Old Chips Attract Some Big Checks

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Trailing-edge chip manufacturing processes benefiting from blowout capital spending to address deficiencies

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TSMC, Intel and Samsung focus on the most advanced manufacturing technologies, often referred to as the leading edge. This means that all three are also responsible for the majority of the industry’s capital expenditure. But TSMC also does a substantial amount of work on the so-called trailing edge, where older production processes and equipment are used to produce less expensive chips. Based on figures reported on Thursday, half of TSMC’s revenue in 2021 came from “mature” processes. The company said in its conference call that it expects to spend 10% to 20% of its planned capital budget of $40 billion to $44 billion this year on its older processes.

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Companies that almost exclusively use back-edge processes to produce their designs are not being spared the pain of the bill either. Capital Expenditure for Texas Instruments,

NXP Semiconductors,

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on semiconductor,

Analog devices and microchip technology are projected to grow by an average of 122% in 2021, according to FactSet data. Expenditure as a percentage of revenue for those five is projected to average 7% in 2021, compared to the historical average of 5%.

Trailing-edge chips include everything from microcontrollers used in cars to power-management circuits used in home appliances. They command a much lower price tag than the AI ​​processors used in data centers, for example. So the business models of trailing-edge producers rely on using older equipment—often fully depreciated. But shortages have made such gear difficult to come by, giving companies like Applied Materials the opportunity to sell new gear designed for mature production processes. Applied Materials chief executive officer Gary Dickerson says the segment now accounts for nearly half of the company’s Foundry/Logic revenue, which jumped 46% to $9.8 billion for the fiscal year ended October 31.

That’s still not enough. The lack of required gear has exacerbated the impact of chip shortages on these product segments. According to the latest research by Susquehanna, lead time—measuring how long a chip is ordered and delivered to a customer—is about 33.9 weeks in December for microcontrollers, compared to the chip industry average of 25.8 weeks. Analyst Christopher Rowland notes that some microcontroller unit buyers are being quoted lead times of more than a year.

Like TSMC and Intel, trailing-edge chip makers are working on expanding their manufacturing capabilities. Texas Instruments is spending about $6 billion to build a new fab in Richardson, Texas, and plans to drop another $3 billion in Lehi, Utah, which it bought from Micron Technology last year. Those two features are set to start coming online later this year and early next year. Analog Devices is expanding a facility in Oregon it inherited last year with its acquisition of Maxim Integrated Products. and GlobalFoundry,

Which went public in October, said in its last quarterly call that it plans to use the majority of the $1.5 billion it raised in the offering to “capacity expansion plans to meet strong customer demand.”

Such decisions are easier to make now as sales are booming with unfulfilled demand. According to data from S&P Global Market Intelligence, the 30 companies in the PHLX Semiconductor Index averaged 32% revenue growth in their most recent previous 12-month period, compared to an average growth of 11.5% a year earlier.

Of course, there is a risk if demand calms down before the new capacity is fully used. Analysts at UBS predicted in a report earlier this month that the trailing chip maker could be in a state of “foundry oversupply” next year, which could hurt gross margins. Untapped manufacturing capacity can be costly for chip makers; Micron said the Utah facility it sold was spending about $400 million a year in “underutilization charges.” Chip makers pouring billions of dollars into new capacity will still need to strike a delicate balance — even at a time when they can sell everything they own.

Write Dan Gallagher [email protected] Feather


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