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Introduction to Foundry Industry

In this article, we will introduce the foundry sector and its importance to the wider semiconductor industry.

Why are foundries so important?

There are two business models in the semiconductor industry, namely integrated circuit manufacturer (IDM) and pure-play fabless and foundry. An IDM both designs its own integrated circuit (IC) and produces it in-house. Intel, for example, falls into this category. The other model separates the process of design and production. A fabless company is only in charge of design, like Qualcomm and Mediatek, while a foundry or fab focuses only on production, like TSMC.

Foundries play a crucial role in integrated circuits supply as many top semiconductor companies have shifted their resources to chip design over the years and do not have large scale manufacturing capabilities. Foundries have also been leading the process node migration, which is the core that enables performance improvement of integrated circuits.

Foundry process migration works on shrinking the distance between transistors, which has allowed more transistors to be packed into a fixed area, achieving higher logic density with better power efficiency. Gordon Moore, the co-founder of Fairchild and Intel, predicted that the number of transistors in integrated circuits doubles about every two years back in 1975, which has since become known as the ‘Moore’s law’. This enables the industry to make faster Central processing unit (CPUs) and larger memories. Today the smartphone in your pocket is much more powerful than the Apollo 11 guidance computer.

Why is the industry so concentrated?

In order to understand the dynamics of the foundry business today, we must look at the history of foundries. Before TSMC was founded in 1987, most integrated circuit companies operated an IDM model with in-house design and manufacturing. TSMC and other foundries have developed this new business model of separating chip design and manufacturing. Overtime, IDM has been losing market share to foundries and fabless companies. One key reason is that process node migration requires significant capital investment and a high utilization rate to be profitable, which makes it increasingly difficult for IDM companies.

The foundry industry is highly concentrated, with the top three foundries accounting for over 78% of the global market share in 2Q20.1 This is the result of significant capital expenditure required to migrate in the advance process. Capital expenditure for TSMC for example was US$15bn in 2019, over 26 times more than that of the fourth largest foundry Global Foundries. Meanwhile, the chip manufacturing process requires close collaboration between foundries and fabless companies and qualification time is lengthy and costly with fabless companies, making it difficult for new entrants to break into the existing market.

Competitive Landscape

There are only three companies which have plans for further technology migration to produce node process below 10nm, namely TSMC, Samsung and Intel. TSMC has been leading the industry since the 14nm process. It started mass production of 7nm node in 1Q18, almost two years earlier than the closest competitor Samsung, and over four years ahead of Intel’s most optimistic 7nm progress projection. Samsung, which starts to ramp up on the 7nm process this year, has an aggressive timeline (see charts below) to catch up on 5nm and 3nm nodes. The company has 19% market share by revenue as of 2Q20, second behind TSMC.2

Intel said in its 2Q20 results presentation that its 7nm node launch date would be further delayed by another six months from the originally planned launch at the end of 2021. It will be a full year behind its target. Management indicated the possibility to outsource production of some chip products to third-party manufacturers to alleviate the delays.

We estimate China’s foundry market share to be around 6% in FY19.3 We see significant room for domestic companies to capture market share in the foundry space due to the current low localization level. Government support and funding will allow domestic companies to invest more in R&D for node migration. The emergence of Chinese fabless companies will also support the growth of local foundries as they are more likely to rely on domestic suppliers.


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