currently offering 0.13-micron process technology. In addition, IBM has thrown its hat into the ring by offering foundry services utilizing their 0.13-micron leading edge technology.
Prices on 0.13-micron wafers dropped significantly in the second quarter, down by 11.4%, but even with four suppliers the prices did not change in the third quarter. Semico believes that prices stabilized in the third quarter due to significantly improved productivity rates on wafers processed at the 0.13-micron technology node. Although 0.13-micron processes are not yet at optimum levels, the manufacturers currently running 0.13- micron wafers have progressed significantly down the learning curve and yields have improved.
And what about the other foundry providers? Large capital investment and economies of scale prevent any company from entering the foundry supply market and making money at it. Although there have been a number of new entrants into the supply side of the foundry market, it is still difficult to establish a substantial market share. Foundry customers are very loyal to their providers because deliverables are a 'do-or-die' aspect of this supply chain.
Wafer price trends for '03
So what is the outlook for prices next year? The survey results indicate that wafer prices will continue its slow decline throughout 2003 for all technology nodes. That is the view from both foundry providers and foundry customers. Semico believes foundry customers should be careful about that scenario. Do not get lulled into the slow ride down the price curve.
With capital expenditures slashed again and d emand expected to rise next year, Semico believes that the industry is once again setting the stage for tight supply. In early 2003, prices will continue to see a downward shift in more mature technology nodes, as smaller foundries vie for market share. But by the second half of 2003, and as we move into 2004, prices are expected to stabilize and even increase as demand rebounds.
So the foundry business has not broken any laws. You can run, but you cannot hide from the laws of economics. Prices do react with some reasoning behind it and the next shortage is just around the corner.