As we discussed in Economics of Semiconductor Business – Uniqueness semiconductor business involve both intensive R&D and capital investment. R&D investment primarily go into design. Capital Investment goes into manufacturing. Historically semiconductor companies used to both design and manufacture chips. Over time companies began to focus on either design or manufacturing due to various reasons. This formed the division among the semiconductor companies.
Semiconductor companies can be divided into four major types of companies
- Integrated Devices Manufacturers (IDMs)
- Fabless Design Firms
- Foundries
- Outsourced Assembly and Test Companies (OSATs)
Integrated Devices Manufacturers (IDMs)
These are the companies which both design and manufacture the chips. Thus they are intense on both R&D and capital Expenditure. For them to be profitable they need high efficiency in both. For this to be possible couples of things help them
- Vertically Integrated – Companies own different stages of supply chain
- Focus on highly scalable products
Financial Table
| Gross Margin | 52% |
| R&D Investment | 14% |
| Capital Expenditure | 20% |
| Operating Cash Flow | 17% |
As we see from the table they have high R&D Investment and Capex.
They focus on Memory and Discrete, Analog and Other (DAO) chips. Interestingly they contribute to 70% of global semiconductor sales
Major IDMs are Intel, Samsung, Micron and Texas Instruments
Fabless Design
These are semiconductor where they only design chips but do not manufacture. They focus on design of logic chips.
Fabless design firms work on products which could be niche and which has small cycles. They are able to do this because they need not focus on manufacturing efficiency.
Financial Table
| Gross Margin | 50% |
| R&D Investment | 20% |
| Capital Expenditure | 4% |
| Operating Cash Flow | 20% |
As we infer from the above table we see that they have R&D Investment but less Capex.
They are the building blocks of 21st century. Major companies in this categories are Qualcomm, Nvidia, AMD, Mediatek, Apple.
These are the companies which drive the 21st century AI revolution.
Foundries
Foundries are companies which focus only on manufacturing. This was possible because of rising manufacturing companies in East, particularly Taiwan. Over the years they have developed a strong core competence, because of which it is very difficult to replicate them.
35% of the total industry manufacturing capacity come from Foundries. Interestingly, 78% of advanced chips (14nm or below) are manufactured by Foundries. The rise of Fabless companies were all possible because of Foundries. This paved the way for semiconductor revolution in the word.
Financial Table
| Gross Margin | 40% |
| R&D Investment | 9% |
| Capital Expenditure | 34% |
| Operating Cash Flow | 15% |
As we can see for foundries capital expenditure accounts for major expense.
Only two companies in the world TSMC (Taiwan Semiconductor Manufacturing company) and Samsung manufacture less than 5nm nodes.
Perhaps most important company in the world now is the TSMC.
Outsourced Assembly and Test Companies (OSATs)
OSATs do the final touch of the semiconductor industry. As expected they focus on assembling and packaging. They need Low capital intensity and low skilled labor, core expectations is to keep cost low. As expected China does the major work here.
Financial Table
| Gross Margin | 17% |
| R&D Investment | 4% |
| Capital Expenditure | 16% |
| Operating Cash Flow | 2% |
We see that both investment as well as margin is low for these business. Thus value added is also low.