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Tuesday, March 30, 2010

Grace Semiconductor Manufacturing: Marketing Trumps Technology?

Dr. Ulrich Schumacher, CEO and president of Grace Semiconductor Manufacturing, provided a standing-room-only audience with detailed insights and plans into the IC foundry’s strategic priorities and technology mix as part of the keynote address at SEMICON China.

I found the presentation fascinating as a description of some massive marketing challenges for semiconductor firms in an era marked by widely variable manufacturing capabilities.

Dr. Schumacher’s presentation, entitled, “China Foundry’s Opportunities
In a Recovering Market” began with an overview of the China chip gap that underlies the long-term expectations for chip manufacturing in the world’s most populated country. While China became the world’s largest IC consumer in 2007, for the foreseeable future China will be able to produce less than 20% of its total demand. The resulting chip gap underlies what some people think will be continued government support for SMIC, Grace and other companies (the US prefers to “support” the low tech industries of banking and agriculture).

Dr. Schumacher gave the audience a generous overview of Grace’s business operations and history. He said the company has already seen revenues rebound to Q3 2008 levels and forecasts all time quarterly revenue levels in Q1 and Q2 2010. The company’s customers are widely distributed by regions (over 50% of revenues from US, followed by China and Taiwan, each contributing 16%), and by technology: logic (44%) memory (16%) and embedded flash (10%).

Like many semiconductor manufacturing companies today, Grace has no intention keeping pace with Moore Law. They aim to excel with a technology portfolio designed to meet a targeted selection of applications in the consumer, communication, computer, and automotive applications. According to Dr. Schumacher, achieving the low cost position in profitable value-added niches still requires consistent technology innovation and capital investment. It also requires, “highly effective technology transfers based on partnerships and services along the value chain".

To explain the Grace strategy, Dr. Shumacher provided detailed market size, growth and technology trends for key application segments, including microcontrollers, SiGe/RF, SmartCards, touch panel controllers, LED drivers, and power management. The target applications drive a Grace technology portfolio that includes geometries of 0.35µm, 0.25µm, 018µm, 0.15 µm, 0.13 µm, and 90nm. Complimenting the mix of geometries are dedicated technology platforms for NOR, EEPROM, embedded Flash, SiGE, and PowerMos optimized for fast time-to-production, yield and cost.

Like many IDMs and fab-lites, Grace has developed a More than Moore technology strategy that is based on complicated market specialization and segmentation. For companies like Grace—and I think the same situation exists for TI, NXP, Infineon, STMicro and others--financial success with this model will be based not on technology or timing massive capital outlays but on very sophisticated marketing. All the key components in the business strategy are essentially classic marketing problems, such as target market identification and sizing, customer needs analysis, competitive analysis, pricing, etc. The business problem has little to do with technology; many companies have the capability to design and manufacture (through foundry or in-house) mid-tier ICs in top computer, industrial and consumer applications, but few can do so profitably for a sustainable period of time.

Increasingly, companies with semiconductor manufacturing assets will have to target specific niche markets to survive. They will have to make very judicious decisions on capital spending and R&D. Maybe these decisions will take the form of Moore-1 or Moore-2, signifying how far off the pace from leading edge Moore’s Law capabilities a manufacturer prefers to operate. Financial health in the mid and low tier IC markets will be driven by margins and capacity decisions that will change quickly overtime. Challenges will always arise as the niche applications reach volumes that allow next node production enabling steep price declines, or during downturns when other foundries will more aggressively compete on price. With a portfolio of production platforms, companies can compete by selectively adapting their niches to keep ahead of competitors and sustaining healthy margins. To do that well, a gutsy commitment to marketing seems a necessity. And, for an industry that shown a high tolerance for technology risk, a business strategy dependent on smart marketing seems like a healthy step forward.

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