A megatrend occurring in the semiconductor manufacturing industry is having a profound influence on all aspects of the supply chain: the shift to fabless operations and a continued migration of chip production to Asia. Indeed, to a great extent, this trend illuminates an entire discussion on the industry’s outsourcing movement and its impact on related operations such as assembly and test.
In essence, the most crucial decision facing semiconductor companies today is whether to fabricate their own designs—the traditional IDM model—or go fabless by outsourcing these tasks to independent foundries. Increasingly, as IC products grow more and more complex and time-to-market pressures accelerate, the trend toward more fabless operations is intensifying because it helps companies offset investment in the capital equipment needed to keep pace with innovation.
And indeed, many of the leading semiconductor companies as well as the niche players are embracing this path as ever-more competitive chip pricing and margin pressures drive decisions that can lower cost. In fact, I think it is safe to say that most companies now outsource at least some of their functions including testing, assembly, and packaging.
Based on my nearly three decades of experience in the test industry, I view the impact of this deconstructed semiconductor supply chain on ATE suppliers as quite significant. For one thing, business relationships between test equipment providers and their semiconductor customers have become more and more complex.
Instead of a single point of supply to a vertically integrated semiconductor company, the fabless business model is fragmented. This means the same capabilities must be networked among separate companies: providing chip design with debug test, outsourced fabrication with wafer test, and outsourced assembly with package test. The burden now is on test equipment suppliers to provide a seamless test operation across this spectrum.
Meeting the Needs of Disparate Customers
To better understand this challenge, consider that the various companies along the fabless semiconductor supply chain have disparate and often conflicting test requirements. For example, fabless chip design companies want the newest test systems to debug their new, high-performance designs. They also require corresponding and compatible, cost-effective, and flexible test capacity to be available from their outsourced test suppliers for wafer and package test.
Subcontractor test providers, looking for the best return on their assets, often find themselves maintaining an installed base of older, legacy test systems that need to be utilized to a high degree to support their business models. The tension between these different requirements must be addressed by the test equipment suppliers that support both the test specifier and the user by matching a manufacturing strategy to the customers’ needs.
Within this business model, it is typical for the larger fabless chip design companies to push a new test system to be deployed at their subcontracted wafer and package test-service providers. The size and scope of the chip makers’ business make this push for new test systems a viable business prospect for subcontractors.
As a result, the test equipment industry has historically relied on the fabless design community to proliferate new products into the subcontractor-installed base. This approach may satisfy a handful of large, fabless companies but falls short of being an ideal solution for foundry, subcontractor test providers, and smaller fabless companies.
Outsourcing Isn’t Just for Chip Makers
Just as the semiconductor industry continues to outsource its manufacturing, the test equipment industry has followed suit. Many of the same economic arguments have been applied to make this practice of outsourced manufacturing all but universal.
Advantest, however, is taking a unique, contrarian position by keeping test system manufacturing in-house. Unlike the traditional test supplier focused solely on large fabless designers, we have realized that, in addition to satisfying the test requirements of fabless design companies, it is equally important to be sensitive to and satisfy the unique test and business requirements of the outsourced foundry and subcontractor test community. Making good on this vision relies on manufacturing capability that can scale effectively to cyclical capacity and time-sensitive deliveries.
As a total solutions provider of turnkey test cells composed of tester, handler, and interface, manufacturing is a core competency and one of the primary ways Advantest is able to give customers an advantage. We keep our manufacturing in-house because we believe it is critical to both our quality and our capability to deliver products rapidly and in the quantities needed by our customers.
Our high-quality, high-precision manufacturing systems and processes not only allow us to produce high-performance test systems and products, but also let us be a reliable business partner in two ways: We don’t compete for outsource manufacturing capacity, and our systems are manufactured well enough to last, in some notable cases, for decades.
Over the last few years, we’ve overhauled our entire manufacturing process because we anticipated that market demands were only going to speed up. We made a state-of-the-art robotic manufacturing line even better. We instituted a groundbreaking, Toyota-style pull production system—just-in-time production, actually—that allows us to lower our costs to customers and to be extremely flexible in production utilization and scheduling. We are ISO accredited, and as engineers making products for engineers, we hold ourselves to the highest standards of manufacturing process and precision.
As a result, Advantest products, engineering support, and funding options address the entire deconstructed supply chain. In fact, our latest SOC tester platform, the open-architecture T2000, actually was designed to accommodate these disparate requirements.
The high-performance test system for design debug also provides configurations suitably scaled to the needs of foundry wafer test and subcontractor package test. These testers are reconfigurable and easily upgraded to meet future test needs, which help our customers avoid installed base obsolescence. The resulting longer product life is financially attractive to all points in the supply chain.
Advantest’s global engineering support is equally applied to all segments of the supply chain to ensure a seamless, virtual operation throughout the entire deconstructed process. Our size and dominant market position in the test industry enable this global coverage. The company’s size also facilitates innovative financial funding and test system usage models to be tailor-made not only for fabless companies, but also for their foundry and subcontractor test partners.
Considering Outsourcing?
Based on the experience of the semiconductor and test industry, outsourcing can clearly be smart strategically, helping companies to focus on what they do best. And it frequently makes sense economically. But it is important to realize that outsourcing isn’t a panacea. The business model is not without risks and challenges.
Outsourcing isn’t a new concept. At a basic level, all businesses must determine what to build and what to buy. That decision-making process is a balancing act in which cost-effectiveness and strategic fit must be carefully assessed for every activity from the drawing board to final production and delivery.
In addition to cost, factors that come into play should include innovation, product quality, and the capability to ensure timely delivery. Getting outsourcing right means, among other things, really understanding what your company can and can’t do cost-effectively and what capabilities are most important strategically.
Leaders must take stock of their own company’s strengths and understand the make and buy trade-offs that must occur along the value chain. Then, they should carefully pick the areas where outsourcing offers the greatest benefits and the lowest risks.
By deciding to outsource, you are agreeing to pay for cost + margin to the subcontractor while insourcing realizes only cost. From a financial perspective, a company that outsources is agreeing that either the subcontractor is more efficient in achieving return on assets (ROA) or there is limited working capital for the company to use and it would choose to use it for other, usually core, purposes.
Time also is bringing into focus some of the challenges created by outsourcing, including the difficulties of managing multiple vendors and ensuring schedules are kept and quality standards are met. And, of course, there are legitimate concerns about intellectual property.
This last point may have the greatest long-term impact. The issue, after all, is not simply ensuring that your patents and your proprietary designs are protected but also that the knowledge and skills crucial to success now are held by outsiders instead of people within your own organization. Recognize too, that with outsourcing there exists the potential for undermining the core capabilities of your own organization.
Bearing these issues in mind—and the range of practice in the semiconductor test field—can help you make the wisest choices in assessing your outsourcing options.
About the Author
Keith Lee, a technology industry veteran of more than 25 years, is president and CEO of Advantest America. Since joining the company in 1984, he has held senior management positions in design and development, sales and marketing, and applications and systems engineering. Before Advantest, Mr. Lee worked for Megatest, Mitel, and AT&T in senior marketing management and engineering positions. He holds a bachelor’s degree in electrical engineering from Auburn University. Advantest America, 3201 Scott Blvd., Santa Clara, CA 95054, 408-988-7700, e-mail: [email protected]
November 2008