Semiconductor Industry: Analysis & Investment Opportunities

Alex EvangSemiconductor

Sep 9, 2011 (5 years and 9 months ago)


In recent years, the semiconductor industry has experienced rapid transformation in the complexity of product functions,precision in the fabrication process and rising costs for production. Not coincidentally, many international Integrated Device Manufacturers (IDMs) are increasing their outsourcing as the logical alternative. Based on the analysis of the Industrial Economics and Knowledge Center (IEK), ITRI, packaging & testing companies will subcontract half of their production volume in 2009.This dramatic change has initiated the adaptation of IDM models to have specialized “Fabless” and "IDM-light" models. Such a trend will have a positive impact on Taiwan’s semiconductor industry, with its comprehensive industry clusters and vertical specialization, making it a key player in the global semiconductor industry supply chain.

Semiconductor Industry

Analysis & Investment

Table of Contents
I. Global Trends in Semiconductor Industry Development............1
(I) “Vertical Specialization”................................................................1
(II) Growth for the Semiconductor Industry in 2008...........................1
(III) Taiwan IC Industry Outperforms the Global Average...................2
II. The Status of the Semiconductor Industry in Taiwan...........4
(I) Supply & Demand..........................................................................4
(II) Analysis of a Gap in the Industry Supply Chain, Investment
Niches, and Prospective Foreign Investors...................................5
(III) Major Suppliers in Taiwan.............................................................9
III. Optimum Investment
for Foreign Investors............12
(I) Taiwan's Geographic Advantages................................................12
(II) Investment Niches and Suitable Investment Categories..............13
IV. Successful Examples of Cross-Border Strategic Alliances
and Foreign Investment in Taiwan.........................................15
(I) Elpida Memory, Inc......................................................................15
(II) Synopsys Taiwan Limited............................................................16
V. Industry Investment Incentives.............................................18
VI. Industry-Academia Collaboration in Taiwan......................21
I. Global Trends in Semiconductor Industry Development
(I) “Vertical Specialization”
In recent years, the semiconductor industry has experienced rapid
transformation in the complexity of product functions,precision in the
fabrication process and rising costs for production. Not coincidentally, many
international Integrated Device Manufacturers (IDMs) are increasing their
outsourcing as the logical alternative. Based on the analysis of the Industrial
Economics and Knowledge Center (IEK), ITRI, packaging & testing
companies will subcontract half of their production volume in 2009.This
dramatic change has initiated the adaptation of IDM models to have
specialized “Fabless” and "IDM-light" models. Such a trend will have a
positive impact on Taiwan’s semiconductor industry, with its comprehensive
industry clusters and vertical specialization, making it a key player in the
global semiconductor industry supply chain.
(II) Growth for the Semiconductor Industry in 2008
With the impacts of over-estimated demand for Windows Vista and
excess inventory, the 2007 global semiconductor industry growth rate only
reached an unimpressive 2.87% . However, there is high expectation that the
upcoming 2008 Beijing Olympic Games will bring increased sales and
demand for consumer electronics and communication terminal products such
as digital TVs, digital cameras, MP3 players, and 3G mobile phones, which
will translate into tremendous business opportunities for the semiconductor
industry. Based on projections from the Topology Research Institute, the
global semiconductor output value will reach US$ 275.2 billion with a
growth rate of 8%, which easily outstripping the 2007 figure.

Annual Forecast of Global Semiconductor Revenue from 2003 to 2010

Source: Consolidated by this study, 2008/01
(III) Taiwan IC Industry Outperforms the Global Average
ITRI analysis shows that the steady increase is due to demand for
semiconductor wafers in 2008. Taiwan’s strong consumer electronics industry,
making laptop computers, 3G mobile phones, PNDs, digital cameras, and
LCD TVs, as well as the growing market for gigabite ethernet, set-top-boxes,
and digital frames. The industry combined revenue is project to be US52.95
billion, with an annual growth rate of 18.9%, which surpasses the global rate
of 8.27%. In terms of output value, Taiwan’s IC industries assumes nearly
one-fourth of the global market share from 20.9% in 2007 to 23% in 2008. In
other words, one out of every four IC products in the world is made in

US$100 million

1664 2130 2275 2477 2548 2752 2814 3033
18.30% 28% 6.80% 8.88% 2.87% 8.00% 2.25% 7.78%
2003 2004 2005 2006 2007(E) 2008(F) 2009(F) 2010(F)

1664 2130 2275 2477 2548 2752 2814 3033
18.30% 28% 6.80% 8.88% 2.87% 8.00% 2.25% 7.78%
2003 2004 2005 2006 2007(E) 2008(F) 2009(F) 2010(F)

Growth Rate
US$100 million
Taiwan’s IC Production Value Accounts for One-Fourth of Global Output

Consolidated by this study,
Analysis of the big-five DRAM manufacturers shows, Samsung in
place with a market share of 24.8%; Qimonda and Nanya Technology
Corporation rank 2
with 23.8%, while Hynix and ProMOS Technologies
rank 3
with 18.9%.

Global 5 DRAM Group Market Share

Source: Consolidated by this study, 2007/12
1800 1927 2096 2165 2335 2370 2560
343 348 435 452 538 561 628
19.1% 18.1% 20.8% 20.9% 23.0% 23.7% 24.5%
2004 2005 2006 2007(E) 2008(F) 2009(F) 2010(F)
Global Production Value
100 million
Taiwan Production Value
% from Taiwan
II. The Status of the Semiconductor Industry in Taiwan
(I) Supply & Demand
Launched in 2002 the “Two Trillion and Twin Star” project chose the
semiconductor and display industries as its key component industries with
output values expected to break NTD 1 trillion, and the digital content and
biotech industries as its emerging industries with core advantage. The
government has set up Semiconductor Industry Promotion Office to increase
the output value of Taiwan’s semiconductor industry, to develop Taiwan as
the center of IC design, IC development, and IC manufacturing, and to
increse added-value for Taiwan`s semiconductor industry.
Taiwanese enterprises are delivering a great performance in the global
semiconductor industry. TSMC and UMC are ranked 1
and 2
, respectively
in the global IC manufacturing industry; Media Tek ranks 7
in the IC design
industry; ASE and SPIL rank 1
and 3
,respectively in the IC packaging &
testing industry.
Research from the Topology Research Institute show, that the output
value of the IC manufacturing sector will reach US$27.76 billion in 2008,
growing by 22% over the same period in 2007. In addition, output values for
the IC design and packaging & testing sectors will be around US$13.3 billion
and US$11.89 billion, and show a 12% and 20% year-on-year growth,
respectively. The nation’s IC industries will see positive growth exceeding
global performance totally. On the demand side, IC market value US$18.9
billion in 2006, taking up 16.2% of global market share.
Taiwan’s IC Industry Value Chain Structure

Source: Industry & Technology Intelligence Service, MOE, 2007/04
(II) Analysis of a Gap in the Industry Supply Chain, Investment Niches,
and Prospective Foreign Investors
After long development, Taiwan's semiconductor industry has
distinguished itself from its complete industry clusters to incorporate from IC
Design, Manufacturing to Packaging & Testing companies. The
globe-leading IC Foundries and IC Packaging & Testing companies together
offer the best deal of one-stop shopping model. There are 262 IC Design
companies, 13 IC fabrication plants, 34 IC Packaging companies, 36 IC
Testing companies in Taiwan, showing the advantages of vertical
specialization of Taiwan’s semiconductor industry.
Taiwan’s semiconductor industry companies mainly are distributed in
Hsinchu and the Great Taipei. Hsinchu is the home of two thirds of
companies including MediaTek, Novatek, Sunplus, Realtek, SiS, Richtek,
Anpec and etc. Other companies are located in Taipei area such as VIA, Ali,
ULi, Prolific etc. Most of IC fabrications are scattered in Taoyuan, Hsinchu,
Taichung and Tainan; furthermore, the first-tier packaging & testing
companies are aggregated in the central and southern parts of Taiwan .
Taiwan, transforming into a “Silicon Island”

Complete up-streams to down-stream clusters of Taiwan’s semiconductor Industry

Source: Industrial Development Bureau, Minister of Economic Affairs (MOEA), consolidated by
this study, 2007/12
To analyze the portential business of semiconductor industry, with a
complete industry chain and strong technology, Taiwan has many powerful
global clients and extensive networkings with international companies. In the
upstream of IC manufacturing, among the leading five DRAM companies
around the globe, Samsung has set up the procurement hub and sales point in
Taiwan. Furthermore, there are some companies joint venture with other
companies such as Hynix and ProMOS, Elpidia and PSC, Qimonda and
Nanya Technology, Inotera Technology and Winbond. In April 2008, Nanya
Technology had cooperations with Micron to establish the joint venture deal.
In view of this, it is recommanded that Taiwan semiconductor industry
should work on the supply chain’s gap through global cooperations, in order
to prevent the happening of DRAM’s price to fall.
As for the semiconductor dedicated foundry industry in the mid-stream,
we can take TSMC, the global leading company,for example. There are over
50% of 20 global leading semiconductor companies which are TSMC’s
clients, including Intel, the leading foreign business. Furthermore, 8 out of
global 10 leading IC Design companies place orders to TSMC, showing
TSMC has great significance in the global semiconductor industry. Even the
other two potential foreign business with IC Design, Xilinx and Sandisk, also
place their orders to IC manufacturers from Taiwan. These facts show Taiwan
semiconductor industry has a widespread range of clients.

Partnership with TSMC

Source: Individual company and consolidated by this study, 2007/12
Taiwan semiconductor industry is short of the related assistances and
unsufficient components. Thus, Taiwan semiconductor industry is facing a
strong pressure from cost competitiveness. If the foreign investors could
bridge the gap, the supply chain could be more complete to make more
profits and benefits. Besides, the key component facilities such as photo
resist spinner, lithography facility, rely on imports. Though there are some
foreign companies in the upstream, they only provide technical services. The
recommanded way to cooperate is to invest in R&D on key components and
to introduce key technology such as gas control system, wafer transfer
machanism, processing reaction, and vacuum system technique.
As for the gap of the supply chain, the recommanded foreign businesses
are facility manufacturers, like Applied Materials, Tokyo Electron, ASML,
KLA-Tencor, Lam Research, Advantest, Nikon, Novellus Systems, Canon;
IC design companies, like Qualcomm, Broadcom, Nvidia, SanDisk, ATI,
Xilinx, Marvell, Altera, Conexant, QLigic, CSR, Silicon Lab, SST, Solomon
System; IC manufacturers, like Intel, Samsung, TI, Toshiba, STM, Renesas,
Hynix, NXPeFreescale, NEC, Micron, AMD, Infineon, Qimonda, Elpida; IC
packaging and testing companies, like Amkor, STATS-ChipPAC, UTAC,
Carsem, Shinko, ASAT.
(III) Major Suppliers in Taiwan
The output value of Taiwan`s semiconductor industry had reached the
goal of NTD 1 trillion in 2005, and the output value is estimated to hit NTD 2
trillion by 2010. Under the cooperation between government and industry,
Taiwan can reinforce the networking within the industry through integrating
the related resources of RoC to form a SoC industry cluster, to make Taiwan
the global R&D center. The vision is to make Taiwan the center of global
SoC design and manufacturing in order to build up SoC technology ourself.
. Taiwan’s Semiconductor Industry Supply-Demand Chain Structure

Source: Consolidated by this study, 2007/12
Taiwan is the second largest IC design center, only behind the United
States. Most noted firms include MediaTek, Novatek Microelectronics,
PixArt Technologies, Elan Microelectronics and Phison Electronics.
MediaTek, an IC design company ranked seventh place in the world, has
been a leading provider of total solutions for consumer electronics and
communication products. This company is the global top supplier of DVD IC,
holding 40% shares of mobile phone IC market in China. The most recent
development for MediaTek is aiming at the emerging market of digital TV IC
application. Phison Electronics has maintained the top three positions in USB
and NAND flash applications by providing advanced technology. PixArt
Technologies, possessing strategic relationship with Nintendo Co., Ltd.,
provides image sensor and object tracking technology for Nintendo’s
new-generation game, the Wii. The PixArt’s IC controller could enable
Nintendo to present innovative interaction game Wii which has been the
hottest product in the global market in recent years.
Taiwan’s IC fabrication continues to grow rapidly with its outstanding
performance in profitability and production capability. The silicon foundry
service pioneer model Taiwan Semiconductor Manufacturing Co. (TSMC)
provides fifty percent of global market demand with the 65 nanometer (nm)
process, and advances to the cutting-edge 45 nm and 32 nm process
technology. Other than TSMC, United Microelectronics Corporation (UMC)
is the second major foundry player in the market, and Powerchip
Semiconductor Corp (PSC), ProMOS Technologies Corp. and Nanya
Technology Corp. are engaged in DRAM manufacturing production. In
recent years, Taiwan semiconductor industry intend to drop OEM mode
because it is more difficult to build up international brands with low-end
products. Some successful companies like HMI and AIBT which cut in the
fields of defeat measurement and ion implantation, launches new brands. The
products are not only sold to TSMC, UMS, ProMOS, but also to the North
America and Singapore; however, the amount and quantity are still far below
the global level.
In line with its very strong IC foundry industry, Taiwan has also
developed into a leading position in the world's IC packaging & assembly
arena. ASE (Advanced Semiconductor Engineering Inc.) Group, the world's
largest provider of semiconductor packaging & assembly services, develops
and offers a wide portfolio of technology and solutions including BGA, Flip
Chip to wafer level package. In addition, Siliconware Precision Industries Co,
(SPIL) also holds the third position worldwide in semiconductor packaging
and assembly business. The main clients include ATI, Qualcomm
International, FreeScale. In IC Design, Media Tek did a great job in China;
furthermroe, Media Tek is expected to replace Trident to be a leading IC
manufacturer in North America. Their clients include Samsung, LG, and
In conjunction with design and fabrication segments, up-stream
silicon-proven IPs service and EDA tool technology are also emerging into
Taiwan’s semiconductor supply chain. Global Unichip Corp.(GUC), which
has close investment partnership with TSMC, Faraday Technology Corp., a
member of UMC Group, SpringSoft Corp. and Integrated Service
Technology Inc. are companies in lieu of advanced technology development.
Regarding masking and IC substrate business, Taiwan Mask Corp., Nanya
Technology Corp. and Phoenix Precision Technology Corp. are carrying out
business with outstanding performances.
III. Optimum Investment Items for Foreign Investors
(I) Taiwan's Geographic Advantages
Taiwan’s semiconductor industry chain structure, including up-stream
IC design, middle-stream IC fabrication and down-stream IC packaging &
testing, has been maturely established with technology and mass-production
capabilities, providing a matchless one-stop service solution. The vertical
specialization model is the sole Taiwan original mode displayed by the
clustering and peripheral supporting effect of IC industry in Hsinchu Science
Park and Tainan Science Park. It is fully demonstrated the extraordinary
advantages of Taiwan’s semiconductor industry in global society.
On the other hand, new relationships among Taiwan, US Silicon Valley
and China have been thriving to form a new model. The PO is issued from
United States to Taiwan, and then Taiwan is responsible for product
development and fabrication. The final packaging & testing process is
complete in China which is also the major market for service and business.
IC industry in Taiwan will play a role for talent recruitment, capital and
technology connection in this new “Silicon Triangle”.
Silicon Triangle Relationship: Taiwan - Silicon Valley – China Connection

Source: Synopsys and Consolidated by this study, 2007/12
Thriving Silicon Triangle Relationship among
Taiwan, Silicon Valley and China
(II) Investment niches and Suitable Investment Categories
1. Semiconductor Facilities
Semiconductor industry is one of the “Two Trillion” industries.
Manufacturing and Testing & Packaging rank 1
in the globe, while the IC
design ranks 2
, taking up a significant position. Taiwan has a complete
structure of semiconductor industry; however, for the percentage of
self-manufacturing on facilities and components, the industry mainly relies
on foreign companies. This fact leads to distance between components and
Besides, Taiwan’s semiconductor industry focuses on the expansion of
12-inch wafer fabs. Each of them costs about NTD100 billion, 90% of the
cost on facilities. Take the 12-inch wafer fabs in Taiwan for example. The
expenses on facilities reach NTD1 trillion, taking up the annual output value
of semiconductor industry. Therefore, the semiconductor industry in Taiwan
confronts the presssure on cost competitiveness. If foreign investors could
successfully fill up the gap of Taiwan’s semiconductor industry, it will
generate great benefits and profits for both sides. Foreign businesses could
cooperate with Taiwan companies through OEM/ODM so as to get more
access to components and services and make a win-win situation.
2. Communication IC
Information Technology (IT) industry in Taiwan has played as an
important role to take the lead on the development of semiconductor and
consumer electronic industry. Communication ICs have been prevailing over
the world because of the world trend of internet communication on wireless
network 1G, 2G to 3G. Since Taiwan’s communication IC industries have not
been very strong in the past, future investment in the field of communication
IC will be treated as a niche investment for foreign investors.
3. R & D of the NAND Flash and DRAM Technologies
Taiwan is the home of ten state-of-the-art factories capable of making
12-inch (300-millimeter) chips wafers. Taiwan accounts for 33% of global
DRAM shipments, ranking as world NO.2 in 2007. Moreover, among the
global top ten DRAM manufacturing production site, Taiwan holds at least
four positions. However, most of companies are cooperating with
international first tiers to provide production capacities for technology
transfer; therefore, investment on R & D ability to catch up the innovative
DRAM technology will be the major focus for Taiwan DRAM markers.
Digital camera, MP3 Player and mobile phone applications have been the new
drive for NAND Flash memory market; nevertheless, advanced storage technology
is exploiting NAND Flash memory to develop Solid State Disk (SSD) for PC and
notebook computer. Such a move will propel Taiwan IC makers to exert themselves
in innovative memory product development. Therefore, Taiwan’s IC industry is
prepared to enter the NAND Flash business by taking the advantage of being
credited for quick absortion of new production technologies.
4. High-Level Systems Integration Technology for Advanced IC Design,
SoC, SiP, and MEMS
High level system integration technology is the main flow for
semiconductor advanced technology to achieve the goal of environmental
and energy conservations. Taiwan’s IC industry will use the current model to
incorporate these new technology for SoC, SiP and MEMS into nation’s
semiconductor chain business.
IV. Successful Examples of Cross-Border Strategic
Alliances and Foreign Investment in Taiwan
(I) Elpida Memory, Inc.
Elpida Memory Inc. is founded in Tokyo, Japan in Dec. 1999. It is the
only DRAM manufacturer in Japan and has two subsidiaries in Japan.
Hiroshima Elpida Memory, Inc. is the main manufacturing base. Taiwan
Elpida Memory, Inc. is one of the five overseas subsidiary and is responsible
for selling and providing services of its DRAM products.
Rexchip Electronics Corporation was established on November 10, 2006,
as a 12" DRAM manufacturing joint venture with Taiwan's Powerchip
Semiconductor Corporation (PSC) and Japan's Elpida Memory, Inc. Both
PSC and Elpida have provided several key management positions to support
operations. Rexchip, combining Elpida's advanced R&D strength together
with Taiwan's manufacturing efficiency, has specialized in the production of
high density/high performance DRAM (Dynamic Random Access Memory).
Rexchip plans to construct a total four 12" DRAM fabs in Central
Taiwan Science Park in the next five years, with a maximum capacity of
240,000 wafers per month and an investment of over 13.6 billion USD. This
will be the largest scale foreign joint investment project in Taiwan and will
lead the DRAM market in 3 years. Rexchip's first 12" fabrication facility
(Fab R1) began 70nm equipment installation in May, 2007 and in the first
half of 2008, its full capacity will reach 60,000 wafers per month. In the
future, the company will shift its gaze less than 50nm and expand 60,000
wafers per month in the following years until the complete construction of all
four fabs.
(II) Synopsys Taiwan Limited
Synopsys, Inc. is founded in Moutain View, California, USA in 1986
and is a leading provider of electronic design automation (EDA) software and
services. Its products are used by designers of integrated circuits (ICs) to
develop, simulate, and test the physical design of ICs before production, and
finally to test finished products. These solutions help establish the
development and production of complex integrated circuits and electronic
systems. Synopsys’ major customers are in the semiconductor, consumer
electronics, and aerospace industries.
Synopsys Taiwan Limited is established in 1991 and it is the largest
solution provider in the areas of EDA tools and system-on-chip. The
company has 210 employees and annual growth is more than 70%.
Synopsys has invested a total of 25 million USD over the past three
years (from 2004 to 2007) in Taiwan for the Synopsys VDSM EDA R&D
Center Project, in a bid to develop EDA technology, which is required during
the chip's production process, including LVS/DRC/LRC Engine, Parasitic
Extraction, and Reliability Analysis. More than one hundred researchers are
recruited from this project.
Synopsys announced its plans in October 2007 to invest 1 billion NTD (30.8
million USD) over the next three years in establishing its second R&D Center in
Taiwan. The research will focus on EDA solutions at the latter stages of IC design,
including high-level technologies such as Analog Mixed-Signal Circuit Simulation,
OPC and Physical Design Kit. Synopsys plans to expand its design engineer
personnel from 100 to 170 within the next three years in the new R&D center. The
company will introduce advanced 65 and 45-nanometer semiconductor design
software technology to help Taiwan become the world leader in both IC design and
EDA software.

V. Industry Investment Incentives
In order to accelerate the growth of semiconductor industry in Taiwan,
the Taiwan government has offered a number of measures to assist companies
in this industry and to encourage foreign investments. These measures
include tax preferences, R&D subsidies, low interest loans, personnel training,
Preferences to Encourage Foreign Investment in Taiwan
±Emerging important strategic industry
(investment tax credit for shareholders or 5
year tax free)
±Personnel training expenditure (business
income tax credit based on 35% of the training
expenditure of the same year)
±R&D expenditure (business income tax credit
based on 35% of the R&D expenditure of the
same year)
±Accelerated depreciation of facilities
(maximum depreciation period: 2 years)
±Tax credit for the purchase of facilities and
technology investment
±Tax free for import facilities
±Income tax free for technology transfer or
technology cooperation
±Tax preference for the establishment of
operation headquarters
Ministry of Economic Affairs
±Industrial Technology Development Program
±Small Business Innovation Research Program
±Industrial Technology Development Alliance
±Strategic Service-Oriented Industry R&D
±Information Technology Applications Program
±Industrial Technology Innovation Center
Program for Local Enterprises€MNCD
±Industrial Technology Innovation Center
Program for Foreign Enterprises€MNCF
Department of Industrial
Technology, MOEA
R & D
±Leading Innovative Product Development
±Enterprise R&D Alliance Program
±Enterprise Operation Headquarters Service
Industrial Development Bureau,
±Industrial R& D Loan Ministry of Economic Affairs
±Low-Interest Loans for Mid- and Long-Term
Council for Economic Planning
and Development, Executive Yuan
±Project Loans for Small and Medium
Small and Medium Enterprise
Administration, MOEA
±Bank Draft and Loan Preferences for
Development Fund, Executive Yuan
National Development Fund,
Executive Yuan
±Low-Interest Loans for Science Parks Science Park Administration
±International Experts Recruitment HiRecruit Services
±Military Training Service Application Military Training Project Office
±R&D Substitute Service R & D Substitute Service Program
Office, Ministry of the Interior
Source: organized for the present study, 2008/1
VI. Industry-Academia Collaboration in Taiwan
The Project “Two Trillions & Two Stars” launched by Taiwan
government is to promote industry development, in which two stars refers to
both semiconductor and display industries. In order to convert the traditional
production-strength business model into advanced technology, the need of
qualified talents becomes a crucial factor to keep up with the future plan.
Therefore, Government, Industry, Academy & Research Institutes are
cooperating to provide technology training program. One action initiated by
Industrial Development Bureau, Minister of Economic Affairs (MOEA) is to
establish “Semiconductor Institute” in 2003 to meet the challenge of
professional and technical talents shortage issue. In addition, different kinds
of organizations are working together to synergize programs for international
investment and local industries.
Useful Websites for Semiconductor Industry Investment
Industrial Development Bureau, MOEA
Department of Industrial Technology, MOEA
Department of Investment Service, MOEA
Semiconductor Industry Promotion Office, MOEA
Nankang IC Design Incubation Center, MOEA
Semiconductor Institute, Industrial Development Bureau, MOEA
Taiwan External Trade Development Council (TAITRA)
Taiwan Electrical & Electronic Manufacturers Association
Taiwan Semiconductor Industry Association (TSIA)
Taiwan Optoelectronics and Semiconductor Equipments
Association (TOSEA)
Taipei Venture Capital Association (TVCA)
Industrial Technology Research Institute (ITRI)
Institute for Information Industry
Source: organized for the present study, 2008/01