Analyst, device makers, epi wafer fab and substrate suppliers look to their markets

Monday 2nd March 2009
Traces of Gallium Arsenide Courtesy:

In the swings and roundabout of the compound semiconductor market Strategy Analytics latest GaAs report is on the consolidating US market leadership in GaAs device suppliers. Cardiff based epiwafer foundry IQE has placed its 2009 GaAs production order with AXT. That substrate supplier has had problems, since halted aluminium production on falling prices in China had its knock-on effect on AXT Ga supplies, but for 2009 Ge is ramping up, and photovoltaics business is looking sound.

Strategy Analytics' latest GaAs report, "RFMD, Skyworks and TriQuint Consolidate Market Leadership," calculates that the overall GaAs (gallium arsenide) device market grew 9% year-on-year in 2008, with early estimates showing that RFMD, Skyworks and TriQuint further consolidated their leadership of the GaAs device industry, accounting for up to 59% of total GaAs industry revenues.

"Overall 2008 was a very good year, but growth in the GaAs industry hit a wall in the fourth quarter and 2009 will see industry revenues decline by five to six percent," observed Asif Anwar (right) at Strategy Analytics. "However we believe 2009 also presents an opportunity for the market leaders to squeeze out their competition, provided they can successfully leverage existing relationships while continuing to tap into adjacent markets and emerging opportunities."

In 2009 he predicts that the GaAs sector in will see industry revenues decline by 5-6%  "presenting an opportunity for the market leaders to squeeze out their competition, provided they can successfully leverage existing relationships while continuing to tap into adjacent markets and emerging opportunities."

Merchant demand for GaAs devices continues to be centre on microwave MMIC-based products,  targeted at the wireless sector giving the GaAs device industry revenues up to $3.9bn in 2008. Strategy Analytics notes that  collectively, the top ten GaAs device manufacturers--including Avago Technologies, M/A-COM and Mitsubishi Electric, still account for up to 82% of the overall market.

UK GaAs producer IQE
Recently  the epiwafer foundry IQE plc of Cardiff, UK. placed a production order worth around $14.3m for semi-insulating GaAs substrates for the 2009 worldwide substrate requirements with US AXT Inc which manufactures gallium arsenide (GaAs), indium phosphide (inP) and germanium (Ge) substrate and raw materials,  The order includes both 4-inch and 6-inch diameter semi-insulating GaAs to support IQE's wide-ranging materials needs.

“AXT continues to be a great partner for IQE,” says IQE’s president & CEO Drew Nelson (left). Previously, in Q4/2007, IQE placed an $18.6m GaAs substrate order with AXT for its 2008 manufacturing requirements. “Its strong customer service focus, ample manufacturing capacity and diverse product portfolio allow us to support diverse and unique requirements of our growing customer base,” he adds.

“As the industry continues to move towards larger-diameter substrates, we have made a firm commitment to supporting this transition through targeted capacity increases in our 6-inch manufacturing capability,” says AXT’s chairman & CEO Phil Yin. “We believe we are well positioned to support IQE's substrate needs in the coming year, and we look forward to continued close collaboration between our two companies.”

Substrate supplier AXT
AXT revenues fell 13%, as GaAs sales drop by a third, with the company reporting a revenue of $73.1m, up 26% on 2007’s $58.2m. Most recently, for fourth-quarter 2008, revenue was $15.6m, down13% on last quarter’s $17.9m. As a proportion of total revenue, North America fell from 28% to 24% and Asia-Pacific from 56% to 45%, while Europe rose from 16% to 31%.

In particular,(GaAs) substrate revenue was $9.1m, down as much as 33% on last quarter’s $13.6m. The decline was due mainly to an overall market slowdown, with lower-than-expected demand from customers and some push-out of scheduled shipments to first- and second-quarter 2009, which also resulted in lower production levels.

Semi-insulating (6-inch) wafers ( for handset applications) fell to just 48% of GaAs revenue, versus 52% for semiconducting (2-3-inch) wafers ( for LED applications). This contrasts with AXT’s normal 55:45 ratio GaAs semi-insulating/semiconducting split.

Indium phosphide (InP) substrate revenue was $473,000, down slightly on $484,000 last quarter but up 43% on $330,000 a year ago while Germanium (Ge) substrate revenue was $684,000, down 16% on $795,000 last quarter.

Raw materials sales (mainly 99.99%-pure gallium) were $5.3m, up 77% on $3m last quarter (restricted due to the Olympics and Paralympics in China) and up 23% on $4.3m a year ago.

Gross margin has fallen from 25.4% last quarter to 4.8%, due in part to  the gallium joint venture Ji Ya Semiconductor in China ceasing production for five weeks as a result of a supply shortage of raw materials from the affiliated aluminum plant in which it is housed (which had reduced production and halted operations due to falling aluminum prices in second-half 2008). To meet customer supply obligations, 99.99%-pure (4N) gallium had to be sourced from an independent third-party supplier, lowering gross margin.

“2008 was a challenging but productive year for AXT,” says chairman & CEO Phil Yin. “We concluded a major qualification with a leading germanium substrate customer, expanded our customer base to include several top tier companies and laid important groundwork for growth when the macro-environment strengthens,” says Yin. “Still, the economic downturn in 2008, coupled with the inventory overhang in our industry and customer-specific issues that we continue to work through, put pressure on our financial performance and will have a significant impact on our first-quarter 2009 results.”

For first-quarter 2009, AXT expects revenue to almost halve to $7-8m. Half of this revenue drop is expected to be due to 6-inch semi-insulating GaAs (mainly from one customer). A request for a major order push-out in Q1 is being addressed in order to help the customer to digest inventory and prevent a further build-up. Gross margin should get back to more normal levels, helped by Ji Ya reaching full capacity (allowing it to build inventory, minimising the impact of any potential future shutdowns).

Most excess inventory at customers should be consumed in Q1/2009, which will represent the bottom of the slump in demand (for semi-insulating GaAs substrates for handset applications), believes AXT, before the start of a slow ramp up from Q2 (driven by demand for WCDMA and CDMA2000 3G standards, especially in China, where handsets have greater GaAs content).

“Beyond the first quarter, we believe that the business will begin to improve as a result of pockets of strength in our GaAs  business, new qualifications of customers in the LED and photovoltaics market, and our improved cost structure as a result of efforts to streamline our business in relation to the current demand environment,” says Yin.

In addition, for concentrating photovoltaic (CPV) technology, AXT’s germanium substrates have now been qualified with a large European solar cell manufacturer for space applications (with a first order received, for shipment in Q2/2009), while further qualifications are underway for terrestrial application.

Additional qualifications with two more European manufacturers are underway, for completion this year. After moderate growth in Q1, germanium revenue should ramp up from Q2/2009. Yin also highlights that NREL’s 40.8% efficient triple-junction solar cells late last year were grown on GaAs substrates, opening up a potential new market. Also, in February, at the first annual meeting of the CPV Consortium, Yin was elected to its board of directors.

“We remain encouraged by the overall trends in our industry and believe that we will successfully leverage our competitive advantages for growth and market share gains as the economy improves,” says Yin.

Sources: Strategy Analytics
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