The extreme consolidation rippling through the microchip industry contributed to last month’s sale of Fairchild Semiconductor International to Phoenix-based ON Semiconductor, which could lead to the closure of the former Fairchild’s South Portland plant.

Last year set a record for mergers and acquisitions in the semiconductor industry, with transactions of $103.8 billion, according to semiconductor market research firm IC Insights. So far, 2016 is on pace to become the second-biggest year on record for consolidation, it said, with $55.3 billion in mergers and acquisitions in the first three quarters of the year.

The consolidation trend does not bode well for the former Fairchild operation in Maine. A major employer in South Portland, the company has about 500 highly skilled manufacturing workers there, along with another 75 to 150 employees at a nearby sales and marketing office. In Maine, semiconductor technicians earn more than $68,000 a year.

ON Semiconductor, which has a global workforce of about 25,000, told investors Sept. 19 that it plans to close two or three manufacturing facilities in its global network by the end of 2018, and that it will transition all of its chip production to larger, more cost-efficient 8-inch silicon wafers. The South Portland plant uses 8-inch wafers, but it still could be shut down because of competition from other ON Semiconductor plants, including lower-cost operations in Asia.

WHY CONSOLIDATION?

ON Semiconductor, a former division of Motorola Inc. that was spun off in 1999, has purchased at least 17 other microchip companies since 2000, and seven of those since 2014. Many of those deals were followed by layoffs, plant closures and consolidation of manufacturing operations.

The company does not produce central microprocessors for high-end computers like Intel Corp. or Advanced Micro Devices. Its chips are simpler in design and serve other purposes, including power management, signal amplification and logic functions. Every computer-controlled device contains multiple chips in addition to its central processor.

Still, microchip producers such as ON Semiconductor and Texas Instruments, which also has a fabrication plant in South Portland, spend a large portion of their revenue – about 20 percent on average – coming up with new and better chip designs. For example, they might develop a new line of microchips with new abilities, more computing power, smaller size or less power consumption. Power drain is a major concern for mobile devices, which operate on batteries.

Research and development in the semiconductor industry is so expensive it’s often more cost-effective to purchase another chipmaker that already has spent the time and money to develop a desired microchip, said Tim Regan, a Portland-based technology company owner who works with both microchip design firms and manufacturers. Regan is president and chief technology officer at IN2FAB, which helps clients identify semiconductor fabrication plants, or “fabs,” with the right equipment and processes to produce the client’s particular microchips.

“It’s more affordable for them to go and buy the technology they don’t have, rather than invent it,” he said.

LARGER IS CHEAPER

Another reason for consolidation is the intense pressure to keep costs competitive with other large companies, including Asian companies that pay far lower wages, said Ed Pausa, director emeritus at professional services firm PricewaterhouseCoopers and the very first plant manager at Fairchild’s South Portland facility back in the early 1960s.

Even most U.S.-based microchip companies have relocated their manufacturing operations to Asia to reduce costs, he said. While about half of all chipmakers have their headquarters in the U.S., 87 percent of all wafer fabrication is done overseas, as is 97 percent of all semiconductor assembly and testing. Most of that work is now done in Asia, he said.

Wafer fabrication is the process of coating, etching and cutting thin, round slices of silicon to make microchips. The silicon itself is “grown” into cylindrical ingots called boules via a chemical process and then sliced into wafers.

The process to design and produce new chips has gotten so expensive that only companies of a certain size can afford to do it, Pausa said. That size advantage also has driven the recent uptick in mergers and acquisitions.

“So it’s winnowing out the players,” he said. “(In the future) the industry will be made up of fewer, larger players.”

OUTSOURCING TRENDS

Asia is now dotted with contract fabrication plants that manufacture chips for other companies. Much of the work they do was performed previously by U.S. workers.

The impact of Asian outsourcing on U.S. semiconductor industry jobs is clear when looking at data from the U.S. Department of Labor’s Bureau of Labor Statistics over the past 16 years. According to the bureau, the semiconductor and related device manufacturing industry employed 180,700 U.S. workers in 2015, down 38 percent from 292,100 in 2001.

“Manufacturing has been moving toward outsourcing for a long time now,” Regan said.

In Maine, there were more than 4,000 semiconductor jobs in 2000, with a total annual payroll of $221.7 million, according to Maine Department of Labor data. Last year, the number of jobs had dropped to 1,505 with a total payroll of $103.4 million. They remain among Maine’s best-paying jobs, with a average weekly wage of $1,322, according to Labor Department data.

ON filed a notice with the U.S. Securities and Exchange Commission on Sept. 23 stating it plans to eliminate 130 jobs company-wide in the third quarter, but it did not specify where those jobs were located. When asked by the Portland Press Herald about future job cuts, ON Semiconductor spokeswoman Sarah Rockey did not disclose specific plans for the South Portland operation but did say that job losses might occur.

“With the acquisition closed, we will be doing our due diligence to review potential synergies,” Rockey said in a written statement. “Once identified, redundant operations and functions in the combined organization will be reduced. Both ON Semiconductor and former Fairchild Semiconductor employees may be impacted by a reduction; as we are committed to keeping the best talent for each position. If significant reductions are taken, ON Semiconductor will do this in compliance with local laws and make announcements and filings as required and appropriate.”

Still, that does not necessarily mean the former Fairchild plant would be shut down completely. It could be a valuable asset for another microchip manufacturer to acquire, said Regan. The South Portland plant’s equipment is extremely valuable, and to the right buyer, the property would be worth far more as a functioning plant than as empty real estate, he said.

“If that can be sold as a going concern … that would be the best outcome,” he said.

The manufacture of certain types of chip generally is not outsourced to Asia, Regan said. Those include high-end central processing units for computers and large “power electronics” chips for high-capacity electrical systems such as street lamp grids and electric trains.

There is ample room for continued growth among companies such as ON Semiconductor and Texas Instruments if they can develop the right products at the right price, analysts said. Major growth areas include communication devices, computing and automotive.

“When you look at a new car’s dashboard, it’s almost like Star Trek with all the buttons and lights,” Regan said.

Correction: This story was updated at 2:35 p.m. October 9, 2016, to correct the size of the wafers used.


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