Bolaji Ojo EETimes Supply Network (04/11/2008 4:54 PM EST)

The NXP-STMicroelectronics wireless IC joint venture announced Thursday (April 10) sounded the death knell for the semiconductor industry's most enduring business structure.

Only a handful of IDMs — semiconductor companies that own their own fabrication plants, design, test and assembly services — exist today as the industry pursues a relentless quest for productivity improvements and reduced operating costs. In order to remain competitive, most semiconductor suppliers have over the last 10 years increasingly opted to outsource their wafer production to foundries, adopting instead a fabless strategy that helps them avoid the stupendously high costs of running $3 billion-plus fabs.

The IDMs were the last to follow and now it appears they are all rushing for the exit door into a new world of asset-smart production system dominated by foundries, which combine demand from dozens of IC makers and theoretically should be in a better position to fund fabs.

Even Intel Corp., the world's No. 1 semiconductor company and one of the industry's biggest spenders on manufacturing plants, isn't immune to the wind of change blowing across the entire IC landscape.

While Intel isn't likely to shed its IDM model anytime soon — it can easily afford the multi-billion dollar cost — it has for some time been supplementing internal wafer production with outsourced procurement.

To augment capacity, we use third-party manufacturing companies (foundries) to manufacture wafers for certain components, including chipset, networking and communications products, Intel said in its latest annual filling with the U.S. Securities and Exchange Commission.

Intel, with $15 billion in cash and short-term investments at the end of the December-quarter, can afford to finance its own fabs but the company is also hard pressed to reduce costs in a bruising battle with rival microprocessor supplier Advanced Micro Devices Inc.

AMD, meanwhile, has embraced a version of the outsourced wafer procurement model although the Sunnyvale, Calif.-based company has yet to disclose details of its plans.

What's clear though, is that for the remaining IDMs, including AMD, NXP and ST, a fabless operating model is no longer just a matter of wafer augmentation. The strategy simply isn't competitive anymore and, in any case, they also lack the financial strength to continue pushing the IDM model.

ST, for instance, closed 2007 with about $2.6 billion in cash and short-term investments while NXP had 706 million euro, or approximately $1.1 billion, nowhere near enough in both cases to continue funding expensive fabs.

It's no surprise therefore that the wireless joint venture announced by both companies won't dabble in fab ownership. It will start out with zero debts and the two partners hope to keep its capital structure as light as possible, they said.

Not owning any wafer fabs, the joint venture is designed with low capital intensity, while having access to secure leading-edge manufacturing capacity from both parent companies and foundries, ST and NXP said in the statement.

DISCLAIMER: THE VIEWS EXPRESSED IN THIS BLOG ARE THOSE OF THE AUTHOR ALONE WHO PROMISES TO BASE HIS SOMETIMES BIASED, POSSIBLY IGNORANT, OCCASIONALLY IRRELEVANT BUT ABSOLUTELY STIMULATING THOUGHTS ON VERIFIABLE FACTS ALONE. ANY COMMENTS SHOULD BE SENT TO BOJO@CMP.COM.