Major shift underway to outsource IC testing

Major shift underway to outsource IC testing
TAIPEI, Taiwan--Chip makers are moving faster now to outsource their chip testing. The shift is occurring because manufacturers are looking for more ways to cut capital spending and speed their new product designs to market.

Test subcontractors -- many of whom already are operating Asian chip-assembly plants -- are not only handling much higher volumes of production test now, but also are moving rapidly into engineering activities. This kind of thing would have never happened just a few years ago.

The sharp increase in third-party chip testing is occuring for a variety of reasons. Chronic shortages of test engineers, fast-changing chip applications, and growing emphasis on IC design and marketing inside semiconductor companies are driving up the use of third-party testing services. Test requirements are getting more difficult as chip designers pursue system-on-a-chip integration, which not only requires more expensive automatic test equipment, but also new IC packaging technologies.

By some industry estimates, spending on subcontracted chip-testing services is growing by more than 40% a year and is expected to reach $2 billion in 2001. Although few analysts track this segment of contract manufacturing, many managers in chip-packaging companies believe that testing services will soon become a pivotal factor in who winds up with backend chip-assembly volumes.

"The business is changing a lot because we are not only looking at a new up-cycle in the chip business but we're also seeing a lot more outsourcing of manufacturing," comments Joseph H.S. Tung, vice president and chief financial officer of the ASE Group.

The Taipei-based company's ASE Test Ltd. subsidiary already has bulled its way to the top of chip-testing services by showing strong growth last year in revenues and making a couple of major acquisitions. By acquiring two large chip-assembly plants from Motorola Inc. in Taiwan and South Korea, ASE Test was able to expand its reach into cellular phone chips and automotive semiconductors (see Feb. 5, 1999, story).

The deal also includes testing a major portion of Motorola's semiconductor production. "We have probably taken on 50% of Motorola's internal assembly and testing operations," Tung says.

ASE Test's second acquisition last year was Silicon Valley's largest engineering test subcontractor, ISE Labs Inc. in San Jose. The deal was made for $98 million in stock (see March 29, 1999, story). The purchase moved the Taiwan test company into the center of U.S. engineering activities at fabless chip companies and at some of the largest integrated device manufacturers (IDMs), which are expected to outsource more of their chip-testing activities in the near term. ISE Labs also expanded ASE Test's capabilities in test program development, wafer sorting, and failure analysis.

"We were strong in backend test for production runs, but ISE Labs will give us strong and wide coverage in the frontend engineering test activities," Tung notes. "We can now work with customers earlier in the cycle helping them develop test programs, and this will enable us to direct the production test business to AST Test and not the competition." (see photo at right).

These two acquisitions drove up ASE Test's revenues to $298.6 million in 1999, up 62% from the $184.7 million it chalked up in 1998 sales. About $250 million of the parent company's 1999 revenues were in test, Tung estimates. He expects test revenues to reach $400 million in 2000.

Major target now for ASE Group growth is Europe. The company aims to double its business in Europe, according to Tung. Less than 5% of the company's revenues presently come from European chip makers. The production test and assembly plants acquired from Motorola are expected to play a key role in serving wireless and automotive application in that market. ASE's bold move into Silicon Valley hasn't gone unnoticed by other chip-testing and packaging subcontractors. Many of them had been counting on ISE Labs to provide their customers with engineering support. While some competitors have not reacted yet to ASE's acquisition of ISE Labs, others are stepping up their own engineering test activities.

Singapore's ST Assembly Test Services Inc. (STATS) has opened a new test development center in San Jose to help North American chip companies reduce "their time-to-market and provide seamless transfer of new devices to high-volume production."

"We're here to serve fabless companies that have no test engineers or limited testing expertise and no test equipment," points out John Ritchie, director of the STATS test development center. "We are also working with IDMs -- the bigger companies -- which want to get products into production quickly but who are limited by resources."

To support its worldwide expansion, STATS has just launched an initial public offering of stock, raising nearly $400 million (see Jan. 28 story). STATS is taking a different approach in Silicon Valley than rival ASE Test, says Ritchie.

"We do not do any production test here," he notes, referring to the new development center. "The ISE facility performs some production testing, but here we are set up exclusively for engineering development activities," Ritchie says. "We will not let subcontractors or 'moonlighters' come in and run production testing in the evenings," he says. "If you do that, production test will squeeze out development because it is the money maker."

Both ASE Test and STATS are trying to move part of their businesses closer to the design engineering departments of their customers. Test engineering programs are aimed at first helping chip developers verify whether or not designs are working properly and optimize them for production test. Testing programs for specific ATE platforms also are generated and then transferred to final assembly and testing plants in Asia.

Other major chip-packaging companies also are moving more aggressively into testing services. Amkor Technology Inc., the world's largest contract chip-assembly company, is setting up new test development organizations at its Korean and Philippines packaging plants. Amkor also runs a U.S.-based test product group, which acts as the technical arm of its testing organization, says Miles Prim, vice president of worldwide test who's based in Chandler, Ariz.

Amkor has offered production test for more than a dozen years. According to industry estimates, it is No.2 in subcontract test services with about $80 million in 1999 revenues. While Prim believes that ASE Test is accounts for the largest share of chip-testing services, he maintains

"We have our own wafer fab services, design center, packaging house, test, and drop-ship operations," he points out. "Worldwide, we have over 400 test platforms and occupy nearly 150,000 sq. ft. of manufacturing floor space. We have nearly 2,000 people dedicated to test," Prim claims. "I would challenge anyone to meet that in our marketplace."

But the Amkor vice president, among others, predicts a major shift is coming in the chip assembly and testing business. Semiconductor companies are no longer just interested in cutting costs on maturing products by outsourcing test. Many testing services simply ran ATE equipment for customers on consignment, providing cheap labor. Until now, nearly all engineering decisions were made by chip makers, but that's rapidly changing.

"We really began to see the changeover to increased testing services as the wafer foundry model grew, making companies more comfortable with the outsourcing," notes Darla Berkel, marketing manager for Kyocera America Inc. in San Diego. Major changes in chip-packaging technology also create a turning point for greater interest in testing services, she adds.

"The clear difference between the old strategies and new testing requirements is wire-bond packaging vs. next-generation technologies, such as C4 flip-chip," Berkel observes. "Existing test platforms could handle the wire-bond packages, and the vertically integrated companies had already depreciated that equipment," she says. "So it was not a significant cost to them--but crossing over to C4 flip-chip applications requires new test platforms."

"Probably 10% or less of our chip-and-wire operations see a requirement for testing, but 50% or more of the flip-chip business comes in with requirements for testing," Berkel notes. "If you cannot follow this model of providing testing services with packaging, the customer "will probably go somewhere else."

Three years ago, Kyocera began developing a test service business model, and the company subsequently formed alliances for test engineering support from ISE Labs in San Jose (see photo at left) and Cadence Design Systems Inc.'s services unit in Rancho Bernardo, Calif. Kyocera also is offering their customers the ability to download chip-testing programs to the factory floor and allow engineers to remotely debug those programs.

Other assembly houses also are trying to respond to the sudden demand for chip-testing services. "In 1998, most of our customers didn't pay attention to testing, but now every customer seems to be asking for testing or wafer probe options," says J.B. Kim, director of worldwide test at ChipPAC Inc. in San Jose. "About 30-to-40% of our assembly business required final test in 1999, but based on the contracts for this year, that level might grow to 45-to-55%," he adds.

ChipPAC testing revenues grew 600% last year and unit volumes were up tenfold, Kim estimates. The company, a spin-off from Hyundai Electronics Industries Ltd., has installed test capabilities in a pilot line for chip packaging in San Jose, but it will conduct the bulk of production test in facilities located in Korea or China, Kim says.

While chip assembly has driven the test business, test is now becoming more important than the assembly capabilities, Kim says. In fact, the fast-growing market is attracting start-up activities in the U.S.

"We have nine major semiconductor companies working with us," says Joe Jones, CEO of BridgePoint Technical Manufacturing Corp. The Austin-based test services startup was formed from the remnants of RISC supplier Ross Technology Inc. in 1998.

"The industry has not added significant testing capabilities in more than two-and-a-half years," Jones says. "With the die shrinks multiplying the number of chips that fabs can make, a shortage of backend capacity has been hitting the industry since last summer." The chip industry ran out of mixed-signal testing capacity in the fall, he says, when digital test got "spotty" and memory test was limited.

"I believe the IDMs and fabless companies will continue to be reluctant to buy $2 million test platforms primarily because they cannot see five years out into the future," Jones predicts. Adding to the problem: testers don't last as long as they used to, he adds.

Until recently, competition among companies for chip-testing services has been almost non existent, says ASE Group's Tung. But that's quickly changing, he adds. From less than $1 billion in revenues in 1999, industry testing services are expected to become a $5 billion segment by 2005, Tung predicts.

"Less than 10% of chip testing is served now by independent companies, compared to 20-to-30% in final chip assembly and less than 10% in wafer fabrication," estimates the ASE Group's CFO. "We think contract assembly could reach 50% of the total business and test 25% this decade."

One thing going for third-party testing is uncertainty and volatility in semiconductor markets. "In-house test has become a costly proposition," Tung says. "When you plan for capacity, you must plan for maximum volumes. If the chip doesn't fly in the marketplace, you sit there with all the test equipment," he notes. "Then a next-generation chip must be introduced, and it might need a new test platform."

Test equipment utilization also hurts chip makers doing their own testing. The typical in-house loading of ATE gear at chip makers is running up to 35%, Tung estimates, while contract test houses serving logic IC suppliers are aiming at 70% utilization of this equipment.