What makes semiconductor manufacturing so different.
The silicon chip business has some unusual economic characteristics that you won't find in most other industries. In most manufacturing businesses, if you sell more products you also have to buy more raw materials. If you're making boats and your orders increase, you have to purchase additional wood, brass, and fiberglass to build the boats you're selling. If you make TVs, you need to buy more cathode-ray tubes (or LCD or plasma displays) to put into the TVs. When sales go up, your materials costs go up. Pretty simple.
But the chip-making business doesn't work that way. Microprocessors, DRAMs, and other chips all contain silicon, copper, aluminum, and maybe a little gold or other trace elements but those ingredients aren't the most expensive part of the chip. Unlike most other tangible manufactured goods the raw materials to make chips are essentially free. Making more chips doesn't mean spending a lot more on raw materials.
No, the most expensive part of a silicon chip is the depreciation on the equipment and the building where it's made. A semiconductor fabrication facility, or fab, is horrendously expensive to build and maintain, to the tune of $2 billion to $3 billion dollars in construction costs and tens of millions per year in maintenance. And the whole facility will be obsolete within three to five years. Ouch.
That means each chip coming out of the fab is burdened with some of the overhead cost of that depreciation. In fact, for many chips that depreciation is the biggest cost of all, even more expensive than the raw materials that went into it. It's as if chip makers had to tape a $5 bill to each new microprocessor.
Making more chips doesn't raise the manufacturer's costs very much. In fact, it lowers costs because that crushing depreciation can now be divided amongst more chips. Same overhead; more units. That's a good thing for both producers (them) and consumers (us). In a sense, the very first chip to come off the assembly line costs $2 billion; all the chips after that are free. Transistors themselves are free but space on the silicon wafer isn't. As with real estate, you're paying for the acreage, not the dirt.
That's why chip makers are so fanatically focused on high-volume products. They want (need) to amortize their overhead costs over as many units as possible. That's also one of the reasons chips are constantly getting smaller. It's not so that they'll use less silicon or copper, it's so that more of them will fit on a single wafer, thereby increasing the yield per wafer. Semiconductors are like pharmaceuticals: very high development costs and very low unit costs. The difference is, there are more Canadian chip companies.
Jim Turley is the editor in chief of Embedded Systems Design. He has been an analyst and embedded systems editor for Microprocessor Report and has been widely quoted in the mainstream media and the technology press. Jim is the author of seven books, including Essential Guide to Semiconductors. You can reach him at .