Strategic Purchasing
Buyers Must Know Suppliers’ Spending Plans

Buyers Must Know Suppliers’ Spending Plans

Most electronics buyers evaluate their suppliers’ performance and give them monthly or quarterly scorecards that rate them on the cost, quality, and delivery of the parts those suppliers manufacture.

Some scorecards also include how quickly a supplier responds to delivery or quality issues and how well the supplier develops new technology and shares its technology roadmaps with the OEM (original equipment manufacturer).

In some cases, suppliers are also evaluated on their ability to comply with the growing number of environmental and social responsibility laws, regulations, and requirements. Some suppliers are also rated on how well they help an OEM identify, avoid, and mitigate supply chain risk.

Though evaluating supplier performance on those criteria is important, buyers should also consider factoring in suppliers’ capital expenditure (capex) plans.  A semiconductor supplier that makes strategic capital expenditure investments in capacity and state-of-the-art process equipment is more likely to have the capability to reduce chip costs, support the volume production requirements of the OEM, and provide leading-edge semiconductors.

Although capex is important for companies in most industries, in electronics it is crucial because technology changes so quickly. Electronics suppliers must not only develop new technology, they must be able to build components that use it in the volumes, quality levels, and price points that electronics OEMs need. This is especially true with semiconductors.

Semiconductor suppliers invest billions of dollars in capital expenditures each year. In 2015, semiconductor manufacturers will make nearly $69 billion in capital expenditure investments, according to researcher IC Insights. For example, Intel, Samsung, and TSMC are expected to make $10 billion or more each this year in capital expenditures, the researcher said.

That spending will be used to increase capacity, build new fabs, upgrade chip-making equipment, replace outdated equipment, and transition from 200mm wafers to 300mm wafers, among other projects.

Such investments can have an impact on the cost and availability of semiconductors. For instance, by investing in new equipment that reduces the line widths of chips, a semiconductor supplier gets more die per wafer, which will reduce cost. It also enables the chipmaker to build parts that use less power, which has become more important, especially in battery-operated mobile and portable electronics equipment such as cell phones, media tablets, and laptops, among others.

Transitioning semiconductor production to 300mm wafers from 200 mm also reduces cost because chipmakers can get more usable die per wafer with the larger size disks.

And though capex is important, the amount of annual expenditures varies depending on the supplier. Buyers need to know how much their strategic suppliers plan to spend on adding new capacity or investing in new process equipment.

While Intel and Samsung invest billions of dollars each year, other semiconductor suppliers are not as aggressive with capex. In some cases, buyers also need to know how much their supplier’s supplier is investing.

Some chipmakers are "fabless,” meaning they outsource chip production to semiconductor foundries. Other semiconductor manufacturers have adopted a “fab-lite” strategy and outsource some chip production to foundries, although they still have their own fabs and manufacture some of their own semiconductors.

Brian Matas, vice president of research for IC Insights, recently told me that buyers who have semiconductor suppliers that use foundries need to make sure those foundries are “keeping up their game and investing  in process technology that uses finer line widths."

He added that chip companies—and buyers that purchase from those semiconductor suppliers—need to know that foundries are making the necessary investments so that the chips being developed “are going to be faster, smaller, and able to use less power. Knowing your foundry partner can supply that kind of manufacturing is critical," he said.

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