A paradigm shift in the semiconductor industry: Could this be the end of Moore’s Law?

Ever since its beginnings roughly 50 years ago, the semiconductor industry has been shaped by a constant drive to produce smaller chip structures and to develop new manufacturing technologies. Formulated in 1965, Moore’s famous law, which states that the performance of microchips increases exponentially at regular intervals, has set the pace within the industry. Chip makers have always had to be at the forefront of each new generation of semiconductor technology in order to benefit from declining unit costs and to protect their competitive edge.

For the majority of market players, it is becoming increasingly tough to keep pace with technological change – a challenge that has caused a paradigm shift. The number of transistors per chip and silicon wafer more than doubles with each technological leap forward, but the effort that goes into research and development and the production of lithographic masks and manufacturing equipment actually increases to a far greater degree. The masks for a chip with structures 65 nanometers wide – that’s one 65 millionth of a millimeter – today can cost as much as US$3 million to produce. And the cost of making a production-ready chip prototype can easily run to several million dollars, not including the development expense.

The technical possibilities for shrinking chips have far from reached their limits at 65 nanometers. Preparations for 45-nanometer technology are already underway, and the development of production methods for semiconductor components with 32-nanometer structures, which will begin to emerge in the next few years, has already begun. Given the enormous amount of capital required to sustain continued miniaturization, the semiconductor industry faces the question: “Should we – and can we – continue to take the same approach?”

The fact is, far fewer semiconductor products today rely solely on the miniaturization of chip structures in order to be competitive. Twenty years ago, around 70 percent of all chips were manufactured using the very latest technology, but the figure has now dropped to just 40 percent as cutting-edge processes have become the preserve of memories and processors. With other types of logic chips, Infineon Technologies’ market, Moore’s Law is only relevant in particular segments such as mobile communications. Here, it’s not just the miniaturization of structures that drives progress – innovations in product design and advancements in systems competency and application knowledge are also key. Prominent examples include integrated nonvolatile memories in chips and chip cards for the automotive sector and the integration of RF circuits with voice processing for use in single-chip phones.

This paradigm shift has led to a profound structural change in the traditionally manufacturing- and process-driven semiconductor industry. Segmentation of the value chain into specialized companies began several years ago. Alongside the major integrated semiconductor manufacturers – companies whose activities span almost every stage in the value chain, from development to manufacturing to distribution – smaller, specialized companies have succeeded in carving out their own niches in the industry. These players include foundries that handle key parts of the chip manufacturing process on a job-order basis, design shops and IP suppliers that specialize exclusively in chip development, and solutions specialists whose expertise lies in specific end-customer segments. However, for these highly specialized operators, the strict division of the value chain is becoming more and more limiting. Foundries will need to try to differentiate themselves by acquiring and offering more extensive design expertise, and fabless companies specializing purely in product design will have to learn more about manufacturing processes in order to master the complexities of modern technologies.

One recent effect of this structural change is that it has prompted integrated semiconductor makers to adapt their manufacturing models. Most of the industry’s major players have now moved over to “fab-light” chip manufacturing, a model in which they no longer maintain their own manufacturing operations for components with chip structures above a specific size. Currently, the majority of chip makers only invest in their own manufacturing capabilities in those areas where technology development, product design and manufacturing need to interlock tightly and where making their own chips constitutes a crucial competitive advantage. Increasingly, they are partnering with foundries to make products using the latest manufacturing processes.

When developing new technologies, Infineon has often formed alliances with partners to share the costs and risks of designing new manufacturing processes. With this approach, each partner can later incorporate the co-designed processes into its own manufacturing environments or have foundries manufacture products using these processes. One benefit for Infineon is that it can retain its competency across the entire value chain without having to invest in manufacturing capacity; it also enables the company to develop products for customers efficiently and to make optimum use of its process technologies.

Infineon is involved in one such alliance with Chartered, IBM, Samsung and Freescale. Chartered manufactures 65-nanometer products for mobile handsets for Infineon using a production process developed jointly by all five companies. Alliances like these give semiconductor makers access to the most advanced chip-making technologies without having to invest in their own manufacturing capacity. At the same time they can benefit from the economies of scale to be gained from being part of a larger manufacturing network – an important factor, considering that a 300-millimeter fab has to produce around 10,000 wafers a week in order to be profitable, and one company alone can hardly utilize the full capacity of a fab of this kind producing 65-nanometer chips.

Development and manufacturing alliances will become increasingly important over time. By engaging in such alliances while continuing to manufacture cutting-edge products based on the latest technology in their own fabs, semiconductor makers are able to choose the most cost-effective manufacturing method for any given product group while remaining at the forefront of technological progress.