Economics of Fabless Semiconductor Companies

1. Slide 1
Economics of Fabless
Semiconductor Companies
& Global Onshoring Initiatives
IIOM – Newport – Nov 04, 2021
Malcolm Penn – Chairman & CEO, Future Horizons

2. Slide 2
About Future Horizons
(Google “Future Horizons” or “Malcolm Penn Semiconductors” For More Details)
◆ ONLY Analyst To Correctly Call 2018’s Double-Digit Upturn
◆ ONLY Analyst To Counsel ‘Stay Calm’ Advice Re 2020 Covid-19 Impact
◆ ONLY Analyst To Call Shortages & Strong Double-Digit Growth For 2021
Consistently Good Track Record, Second To None
1. Facts
◆ Economy (IMF)
◆ Unit Demand (WSTS)
◆ Fab Capacity (SEMI)
◆ ASPs (WSTS)
Four Key Influences
(Apocalypse Horsemen)
2. Sentiment
◆ Perception
◆ FUD
◆ Fashion
◆ Emotion
Hype Vs. Reality
(Sanity Check)
3. Experience
◆ 5+ Decades (From The First ICs)
◆ End User (Industrial & Telecoms)
◆ Business Development (DRAM & ASSP)
◆ Operations (Wafer Fab & Test)
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100%
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2020F
Every Downturn Bar The First
(Unrivalled Hand’s On Knowledge)
Proven Research Methodology
◆ Longer That Any Other Analyst (& Most Industry Execs)
◆ Five Plus Decades Of Industry Experience (From The First Commercial IC)
Founded In 1989 … 32 Years In Operation

3. Slide 3
Agenda
◆ Semiconductors 101
➢ Characteristics / Driving Forces
◆ The Perfect Storm
➢ Under Supply / Over Demand
◆ Market Outlook
➢ Will Boom Turn To Bust
Part 1 – Economics Of Fabless
Semiconductor Companies

4. Slide 4
Agenda
◆ Semiconductors 101
➢ Characteristics / Driving Forces
◆ The Perfect Storm
➢ Under Supply / Over Demand
◆ Market Outlook
➢ Will Boom Turn To Bust
Part 1 – Economics Of Fabless
Semiconductor Companies

5. Slide 5
Making Sense Of The Industry ‘Tea Leaves’
FH
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Key Driving Influences
◆ Technology Push (Moore’s Law / Science)
◆ Market Pull (Doing The Previously Impossible)
◆ Production (Supply / Demand)
◆ Economy (Greasing The Wheels)
Analytical Tools Used
◆ Economy (IMF) / SC Sales (WSTS) / CapEx &
Wafer Production (SEMI) plus Company Reports
& In-House Proprietary Database
◆ Not An Exact Science … There Are No
Predicting Formulas Or Models
◆ Jigsaw Puzzle With A Goodly Portion Of
Missing Pieced
◆ 50+ Years Of Industry Experience Clearly Helps
… So Too Does Some Common Sense!

6. Slide 6
Key Driving Influences – Impact & Role
1. Economy
Determines What Users Can Afford To Buy
(More Buoyant, Stronger The Demand)
2. Unit Demand
Defines What Users Actually Buy
(Plus / Minus Inventory Adjustments)
3. Capacity
Determines How Much Demand Can Be Met
(Under- Or Over-Supply)
4. ASPs
Sets The Price The Units Can Be Sold For
(Supply-Demand Plus Value Proposition)
(SC Apocalypse Horsemen)
Need To Track Current Status Vs. Underlying Trends
(It’s Rarely ‘Different This Time!’)

7. Slide 7
Key Driving Influences – Current Status
1. Economy
➢ Strong 2021 Bounce Back (+5.1%) Following
2020’s -4.4% Contraction
➢ Recovery Hampered By Shortages, Supply Line Imbalances
& Inflation Concerns
2. Unit Demand
➢ Shipments = Real Demand +/- Inventory & Leadtime
Adjustments plus Double Ordering / Line Purging
➢ Shipments Currently Running Well Above 8% Trend Line
3. Capacity
➢ Completely Sold Out, Following Years Of Under-Investment
➢ Modest 2020 CapEx Increase, On Stream Q4-21?
➢ More Robust 2021 Increase, On Stream Q3-22?
4. ASPs
➢ Recovery Lags Units By 12-Months (This Time Only 8)
➢ Long-Term Trend = 0% (Hostage To Moore’s Law)
(SC Apocalypse Horsemen)
All Four In Strong Unison, Hence The Current (14th) Market Boom!

8. Semiconductors 101 – Industry Cyclicality
Pig Cycle
*Source: M Penn Market Presentation - IEEE Boston 1975
Boom
Suppliers Overbooked
Customers Build Stocks
Double Ordering
Prices Stabilise
Pressure On Production
Delinquency
Slump
High Stocks
Cash Flow Problems
Customers Return Product
Prices Fall To Marginal Cost
Pressure On Production Costs
Long Term Orders Disappear
Market Impact*
Market Value Collapses
Market Value Surges
Shortages Triggered By
• Under Investment
• Increased Demand
Over Supply Triggered By
• Excess Investment
• Market Collapse
Supply/Demand Balance
Demand Fundamentals: Poor Visibility / Highly Volatile / Unreliable Forecasts
Supply Fundamentals: Long Production Cycle (4 Months)
Long Capacity Lead-Time (1-2 Years)
Nothing Has Changed In The Past 50 Years

9. Semiconductors 101 – Long New Capacity Lead Time
These Numbers Have Also Not Changed Either
(Next 4 Quarters Capacity Is Always Fixed In Stone)
PLUS … 2 Years To Design A New SoC IC
(Nowadays Sole Sourced … There Is No Plan B)

10. Slide 10
Agenda
◆ Semiconductors 101
➢ Characteristics / Driving Forces
◆ The Perfect Storm
➢ Under Supply / Over Demand
◆ Market Outlook
➢ Will Boom Turn To Bust
Part 1 – Economics Of Fabless
Semiconductor Companies

11. Slide 11
Perfect Storm Brewing … Decade Of Low Single Digit Growth
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35%
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2015
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2017
2018
2019
2020
Market Growth
Sub-Prime
Bust
Lehman
Collapse
Stop-Start Post Lehman
Global Economic Recovery
2002>07 = 12.7%
Post-Lehman Economy
2008>19 = 4.7%
Demand-Side:
◆ No-One Believed Pre-Lehman SC Demand Would Return
◆ Received Wisdom: “Industry Has Matured , It’s Now Low Single Digit Growth”
Source: WSTS
Normal Y2 Recovery Curtailed By
US-China Tariffs /Trade War &
Heightened Economic Uncertainty
Covid-19
Pandemic

12. Slide 12
Perfect Storm Brewing … No Slack In The Supply Side
Source: SEMI/WSTS
Supply Side:
◆ 2008-2019 CapEx Reflected ‘The New Low Level’ Of Demand Expectations
◆ 2020 Modest ‘Reactionary’ CapEx Increase, On Stream Starting Q4-21?
◆ 2021 More Robust CapEx Increase, On Stream Starting Q3-22?
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2021F
Total
CapEx
Equipment
%
SC
Sales
Total
SC
Sales
($b)
Total Semiconductor Sales ($b) Total Equipment % SC Sales

13. Slide 13
Perfect Storm Brewing … Supply-Demand Balance
What Could Possible Have Gone So Wrong?
◆ Consolidation & Out-Sourcing, Reduced Capacity Options (No Plan B)
◆ Industry Now ‘Fab Tight’, Built To Demand (Commitment, Not Speculation)
◆ CapEx Spend Trending At Historically Low Levels Since 2007
◆ Small Demand Uptick Quickly Collapsed The Status Quo
(Just As With Petrol & Toilet Rolls, Shortages Quickly Turn To Panic)
Warning Signs Were All There (Capacity Shortages Waiting To Happen)
◆ Shortages First Surfaced In 2018 (Y2 Of 2017-18 Cyclical Boom)
◆ 2019 ‘Recession’ Was Classic Y3 Adjustment To 2017-18 Boom
◆ Impact Of 2018 Shortages Curtailed By Systemic Slowdown In Demand
(US-China Tariffs & Trade War Plus Economic / Business Uncertainties)
◆ Covid Increased The Demand For ICs, Despite WW Collapse In GDP

14. Slide 14
Source: WSTS/Future Horizons
Perfect Storm Broke In July 2020 (But No-Body Was Paying Attention)
◆Strong 2H-2020 Set The Stage For Double Digit Growth In 2021
- Economy … GDP V-Shaped Bounce Back (China Leading The Way)
- IC Units … Continuing Strong, With Supply Shortages Starting To Bite
- Fab Capacity … CapEx Still Trending Below Long-Term Average
- ASPs … Still Recovering, Always Lag Unit Recovery By A Year
◆Industry Fundamentals Had Not Changed (Still Cyclical / Still Strong Growth)
◆Storm Brewing Since 2018, Just ‘Never’ Broke (Lulling Everyone Into Complacency)
◆Supply Maxed Out In Q4-2020 Due To Under-Investment In Q4-2019
(You Can’t Blame Covid For That!)
◆Widespread Disregard For Supply-Demand Fragility (Despite Clear Warnings)
Quarter Market Growth
Q1-20 104.560 -3.6%
Q2 103.423 -1.1%
Q3 113.526 9.8%
Q4 117.573 3.6%
2020 439.082 6.5%

15. Semiconductors 101 – Supply Demand Dynamics (Gas Tank Effect)
1. For Each Car On Empty One Has Just Filled Up, Average All Cars = Half Full
- Supply Chain Is Nicely Balanced
3. Supply Eventually Rebalances, Queues Disappear, Drivers Stop Buying Petrol (Gas)
- Average Again = Half Full
Same Thing Happens In SCs, But It Takes Over A Year To Rebalance
Supply
◆ Demand Rises, Lead-Times Extend, Buyers Order More Stock (To Cover The Delay)
◆ Increased Demand Met From Die Bank, Consignment Stock Buffers, Line Balance Tweaks
◆ ‘Wait One More Quarter’ Means Suppliers Don’t Take Increased Demand Seriously
◆ Lead-Times Extend More As Suppliers Struggle To Replenish & Build Stocks
◆ Die Banks Drained, Added Wafer Starts Needed To Meet (Now Inflated) Demand
◆ Customer Long-Term Agreements To Secure Future Supplies Plus Double-Excess Ordering
◆ Eventual Investment In New Capacity But Take 12 Months Minimum To Come On-Line
◆ Supply Overshoots Demand, Lead Times Shrink, Orders Collapse… Classic Pig Cycle
2. Supply Becomes Tight, Everyone Immediately Fills Up, Average All Cars = Full
- Surge In Demand Throws Supply Chain Off Balance
- Supply Can’t Keep Up, Fueling Queues, Panic & More Shortages

16. Semiconductors 101 – IC Unit Shipments
Monthly IC Unit Shipments
(5-Week Month Adjusted)
◆ Units Shipped = Real Demand + Inventory/Lead-Time Adjustments
◆ In Times Of Shortage, Orders Are Over-Inflated (= Demand + Adjustments)
◆ Once Supply Catches Up, Orders Collapse (= Demand - Adjustments)
◆ Demand (As Seen By The IC Firms) Can Be Seriously Distorted
(2x Real Use During Growth Phase & 0.5x In A Slowdown)
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IC
Unit
Run
Rate
(Billions/Week)
Overshoot (Both Ways) & Correction Inevitable, Only Uncertainty ‘When’

17. SC Industry Cycle
14th Correcting Crash Inevitable, Only Uncertainty Is ‘When’
We Are Currently Here
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Change In End User Demand
Unit
Growth
Impact
Ramp Up - In Tight
Capacity Market
Steady State Demand
Overheat Potential
'15-24 Month' Year
'5-8 Month' Year
Slowdown Potential
Typical Profile

18. Slide 18
Agenda
◆ Semiconductors 101
➢ Characteristics / Driving Forces
◆ The Perfect Storm
➢ Under Supply / Over Demand
◆ Market Outlook
➢ Will Boom Turn To Bust
Part 1 – Economics Of Fabless
Semiconductor Companies

19. Slide 19
2021 Forecast Summary (As At Jan 2021)
◆‘Consensus’ Average = 9.9% vs. FH Forecast = 18% (Min 11% Could Even Be 24%)
◆Shortages Through 2021, Possibly Longer
◆Stage Had Been Set By 2020’s Strong Second Half Performance
Dismissed At The Time As “Ever-Optimistic”, By June Everyone Was Forced
To Revise Their Forecasts In Line With Ours!
Source: SEMI

20. Slide 20
Current Outlook For 2021 … +25.5% (Up from 18% in Jan, Close To Our +25% Upside)
Biggest Forecast Risk? …
◆ Major Economic Hit (Very Unlikely To Happen)
◆ Oversupply In Q4-2021 (Possible, Precise Timing’s Hard To Predict)
Quarter Value ($b)
Q1-21 4.9% 123.343
Q2 9.3% 134.863
Q3 7.4% 144.841
Q4 2.1% 147.883
2021 25.5% 550.930
Quarter Value ($b)
Q1-21 4.9% 123.343
Q2 9.3% 134.863
Q3 7.4% 144.841
Q4 3.8% 150.345
2021 26.0% 553.393
Quarter Value ($b)
Q1-21 4.9% 123.343
Q2 9.3% 134.863
Q3 7.4% 144.841
Q4 -2.5% 141.220
2021 24.0% 544.268
Little Numerical Upside (Partly It’s The Maths) Huge Psychological Impact

21. Slide 21
What Then For 2022? Correction Inevitable … +4% (-6% To +8%)
Biggest Forecast Risk? … Uncertain Timing
1. Uncertain Supply-Demand Impact (Due To 2H-2020 CapEx Increase)
2. Supply Surge In 1H-2022 (Due To 1H-2021 CapEx Increase)
3. Covid-19 Fiscal Support Unwinding (Uncertain Economic Impact)
Quarter Value ($b)
Q1-22 -6.0% 139.010
Q2 -9.0% 126.499
Q3 1.0% 127.764
Q4 -2.5% 124.570
2022 -6.0% 517.844
Quarter Value ($b)
Q1-22 -1.6% 145.517
Q2 2.0% 148.427
Q3 3.8% 154.068
Q4 -4.6% 146.980
2022 8.0% 594.992
Quarter Value ($b)
Q1-22 -2.6% 144.038
Q2 1.0% 145.479
Q3 2.6% 149.261
Q4 -10.0% 134.335
2022 4.0% 573.113

22. Slide 22
2021-22 Pinch Points To Look Out For
◆ 2H-2020 Spend Up 25% On Previous 10 Quarter Run Rate
(Unlikely To Destabilise Supply)
◆ 1H-2021 Spend Up Further 23% On 2H-2020, 53% Overall
(This Will Trigger Supply Destabilisation)
◆ Q4-21/Q1-2022 Supply/Demand Overshoot Risk
(Coincidence Of Capacity Surge / Seasonal Soft Demand)
Once Supply Catches Up ‘Demand’, The Market Will Crash
$0
$5,000
$10,000
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Q1-2018
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Q4-2019
Q1-2020
Q2-2020
Q3-2020
Q4-2020
Q1-2021
Q2-2021
Wafer Fab Equip Sales
Wafer Fab Equip Sales
Base Line
+25%
+53%

23. Slide 23
Agenda
◆ Move From IDM To Fabless
◆ Be Careful What You Wish For
◆ Rethinking The Supply Chain Model
Part 2 – Global Offshoring Initiatives

24. Slide 24
Agenda
◆ Move From IDM To Fabless
◆ Be Careful What You Wish For
◆ Rethinking The Supply Chain Model
Part 2 – Global Offshoring Initiatives

25. Slide 25
Fabless Semiconductor Evolution
◆ Back In The Day All Firms Had Fabs But Low Chip Complexity Meant Labour Intensive
Assembly & Test Determined Device Manufacturing Costs
◆ Factories Moved Offshore, First Hong Kong Then Malaysia – Lower Labour Costs, Western
Educated Technicians, Good Technical Schools, Government Incentives
◆ As Complexity Increased, Die Cost Became More Critical & Wafer Fab Yield & Productivity
Started To Increase In Importance, Opening The Door For Japan
◆ As Complexity Increased Further, ASICs & ASSPs Overtook TTL/Gate-Level Standard
Parts, Driving Priority From Die To System Cost & Fast To Time To Market
◆ IC Designs Didn’t Need Advanced Wafer Processing (Competing With TTL) Opening The
Door For The Fabless SC Era Led By Chips & Technology IBM PC AT Chip Set
◆ Low Cost Of Entry (No Fabs To Finance) Plus Improved Wafer Foundry Access & Easy To
Use EDA Tools Triggered Second Explosive Wave Of Chip Industry Start-Ups
◆ Strained Fab/Fabless Love/Hate Co-Existence (“Real Men Have Fabs”) Until The 2000 Dot.com
Crash & Simultaneous Move To 300mm Wafers (1999-2002)
◆ E&M Decision Not To Support Sub-95nm Node Development On 200mm Forced Chip Firms To
Re-Assess Their IDM Needs & Strategy … Most Too Small To Fill A 300mm Fab
◆ Then Came The Lehman Collapse & 2008 Financial Crisis … By 2010 It Was Game Over For In-
House Manufacturing (Except Memories & Advanced Logic)

26. Slide 26
Demise Of The IDM Business Model (Reprinted From 2010 Report)

27. Slide 27
Wall Street’s ‘Formula For Success’ (Reprinted From 2010 Report)

28. Slide 28
Gradual Advanced Logic Outsourcing Transition
Move From Planar To FinFET (Sub-22/20nm Node) Final Nail In IDM Coffin

29. Slide 29
IDM End Game
◆ By The End Of The 20’s Only 2 Advanced Logic IDMs Remained
- Intel (But Struggling) & Samsung (‘Subsidised’ By Memories)
◆ TSMC Now Dominated The Advanced Logic Landscape
◆ Fabless Rationale Morphed From ‘Faster Time To Market’ To ‘Balance Sheet Efficiency’
◆ De-Emphasis On CapEx/Manufacturing Meant Increased Profits, Improved Cash Flow, Bigger
Dividends, Better (Near-Term) Shareholder Returns, Fuelling Drive For Share Buy Backs &
Other Financial Shenanigans Enhancing Shareholder Returns & C-Level Renumeration
◆ No Interest By Anyone Non memory For Building Wafer Fabs Anywhere …
- Why, When TSMC Was Performing So Perfectly …
- Plus It Would Be Balance-Sheet (& Bonuses) Destructive …
- Fabless Is Fabulous … What Could Possibly Go Wrong?

30. Slide 30
Agenda
◆ Move From IDM To Fabless
◆ Be Careful What You Wish For
◆ Rethinking The Supply Chain Model
Part 2 – Global Offshoring Initiatives

31. Slide 31
The Industry Entered A Classic Supply Shortage
◆ Covid Surge In Demand Was the Trigger NOT The Cause
◆ Cause Was Several Previous Years Of Under-Investment
◆ Capacity Now Built To Order Not On Speculation
(Adding 1 Year To The Normal 4-6 Month Manufacturing Leadtime)
◆ Factory Interruptions Due To Power Outages, Fires & Covid Restrictions

32. Slide 32
Where Are My Parts? (Reprinted From 2010 Report)

33. Slide 33
What Happened To My Wafers? (Reprinted From 2010 Report)

34. Slide 34
Solutions vs Products – Supply Chain Challenges
◆ Covid-19 Exposed Global Supply Weakness
(Logistic Risk Today … Geo-Political Risk Tomorrow?)
◆ TSMC Controls 60% World IC Production
(23rd Province of China)
◆ Little Business Enthusiasm For Bringing Wafer Fabs Back Home
(It’s Not In The IDM’s P&L / Shareholder Interest)
◆ Political Backlash ‘Subsidising’ Foreign Fabs (TSMC / Samsung) Or (Intel / GloFo?)
(Especially US Taxpayer’s $$$s / State ‘Favourism’ … Why Arizona? / Why New York? …)

35. Slide 35
Agenda
◆ Move From IDM To Fabless
◆ Be Careful What You Wish For
◆ Rethinking The Supply Chain Model
Part 2 – Global Offshoring Initiatives

36. Slide 36
Home-Shoring Production – Zero End Market Pull
◆ IDM’s Don’t Want To … Board/Investor Pressure To Be Fabless
◆ No Demand From The System Houses To Favour Local Production
◆ No Appetite Either For OEM Directs To Fab Their Own ICs
(Apple, Google, Amazon, Facebook etc)
Services
$1.6t
$411b
$31b
$60b
$20t+

37. Slide 37
Partnership Or Adversarial?
◆ SC Industry Supply Chain Has Always Been Adversarial
◆ Customers Seek Lowest Price / Zero Commitment (From Wafers To Parts)
◆ In Times Of Undersupply, Roles Are Reversed … “Your Turn In The Barrel”
Customers Forced To Sign Long-Term Agreements & Agree Price Increases
◆ Until Supply Catches Demand, Prices Plumet / Contracts Re-Negotiated
◆ Everyone Talks ‘Partnerships’ … Very Few ‘Do It’
◆ Yet The Rewards Are Very Clear Once Outside The ‘Jam Today’ Mindset

38. Slide 38
Key Takeaways
➢ EV Is Causing A Seismic Auto Industry Disruption – The Old Model Is Dead (Ask Nokia)
➢ Pent Up End-User Demand – From Cars To Holidays & Everything In-Between
➢ Remote Working, Voice Activation & Video Conferencing – All Permanent Change
➢ Massive Acceleration Of Personal Health Care & Medical – Dwarfing Everything Before
1. 2020 Was A Normal Recovery Year, With Covid-19 Was A High-Tech Tipping Point
3. Onshoring & Supply Chain Issues Will Disappear Once The Shortages End
➢ Welcome To ‘Wall Street’ Shareholder Capitalism At Its Best (Worst?)
➢ It’s A Long-Term Strategic Problem, Beyond Any Government’s Attention Span
4. Current CapEx Explosion Will Overshoot & Trigger The Next Crash
➢ Enjoy The Current Super-Cycle, It Will Eventually End In Tears!
➢ In A Boom (Bust) Be Prepared (Plan) For It Ending Tomorrow … Fast Reaction Is Essential
Rethinking The SC Supply Chain Business Model
2. 2021 Supply Shortages Were Foreseeable & Classic Industry Behaviour
➢ All The Signs Were There, No-One Was Listening Or Paying Attention,
➢ Most Industry Execs Had Not Lived Through A Shortage (aka 2004, 1993, 1984)

39. Slide 39
Contact Details – www.futurehorizons.com
Future Horizons Ltd
Blakes Green Cottage
Sevenoaks, Kent
TN15 0LQ, England
T: +44 (0)1732 740440
E: mail@futurehorizons.com
Regional Offices In The UK & Russia
Affiliates In Europe, India, Israel, Japan,
Russia & USA
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