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Taiwan: From Death by DRAMs to Finding Foundry Success

Comments(0)Vanguard International Semiconductor, Once a DRAM failure, is Now a Successful Junior TSMC
The conundrum that Taiwan DRAM makers find themselves in today has been a topic of this column for many months, along with other commentary that has appeared on the internet, in print media and on the airwaves for far longer. In short, the Faustian agreement struck by Taiwan's chipmakers with the Devil, for DRAM technology and designs, is coming due. Technology-dependent on their 'corporate partners (masters)', with accumulated debt now in the neighborhood of $13-14B US, still losing hundreds of millions of $US a month on DRAM production, and reaching out for assistance whereever they can find it in governments, the courts, as well as asking forgiveness from their creditors and shareholders. In addition, they are still falling further behind on the technology front as they do-not-invest, and, finally, with no solution and still no end in sight and a world forever awash in DRAMs, there's no obvious end to the red ink, and no 'light at the end of the tunnel'. It is a tough situation they are in, to be sure.

But here is a story of true salvation from DRAM hell, as I saw in from inside and outside. And it is right there in Taiwan for all to see for themselves.

My Vanguard Experience in 3Q99-1Q00: I worked for VIS Micro, the US-based design arm of Vanguard Semiconductor, for several months in late 1999 (before they laid us all off in 1Q00). It was a useful and telling experience that has some relevance to Taiwan's DRAM Travails today.

When I got there in August of 1999, the industry was humming and the market bubble of 1999-2000 was well underway; it had another full year to run. For DRAM makers, 1998 had been a disaster, with losses of about $12B on DRAM sales of about $14B (about the same loss rate as this time); TI had tapped out, and sold its DRAM operation to Micron (always looking for a good deal). Japan had backed off DRAM over the prior years, and was set to launch Elpida, then a combination of NEC's and Hitachi's DRAM operations. Toshiba, Fujitsu and Mitsubishi were still forging ahead by themselves, in a cautious and reduced mode, at least for a little while.

But in 1999, things were rosy. In Hsin Chu, they could not get enough talent fast enough. With Coroprate Loyalty a distant second to 'compensation' for many in the mobile workforce, huge 'hiring bonuses' drove the flow of warm bodies from one employer to the one next door (easier than Silicon Valley, even in its heyday, as Hsin Chu is more compact...more "wafer starts/hectare of available land"...and has smaller parking lots to walk across.).

Shut it down!: In 9/99, when I went to Taiwan HQ office, I was told a few things that characterized the Taiwan Culture-de-jure: The most senior staff member on the Vanguard manufacturing line was hired just in July...so had only a few months experience there (big turnover was/is a problem)!. Truth or fiction, it passed for truth. Secondly, Vanguard was struggling to make their home-grown DRAM processes yield, and had 4-5 DRAM designs (their entire portfolio) running on...five separate process flows, running from about 0.18um to 0.30um. No success in any of them.

Vanguard was then run by Rick Tsai (now President and CEO of TSMC), and TSMC held a substantial share of the stock (40%); the close relation existed from Vanguard's inception. But Rick was victim of harsh circumstances, and it is doubtful if anyone could have righted the ship in any other way that how he did it.

December of 1999 was a Corporate 'Moment of Truth'. The Vanguard Board met, it was decided to cease the 'do-it-ourself' approach as unworkable, they then laid off the hundred of so enginers and chip designers who worked in San Jose and many in Taiwan, bought the Mitsubisi DRAM process flow for 0.18um, also bought the proven designs for 64M and 128M DRAMs. In just a few months, they had flushed out their own designs and processes, and brought up the Mitsubishi designs and process, successfully. They took their 1Q writedown of about $100M, including severance for us in California's design team, and moved on. That was all accomplished by about mid-2000.

Fast Forward to 2008/09: Now run the clock forward. Steadily, the world moved on from 0.18um and 64/128M DRAMs; Vanguard bought in one more design and process node from Mitsubishi, and kept making DRAMs. But they also started taking in overflow foundry work from TSMC, building logic in one of their fabs. Within a few years, they had disappeared from the DRAM business (not a cheap departure, with the process and design purchases, plus the miseries of 2001-2-3 enjoyed by all DRAM makers). But, by 2004, they were fully a junior Foundry partner for TSMC (Can you name a better Big Brother?), and off and running on their new and Improved Business Model.

While the production logistics, the tool set and process flow, end markets, 'customer relations', and business practices of Foundry and DRAMs are quite different, the transition is possible. (Many memory makers also take in foundry businesses today...Samsung and Nanya come to mind...not just to absorb spare capacity, but some with the intention of making them on-going successful businesses (esp. Samsung).)

Vanguard's Transitional Years: They were 'a man with a plan' from the start, and initially acquired the TSMC 0.5um, 0.35um and 0.25um logic process flows (again, buying proven processes, not developing their own...but that would come later). 2000 was a mostly-DRAM year. However, by 2001, their revenues were about 35% Foundry (DRAM and Logic) and 65% Vanguard (via Mitsubishi) DRAM. But 2002 was a watershed year, and their product mix was about 50% logic and 50% memory (mostly DRAM, but some flash, eFlash, SRAM and 1T SRAM). They also developed their own high-voltage processes, and steadily shaped their focus to become a specialty foundry. By 2003, memory was slightly less than half of VIS's sales, but by 2004, it was dropped to about 15%, as their logic foundry, CMOS image sensor, analog and mixed signal, and high-voltage business prospered in the industry upturn. They continued to stay close to TSMC process roadmaps, plus added some of their own,home-grown processes that provided a useful adjunct to TSMC's main process flows.

Vanguard Today: Today, Vanguard is a Specialty Foundry, with 2008 sales of about $500M. Their manufacturing capacity is not large by today's standards, with two 200mm fabs running, together, a total of about 110K wafers/month, on installed processes down to 160nm. They are still strongly aligned with TSMC, by history and by strategic choice. They also have some special standing in HV processes, running up to 200V, and other self-developed and licensed technology. (After avoiding all memory fabrication for some time, they added back some memory foundry work in 2008.)

For sure, VIS's relation with TSMC has been invaluable from the beginning.

In VIS's case, transfer of proven proccesses from TSMC (logic) and Mitsubishi (DRAM) was critical: TSMC for the long haul company direction, and Mitsubishi to keep the fab full and get them to the point where they could survive on their logic business. They disproved the aphorism, "Once a DRAM maker, always a DRAM maker"...and that non-lethal exits, and business focus transformations are possible.

Special Relevance of This Story to Today's Chip Business (Maybe): While it may sound naive today to talk about capacity shortages, the issue was raised by IC Insights in July 2008, and has not been satisfactorily resolved. Their premise that huge takedowns in CapEx in 2008 and again in 2009, combined with very fab high utilization rates (until everything went bonkers in 4Q09) make for unusual vulnerabilities for the industry. This, along with today's universally poor cash flow, and both a reluctance and inablilty to invest, join forces with the secular trend to "fablessness" at 65nm & 45nm nodes...means that when prosperity returns, companies may be clamoring for expensive-to-develop advanced process capacity...and it will not be there.

Some analysts see the first glimmerings of this in upward ASP trends taking place today.

Still, there is a huge overhang in capacity in DRAMs and NAND flash, as both were the excessive spenders in 2006-07. ISuppli analyst Nam Hyung Kim warns that much additional capacity has to be decommissioned before the supply and demand will balance, and there is no consensus that demand will bounce back to anything like it was before. But April was a marked improvement from March for all memory makers and foundries, in terms of sales and capacity utilization, putting to rest the most dire of the forecasts.

Whether this improvement will continue is now the open question. But if it does, the scenario that capacity shortfalls will show up has to be taken seriously for 2010. Idle equipment in memory makers might better be put to use in expanding the industry's advanced process foundry capacity, one way or another.


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