If the metaphor for the industrial age was the assembly line, then the metaphor for today’s digital age must be intellectual property.
In industrial-era manufacturing, a company started with a batch of raw materials, performed standard operations and ended up with a standard product.
The apex of this manufacturing model was the vertically integrated company. But today that’s all changed.
Nowadays, strategy consultants like Forbes’ Don Tapscott conclude that corporations, the basic institutions for wealth creation, must undergo profound change to survive.
Companies need to focus on what differentiates them in the market and outsource functions that are not part of their core competency.
Semiconductor companies in the San Diego area such as Qualcomm Inc. and Silicon Wave are in the business of manufacturing silicon, yet few of them own the manufacturing facilities necessary for production.
Known as the fabless model, this business methodology is quickly becoming the model of choice with approximately 450 companies in North America. A strategy of fabless manufacturing allows a company to focus on the design, development and marketing of its product.
This is in contrast to the traditional semiconductor company known as the integrated device manufacturer, the type of company that owns an internal silicon wafer fabrication plant. Some examples are Texas Instruments, Cypress Semiconductor and Integrated Device Technology. It should be noted, however, that many IDMs still continue to outsource in order to supplement production.
– Steps in Chip Production
Let’s first discuss how an integrated circuit is made. There are six basic steps in the creation of a silicon chip. In the case of Bluetooth wireless technology, engineers first work to create a concept based on the open specification offered by the Bluetooth special interest group.
In the next step, the design phase, engineers design the chip with input from various engineering subgroups. In a Bluetooth design, for example, teams involved with specific functions of the chip (such as baseband, receive and transmit sections) provide suggestions for the final design along with feedback from the customer.
In the layout phase, engineers plan where each component will physically reside on the silicon chip.
Masking or photolithography is the process whereby the design is transferred to the silicon wafer. A light sensitive film (photo resist) is applied to the wafer and an intense light is projected through the mask to expose the photo resist.
In the manufacturing phase, light and chemicals etch the characteristics of the design onto the wafer. The steps are repeated until the enough layers are created to provide the chip with the functionality needed to execute the task.
In the test phase, an automatic, computer-driven test system checks the functionality of each chip on the wafer. Finally, a diamond saw slices the wafer into a number of individual chips, which are packaged and tested again prior to shipment.
– Foundry Alternative
With few exceptions, most semiconductor start-ups take the fabless approach because of the tremendous costs associated with establishing and maintaining a foundry. The fabless method is gaining momentum, says a survey conducted by the Fabless Semiconductor Association (FSA.org). Approximately 15 percent of companies outsource today and that figure is expected to grow to 50 percent by 2010. More impressive is the fact that revenues last year grew an astounding 68 percent for the 625 fabless companies worldwide.
Southern California is one of the primary centers of excellence in the fabless world. San Diego has the second largest concentration of communications firms in the country, said Marco Thompson, president of the San Diego Telecom Council. “It surprises everyone to discover there are actually over 500 companies in the communications business, and over 150 are in the wireless sector.”
According to FSA, 19 fabless companies worldwide experienced annual run rates of $1 billion or greater; 11 reached $500 million and eight reached $250 million. Qualcomm, ranked third in 2000, is expected to be the leading fabless company in 2001.
– Foundries Face Increased Demand
This proliferation of the fabless semiconductor model clearly demonstrates how intellectual property-rich companies have been able to leverage assets by outsourcing, a value-added strategy that focuses on proprietary design, product architecture and software expertise.
Roughly 40 foundries worldwide produce silicon. Two Taiwan foundries, Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp., handle the majority of production, roughly 65 percent. A third foundry, Chartered Semiconductor Manufacturing of Singapore, rounds out the big three by producing an additional 18 percent.
To accommodate anticipated demand, nine new foundries are scheduled to go online within the next three years. Countries slated for new facilities include Malaysia, China, Taiwan, Israel and Singapore.
The FSA 2001 survey confirms that the number of fabless wafers being allocated to personal computers and related peripheral devices has continued to shrink, down 8 percent last year. Instead, growth is now centered on telecommunications (capturing 18 percent of the market) and data communications (13 percent), coupled with a phenomenal growth in wireless handsets.
Barach is president of Carlsbad-based BrightCom Technologies, Inc, the U.S. subsidiary of BrightCom Technologies Ltd.
