Jerry Sanders III, the oft-quoted, hard-fighting, co-founder and former CEO and chairman of Advanced Micro Devices Inc., who made the chest-thumping statement from which I took the headline for this blog, was right about many things in his long career in the semiconductor market. He was also wrong about a few things. Taking on Intel Corp. head-to-head was one. The other was believing a chipmaker must own its own fabs to be competitive.
Or was Sanders more unfortunate in taking on Intel in processors than wrong about chip fab ownership? The Intel CEOs who fought long wars with Sanders also believed their company should own and operate its own chip fabs. So does current Intel CEO Brian Krzanich, an engineer who headed Intel’s manufacturing operations for years and led the transformation of its plants in the last decade.
For Intel, technology process and fab ownership, are the cornerstones of the company’s leadership. Fab ownership, they reason, give the company competitive advantage over rivals. In Intel’s case, I concur – for now; the future may unfold differently.
Only a few semiconductor companies still own chip fabs, marking one of the more critical changes that have occurred in the industry over the last 20 years. In fact, the era of the integrated device manufacturer (IDMs) – chipmakers who operate their own fabs – is nearly over. Very few new plants are being constructed by companies like Intel, Samsung Electronics and foundries that offer contract semiconductor wafer production like Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC).
So, how come most “real men” in the semiconductor market no longer operate fabs? AMD’s experience is instructive. The company’s decision back in the 1980s to continue making its own fabs at a time the rising cost of semiconductor plants was forcing some companies to outsource wafer production nearly bankrupted AMD. It valiantly but vainly tried to keep up with Intel and gave up eventually. By then the Sanders era, too, was over.
Dan Deisz, director of design at Rochester Electronics Inc., reminded me of Sanders’ contempt for fabless chipmakers in a presentation yesterday at ES Live Boston. The statement shows how much the electronics industry has changed since Sanders’ time at AMD. Today, not a single new semiconductor company has emerged in the last ten years that has a goal of spending the $3 billion-plus it will cost to build a fab today.
Fabless is the norm today; real men don’t think about fabs. Instead, they call on foundries. Even Intel, the world’s biggest semiconductor company by revenue, sees opportunities in the foundry market and is offering its fabs to chipmakers. It is unlikely to take the more drastic step of spinning off its fabs, which AMD did when it separated its manufacturing operation into what’s now GlobalFoundries. (See: Intel Foundry: Leveraging Process Edge for Profit.)
This is not an excursion into history however. Much has changed in the electronics supply chain and complicating purchasing functions. The relationship between original equipment manufacturers (OEM) and original component manufacturers (OCM), for one, is quite different. So is the relationship between OCMs and distributors.
OCMs, for example, prefer to sell mainly through distribution rather than directly to end-equipment makers because they can address a larger customer base and transfer more operating costs to channel partners. They also don’t hold as much inventories anymore – another task they’ve left to distributors.
Do distributors like this new phase of the electronics market? They aren’t complaining about the added responsibility, just the payoff. Distributors know they are sandwiched between difficult and often conflicting positions but that’s how they offer value; they’ll hold inventory, support OEM design programs, deliver parts to China or anywhere the OEM wants them and even take on supply chain management functions. They just want to be compensated for these value-added services.
Other changes have eaten deep into the fabric of the industry and changed it completely, with major implications for all segments of the market and especially for procurement. Engineers now interact differently with everyone, including distributors who sell them parts. Courtesy of the Internet, engineers can retreat deeper into their cells, popping out to click “buy” occasionally but otherwise staying aloof from even procurement who will make the final volume purchase.
Purchasing, too, is changing but getting a handle on how things like the Internet, the tighter relationship between suppliers and distributors and the distancing of OCMs from OEMs/EMS providers are affecting components buyers is a lot more difficult. That’s because the relationships are more complex. All of these complex relationships must be understood by industry executives but they have to start from the past, peel layers of the complexities existing today and figure out how to serve their customers better now and well into the future.
Speaker after speaker addressed these issues during ES-Live. I’ll be bringing some of their revelations to you in future blogs. Please share your thoughts on any of these with us at www.epsnewsonline.com and post your comments.
Bolaji Ojo is editor-in-chief and publisher of Electronics Purchasing Strategies. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at firstname.lastname@example.org.