Under Foundry 2.0, the semiconductor value chain is moving back into strategic focus.
When Joni Mitchell recorded Big Yellow Taxi, singing “You don’t know what you’ve got till it’s gone,” she was reiterating the proverbial warning that we often appreciate things properly only after losing them. It’s an observation that transcends context and can be applied even in today’s electronics industry. For decades, Western companies have outsourced significant parts of their value chain to achieve cost-down and to focus on core competencies in pursuit of efficiency. Today’s geopolitical tensions are drawing attention to the loss of sovereignty that results from exporting control of critical processes like packaging and testing as part of the semiconductor value chain.
While repatriation initiatives like the US Chips Act have focused on silicon, it’s becoming clear to all involved – politicians included – who depend on experts from the industry to provide technical and practical insights, that achieving any meaningful future shift in the balance of economic power is a much broader task than setting up wafer fabs alone. Although establishing those fabs is a huge undertaking that demands massive investment, the Act has not ascribed comparable value to activities like packaging and testing.
At the same time, packaging has undergone significant technical changes. While traditional lead frame-type packages, including small-outline lead frame packages, account for more than 60% of the market, emerging AI and high-performance computing demands are driving powerful new trends in advanced packaging. As chip makers combine processors and memory dies in 2.5D/3D structures and chiplets to increase compute performance and efficiency, the emphasis is shifting from wafer-level packaging to panel-level technologies that package multiple dies together. This convergence aligns well with vertical technology integration and brings additional advantages such as greater overall yield and efficiency, as silicon manufacturers can easily identify and select good dies and perform system-level testing.
Hence, panel-level packaging has disruptive potential by creating a strong case for chip fabricators to handle testing and packaging under the same roof. It’s recognized as a trend, now described as Foundry 2.0, and the largest companies, including TSMC and GlobalFoundries, are already committing multi-billion-dollar investments to expand their advanced packaging capabilities. There are major implications, not only for the outsourced semiconductor assembly and test (OSAT) sector but also for the future of Western semiconductor manufacturing, as the model is based on companies extending sovereignty over their value chain. The window of opportunity for Western chipmakers is slim, however, as they must move quickly or be left behind by the big foundries. Given the narrow focus of the Chips Act and similar European government initiatives, and the Trump administration’s reframing of Chips funding, private equity appears to be the most practicable source of timely and sufficient financing.
Adding to the complexity of the situation, leading PCB fabricators are also investing heavily to migrate their businesses into the advanced packaging market. However, the processes are not easy or cheap to set up. Such is the investment needed that making the change to advanced packaging is an option only for the largest companies here.
With the silicon fabs and large board shops eyeing a slice of the advanced packaging cake, the changes present opportunities for OSAT businesses as well as vertically integrated manufacturers that bring chip fabrication, assembly and test together under one roof. Private equity is flowing into companies of all types, which is unsurprising given the strong growth in demand for electronic hardware across markets such as automotive, consumer, industrial, medical and defense. It’s a favorable risk-versus-reward equation for investors.
Foundry 2.0 embodies the values of vertical integration in combining competencies to create a whole greater than the sum of its parts. In the past, as each constituent process became more developed, it made sense for individual specialists to make it their core competence, effectively globalizing the industry. Now that high-tech is recognized as a hugely powerful economic engine, with semiconductor innovation taking such a central role in driving progress, it has become extremely important politically. In this context, the lack of control over critical packaging and testing processes is a problem. Fixing it will not be easy because few, if any, companies in the West now have the required competencies, as they have been so extensively exported.
As the pendulum swings back, things will not simply return to the way they were. The industry has become more mature and professional, processes are more complex, quality standards are higher, and so, too, are market expectations. The large investment needed to enter and compete presents a barrier to smaller companies.
Although time is of the essence for Western economies, there is evidence of action in the US to restore lost competencies, including through acquisitions and organic growth. Perhaps we can all learn the importance of big-picture planning and mapping in advance the long-term consequences of business decisions. It’s true that outsourcing to reduce costs has been critical to the survival of businesses in the West. On the other hand, the tradeoffs are now clearly visible, including the loss of indigenous suppliers and, more importantly, the loss of up-to-date knowledge by effectively handing the baton of progress offshore.
Clearly, today’s globalized electronics industry is set to change. In Foundry 2.0, however, we are seeing the birth of a new approach, and not a return to the old. It’s the next stage in the maturing of a value chain that is always innovative, intriguing and exciting.
Alun Morgan is technology ambassador at Ventec International Group (venteclaminates.com); This email address is being protected from spambots. You need JavaScript enabled to view it.. His column runs monthly.
