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Tuesday, September 29, 2009

Extreme Innovation at Tong Hsing

My last blog entry was on the challenges of diversification in the micro and nano-electronics manufacturing markets. I compared the natural diversification opportunities of parts and sub-system suppliers with the overwhelming challenges of diversification for highly specialized semiconductor tool manufacturer.

Yesterday, I saw another version of the diversification story on a visit to company that has made leading-edge, niche markets its prime domain. Its business strategy is to find customized applications in promising markets--typically served by hard-to-find, underfunded start-ups—and develop novel and innovative packaging solutions. Entering into long, complex development cycles in risky markets and difficult applications is its forte.

Nestled among the narrow streets of Tauyuan area, between Taipei and Hsin Chu, Tong Hsing Electronic Industries is developing some of the world’s most innovative micro modules and custom semiconductor packages. The company specializes in PA front-end modules, MEMS packaging, thick film and thin film ceramic substrates, and other advanced microelectronic packaging.

Heinz Ru, senior vice president of marketing and innovation contacted me after reading my name a SEMI press release announcing the Extreme Electronics section of SEMICON West that focused on MEMS, high brightness LEDS and printed and flexible electronics. Heinz had a feeling I would enjoy the Tong Hsing story and he was right.
Tong Hsing specializes in Extreme Electronics, providing advanced packaging to some of the most successful companies and products in the world. Their core expertise is in material science on interconnect applications and they have been enabling some of the most difficult and successful applications in MEMS, including displays, inkjet printers, accelerometers, gyros, and microfluidics. Heinz described a wide variety of successes; their provide modules for fuel cells that fit in your pocket or power your neighborhood; MEMS ink jet heads that can put a printer in your cell phone; high performance PV modules with high-voltage, thick copper substrates. They are the world leader in providing module substrates to HB-LEDS (hundreds of millions of units) from factories in Taiwan and the Philippines. About 80% of their business is from the US.

Their expertise is focused on solving packaging and system problems in ways that can be economically scaled to mass production. They are skilled at process development, yield enhancement, and customized reliability testing. Their mission is to become the leading foundry service provider of RF Modules, SiP and MEMS packaging in Asia Pacific. Tong Hsing is currently focused on doubling the production scale of metallized ceramic substrates used in HB-LEDS, adding production capacity for thick film substrates and hybrid modules used in the automotive industry, and ramping up ink jet printing heads lines.

Unlike many companies in the semiconductor supply chain, Hong Tseng isn’t diversifying into high-risk, niche markets as a way to soften the boom and bust of the chip cycle; this is a company that embraced innovation in emerging adjacent microelectronics markets as a way of life.

Monday, September 28, 2009

The Challenge of Diversification

I began my career in the semiconductor industry in the 1980’s with Omron Electronics, then and now the world’s largest manufacturer of controls and automation components. Omron made thousands of products used in advanced manufacturing including sensors, switches, controllers, vision and RFID systems and a whole lot more. Virtually every industry and every sophisticated machine used sensors and controls from companies like Omron.

For a marketer it was a wonderful learning experience, understanding how our products could be used in different applications by different industries. Trade show were a big part of marketing process. After SEMICONs, I would be off to a pharmaceutical, textile, food, packaging, plastics, or other industry event. We made a several specialized devices for the chip industry, but many of our standard products could be used any industry to sense and control.

Omron (one of the great companies in the world, by the way) is like many exhibitors at SEMICONs who serve many industries with mostly standardized products. Companies that sell motion control, pumps, process equipment, chemicals and many other products aren’t exclusively reliant on semiconductors for revenues. When fab spending declines, they look to other industries to compensate for the losses.

For the top OEMs in the semiconductor equipment industry, diversification is a much more difficult proposition. While their parts and subsystem suppliers are typically highly diversified across multiple industries, being successful at developing equipment for the next technology node requires enormous R&D and engineering resources. Many of these tools cost in excess of several million dollars. You can sell a multi-million machine tool to make aircraft, ships, cars or rocket ships, but you can only sell an advanced tool to a semiconductor manufacturer.

The chart at the bottom of this article illustrates the challenges to diversification for specialized semiconductor suppliers. The semiconductor industry is larger than the flat panel, PV, MEMS, printed electronics, and LED industries combined. Not only is it larger, it is significantly more capital intensive. Historically, semiconductors requires between 15-17% of sales on capital equipment. Advanced chips have well over 100 process steps while LEDs, PV and MEMs often made with integrated system that resemble a batch production operation. Even by 2013, most observers do not expect LED, MEMS and Printed Electronics to spend more than a billion on equipment.

Still many equipment and materials suppliers have had success in supplying to adjacent nano-manufacturing markets. Many top semiconductor equipment suppliers led by Applied Materials and Oerlikon, have successfully transitioned to PV. Veeco and Aixtron are building healthy businesses in LEDs. Many of these companies are looking not at the five-year projections, but betting on visions that extend 10-years and more. Many of them are trading low-share, low-profit positions in semiconductors for high-share, high-profit gambles in smaller markets.

Companies that succeed in leveraging their semiconductor process expertise to adjacent markets will win by:

Innovation- Emerging markets in PV, LEDs and MEMS are often characterized by their resemblance to semiconductors 10 to 20 years ago. They are often non-automated, open loop manufacturing systems that produce low yields and low throughput. As young industries, they have yet to fully benefit from the venture-fueled ingenuity that has characterized a generation of chip companies. Blockbuster innovations and breakthroughs are nearly certain.

Specialization- As many companies have realized in PV, you can’t sell a tool optimized for one application into a new market without significant modification. Winners in adjacent nano-manufacturing markets will take enormous risks to learn and adapt their chip expertise to new applications.

Patience- The emerging markets in LEDs, PV, MEMS and Printed/flexible are long-term plays. Many observers see PV as the beginning of a 30-year run; the high brightness LED market won’t explode until they reach parity in 5 years; and printed electronics may initiate a new era of ubiquitous electronics in retail, clothing, biomed, building materials and more.
Diversification is increasingly an important part of our industry. The economics, science, engineering, and vision that drove the semiconductor industry is transferring to many other microelectronics industries. While they may share the same origin in semiconductors, the solutions and supply chains that serve PV,MEMS, LEDs and other adjacent markets will be of those industries, distinct and unique, like children who leave home in search of their own separate lives and future.