Foundry Overcapacity and Opportunities in EDA Companies

Recently Mentor Graphics CEO Walden (he's know as Wally to many folks) Rhines said some things about overcapacity in the foundry business. Apparently he told this to reporters at the Tech Design Forum 2011 last month:

"But I have some concerns about the growth next year because capital investment in foundries in 2010-11 has been very high and there is some worry that there would be some oversupply."

He's worried about a price recession for devices in the second half of next year although he expects that dip to be overcome by demand growth in those markets we hear about so often - mobile, automobile, and security - to name just a few.

He goes on:

"The problem is that you have doubled the investment in foundry wafers while investment in memory is very modest. So I would expect the fabless companies will find that there is a plenty of capacity starting second half of next year leading a likelihood of price competition in fabless semiconductor industry."

Putting further spin on the situation he notes that this would be short-lived as long as we have economic growth. Well, that's certainly true. If the economy grows folks spend money on electronic gadgets. Growth in the semiconductor industry is totally linked to growth in worldwide GDP - an irrefutable fact.

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I've written recently that during the first half of this year the foundries have dramatically slowed their rate of capital spending. Aside from the ramp that is taking place at Global Foundries there just hasn't been a lot of buying. Last night we heard from United Microelectronics Corporation - presentation materials from the report are available here and here.

In a nutshell, flat sales, declining profits and factory utilization rates of less than 75% are what to expect for the next three months. No predictions were made about the fourth quarter - which is similar to what we’ve been hearing from everyone else in the industry.

As for their capital spending plan, UMC is sticking to their $1.8 billion target for this year as they ramp their 40nm process technology. They will also begin to install 28nm production tools late this year for production ramps next year.

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The concern I have with overcapacity rests on two items: 1) We need healthy Global GDP Growth to absorb the production and 2) How improving foundry yields will impact the number of devices generated at the 40nm and 28nm nodes. The latter point being one I mentioned in a previous note. These yields are bound to go up as companies move along the learning curve.

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Circling back, as the market swan dives I'm getting more interested in the EDA companies. Mentor Graphics, Synopsys, Cadence Design Systems and Magma Design Automation are on my radar screen. Shares of the largest player in this field, Synopsys, are really starting to get interesting. On August 17 the company will provide an update. I will be most interested in the forward view - assuming the world hasn't ended by then. :-)