The Golden Age of Semiconductor Factory Ownership

As the costs of pursuing Moore’s law has spiralled out of control, more and more semiconductor companies have changed their manufacturing strategy to be less dependent on in-house process technology and to a higher degree, utilise the investments of Semiconductor foundries like TSMC and similar. Without the ability to compete with their process, fabless semiconductor companies must rely on their ability to design great chips, software and development systems. Despite having one less parameter to compete on, the fabless model has been promoted as superior to manufacturing models based on owned fabs.

The fabless model looks superior seen from the short-run financial perspective. With process costs embedded into the cost of sales and low capital investments, fabless companies can generate high free cash flow.  The long-run perspective could be different. Fabless companies could be commoditised or their products could become obsolete by being outperformed by products with superior process technology.

Although the fabless model is more often chosen out of the inability to participate in the intense capital investment game, there are many companies that have some or a significant proportion of manufacturing served at internal factories.

The 4 manufacturing models we track.

Understanding the different manufacturing models and how they perform over time an in different market conditions is an important element of Semiconductor Business Intelligence. Fab investments are B$ decisions as is M&A activity that might contain used factories that will require an operate, sell, close decision. Rather than making these decisions based on gut feel, it is important to get evidence and data support for decisions.

We track top 40 semiconductor companies (accounting for 85% of the semiconductor chips on the market) and have divided them into 4 categories.

Full Fab: Companies that are fully dependent on owning their own factories like Intel, Samsung and other memory companies.

Fab Heavy: Companies with over half the revenue manufactured in internal factories

Fab Light: Companies with less than half the revenue manufactured in internal factories

Fabless: Companies without internal semiconductor manufacturing capabilities.

As companies change manufacturing strategy over time, so does our categorisation. A good indicator of the fab- dependence is to track the revenue per dollar of Property, Plant and Investment on the balance sheet as seen below. Conglomerates are semiconductor companies that produce other products than semiconductors and need to be analysed differently. They are in general manufacturing companies though.




The current upcycle in the light of manufacturing strategy.

In the chart below it becomes quite obvious that the current upcycle has benefitted the fab owners which is not surprising given the dominance of memory. This has been dampened by the less than industry revenue growth of Intel Corporation. The large memory companies have all increased their revenue significantly based on price increases on DRAM and volume and price increases of NAND flash.




The Q1-18 revenue growth vs the same quarter last year shows that all categories have grown healthy with the fully fab’ed companies in the lead. Q1-18 growth vs last quarter was negative for Fullfab while the FabLight model was the only one that grew.




This semiconductor cycle has changed the manufacturing landscape significantly. Even though only a few companies now fully dependent on their own factories they represented more than 50% of the revenue in Q1-16. This has now grown to over 62% making the traditional manufacturing model the most common also.





A benefit of tracking the different manufacturing strategies is to be able to identify inflexion points and potential changes in supply and demand. We are able to track all significant financial parameters by manufacturing strategy.

The chart below shows the changes in revenue and in inventory compared to the beginning of the up cycle. The chart includes total inventory and revenue for conglomerates. The fabless model had an immediate spike in inventory despite negative revenue growth. The model requires careful planning and forecasting and gets influenced by foundry pricing. Part of the inventory increase could be a higher cost of products produced due to constrained supply from foundries. Similarly for the fab light model.



The fab heavy model seems quite robust in the upmarket. The companies using this manufacturing model are typically producing products that are less sensitive to process innovation like analogue, discrete and power products predominantly for the automotive and industrial markets.

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