Outsourcing services now a key part of manufacturing chain, Gartner reports

The continued industry movement toward fabless business models plays directly into the hands of the semiconductor assembly and test services (SATS) companies, with the net result that foundry and SATS outsourcing services will grow faster than the overall semiconductor industry, according to the market research company.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 7/23/2008

Worldwide semiconductor outsourcing services revenue is on the rise and will remain on the rise for the next few years as more and more semiconductor companies move toward fabless and asset-lite business models, according to a report from Gartner Inc this week.

Outsourcing services revenue is on pace to total $47.4 billion in 2008, a 10.8% increase from 2007 revenue of $42.8 billion, and to reach $66.8 billion in 2012, the market research company forecasted.

Gartner noted the high cost of manufacturing, a very evident concern at this month’s Semicon West show. Industry pundits including IBM’s Bernie Meyerson commented on the associated costs of fab construction and manufacturing at the capital-equipment industry focused event, held mid-July. Separately, IC Insights this week noted a related disconnect between capital spending and supply, demand, and ASPs (average selling prices).

“During these tough economic times, product design is the major competitive advantage and must be the major focus for resources,” Jim Walker (pictured, left), a research VP at Gartner, said in a statement Tuesday. “Installing and maintaining captive semiconductor manufacturing facilities has become a huge burden with the cost of building a state of the art wafer fabrication facility currently coming in at between $3 billion and $4 billion. The management of capital risk versus reward will only serve to promote the growth of outsourcing in the future.”

According to Gartner data, worldwide foundry services revenue is forecast to reach $25.5 billion in 2008, a 14.8% increase from 2007 revenue of $22.2 billion. Additional growth is expected in Q3, supported by better product mix, an improved pricing environment and stronger wafer demand, particularly from wireline, baseband, handset, storage, and networking applications, the market research company said.

Semiconductor assembly and test services (SATS) revenue is on pace to reach $21.9 billion in 2008, up 6.6% from 2007 revenue of $20.6 billion, Gartner further estimated, noting that pricing should be stable for the remainder of the year, but there will be pressure to reduce package prices, especially in the highly volatile memory markets. Gartner also said test prices will remain steady for most devices, but there will be pressure to reduce costs for memory as the final product ASPs continue to erode.

Walker said that even in the difficult economy, the time is coming when advanced processes and technologies offered by the outsourcing market are of equal competency with most internal development and capabilities by IDMs (integrated device manufactures) and OEMs. Many of them have grown their dependence on the outsourcing community in recent years with asset-lite and fab lite strategies, and for many, there would be no turning back to in-house production as in previous cycles, he said.

“As the IDMs and OEMs become more ‘fabless’ and ‘assemblyless’ in this nature, this plays directly into the hands of the SATS companies, with the net result that foundry and SATS outsourcing services will expand at faster growth rates than the overall semiconductor industry,” Walker continued. “Outsourcing services are no longer just used for excess production requirements; they are truly part of the manufacturing chain.”