Wednesday, May 16, 2018
Advanced Semiconductor Engineering (ASE) and Siliconware Precision Industries Ltd. (SPIL) are beginning the process of uniting the two companies, which are among the largest outsourced semiconductor assembly and testing contractors in the world.
For now, the companies will continue to operate separately, while their shares are traded under the ASX symbol on the New York Stock Exchange. ASE Industrial Holding serves as the parent company for ASE and SPIL. But the merger is almost certain to change the competitive landscape in the assembly, packaging and test markets.
All of these areas are tough markets. ASE posted net income of $670 million on 2017 revenue that was just slightly shy of $9.8 billion. While that may seem like a lot of money, compared to many segments in the technology world it’s a tight operating margin.
The ASE/SPIL deal is being very closely watched by Amkor Technology, JCET Group, and smaller contractors. OSATs are not just competing among themselves anymore. Increasingly., they are facing competition from TSMC, UMC and other foundries, which have pressed into chip packaging and testing services for several years now. There are also internal assembly and testing operations at some of the bigger semiconductor vendors, such as Intel, Samsung Electronics, and Texas Instruments, that take away certain business opportunities.
“There are a bunch of pressures in the OSAT business that will shape the industry in coming years,” says Risto Puhakka, president of VLSI Research. TSMC is competing in the high-end packaging business, with Apple as its big customer, and integrated device manufacturers are also competing in that field, he notes. (TSMC’s largest customer, not identified in its most recent 20-F filing, accounted for 22% of the foundry’s 2017 net revenue.)
There is more competition on the horizon, too. “The other pressure point that the OSATs feel is China,” says Puhakka. “There’s a substantial amount of packaging coming up in China, with the much lower cost, whether it’s through subsidies or something else. There is definitely pressure at the low end. It comes in the form of price pressure. Because the OSATs want to keep up the volume; their pricing is a much tougher environment. If you look at those two trends, you see people probably want to get bigger, they want to be operating in China, they want to be more competitive. The cycle in R&D is to get back that high-end business, and there are a number of things pushing in those directions. If you look at the OSAT business last year, there was growth, but nothing spectacular. Then, you look at the assembly equipment demand, which was spectacularly hot, which means a lot of equipment went to others—other than the traditional OSATs. It went mainly to China, to IDMs, to TSMC, Samsung.”
China’s OSAT industry is mostly made up of smaller firms, aside from Jiangsu Changjiang Electronics Technology (JCET), which owns STATS ChipPAC and other companies. JCET acquired STATS ChipPAC in 2015.
ASE and SPIL will be involved in integration initiatives in the near future, according to Puhakka. “The bigger question is, what will Amkor do? What will JCET do? The big players may want to buy from China. That’s not out of the question, but there would be some regulatory hurdles, I would imagine, to do that.”
The large OSATs today have geographically diverse operations throughout Asia. But China represents the largest growth opportunity.
“It is a market not to be ignored,” he says. “It just that you have the Chinese regulations, the requirement of joint ventures and technology transfers. It makes people very uneasy to do something like that. Those kinds of actions have limited how much business transfers to China. If you’re operating in China, you have ongoing IP protection issues. You’re constantly making decisions about what IP are you moving to China, what are you not. By default, people are basically saying, whatever you move to China, it becomes Chinese knowledge.”
Just as more limited opportunities and growing R&D investments fostered some mega-deals in the semiconductor business, similar forces are at work in the assembly, package and test world, which serves the semiconductor companies.
“It was certainly no surprise that ASE and SPIL came together, because of the increasingly challenging OSAT business environment and the major consolidation we’re seeing in our customer base,” says Hal Lasky, senior vice president of sales and marketing for JCET Group, who also serves as executive vice president and chief sales officer for STATS ChipPAC. “It’s kind of inevitable that we would see this at the OSAT level. Clearly, we’re a part of that as well, as we are now a part of the JCET Group. What does it mean for the competition? As a company, we embrace this change, and we see many opportunities arising due to this merger. There are many semiconductor companies, our customers, who see a combined market share of ASE and SPIL within their own TAM. I call it unhealthy, or maybe a little too high. We’ve had many chances to compete for market share where, without this merger, we wouldn’t have. I absolutely believe this merger enhances the competitive nature of the OSAT space. Maybe it gives us a higher bar to shoot at, which is not necessarily a bad thing for this very competitive OSAT industry.”
Lasky anticipates there will be more consolidation ahead, for the OSAT segment in particular, and the semiconductor industry in general.
“In the OSAT space, while I do expect us to follow the trend, we won’t see quite the pace. There is still a chance to see continued OSAT consolidation, but maybe not at the pace of our customer set. And the issue with OSATs is that the long tail of our industry—where the small players are not always of interest for M&A for the larger OSAT because the return you get versus the alternative of just competing for the business—when you look at that and the ROI and the deal around that, it doesn’t come out in favor of acquisition. Also, in the OSAT space, the technology gap between top-tier OSATs and the smaller OSATs continues to grow. That has an impact on the interest level in the larger OSATs to drive M&A with smaller ones.”
So rather than accelerating consolidation, consolidation among OSATs actually could slow down, he says. At the same time, TSMC will continue to compete with OSAT contractors in IC packaging services. “Their solutions in the wafer-level space—InFO and CoWoS—those are outstanding packaging solutions. They are targeted at key segments in our customer space, and they are staking out their portion of the application space. Within the overall application space, there is a very good fit for those products. They’re investing in the back end, and they’re doing it in a way that makes sense to their business. And it lets them optimize their overall business model. I see them continuing with that and continuing to stake out that position. While that’s certainly a challenge to the OSAT space, it’s not really a killer. But we need to adapt to that.”
Copyright © 2018 CST, Inc. All Rights Reserved