Foundry Model Unsustainable

Back in early 2003, it was being said that the silicon foundry business model would have to change if firms were to recover from low profit margins and low growth rates.

“The era of high margins for the current foundry model has gone forever,” said Bob Tsao, chairman of foundry firm UMC at its February investor conference.

Under a new model, UMC will form alliances with chip companies who commit all their production to UMC. As an example, Tsao cited UMC’s alliance with chipset manufacturer Silicon Integrated Systems (SIS).

UMC has 30 per cent of SIS and has shareholdings in other chip companies which it is expected to increase as a result of the new strategy.

The foundry business has flourished because of cheap capital and favourable local accounting rules.

“ProMos [Infineon’s Taiwanese joint venture fab] never had a single dollar of ramp-up cost because, under Taiwan accounting rules, that goes to the balance sheet and is accounted an asset,” said Dr Ulrich Schumacher, CEO of Infineon Technologies, “and, because of foundries’ high growth – leading to high capital valuations – they get access to capital significantly cheaper than we do. So these companies can invest between 70 and 150 times revenues – on which they can have no hope of making any return.”

Analysts were saying the amount of capital going into the foundry industry was “insane”.

But, as things turned out, it wasn’t.