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Weak Semiconductor Market Doesn’t Deter R&D Spending

Last year, semiconductor companies spent a record-high $53 billion on research and development, according to the 2013 edition of IC Insights’ McClean Report. The R&D numbers didn’t reflect performance in the semiconductor market, though, which declined 1% to $318.6 billion.

For more than three decades, R&D spending as a percentage of total semiconductor sales ramped up due to increasing costs of developing complex IC designs and creating next-generation process technologies to manufacture these circuits. That trend was no different in 2012—R&D spending by chip companies climbed to 16.7% of total semiconductor sales, the highest level since the peak of 17.5% in both 2008 and 2009. Comparably, in the late 1970s and early 1980s, R&D spending as a percent of semiconductor sales was typically 7% to 8%. R&D-to-sales ratios grew to 10% to 12% of revenues by the early 1990s, and jumped to more than 15% during the last decade.

However, the escalating R&D revenue grab isn’t occurring across the entire industry (see the figure). Samsung, for example, saw its R&D-to-sales ratio fall from a peak of 25% in 2001 to 8% in 2010, and has stabilized at that level since then.

Samsung’s semiconductor business is more capital- rather than R&D-intensive due to the commodity nature of the DRAM and flash memory industry, which is the company’s main enterprise. Thus, Samsung has experienced 16% growth in semiconductor sales every year since 2001, while R&D spending increased at about one-third the rate (5%). Capital expenditures rose by an average 19% annually. The main R&D investments center around adding new fab capacity for large-diameter wafers—currently it’s 300 mm, but expectations are for 450 mm later this decade.

Capital-intensive Intel is another company bucking the R&D-to-sales trend. The company has spent approximately $11 billion on new fabs and equipment in each of the past two years, about $1 billion less than Samsung over that same timeframe. Due to the very short life cycles of its advanced microprocessors and other complex logic devices, Intel’s business model usually includes spending large amounts of R&D money. In fact, it spent $10 billion in semiconductor R&D last year, more than seven times the amount spent by second-place Qualcomm. Overall, Intel accounted for more than one-third of the combined $28.7 billion expended by the top 10 R&D spenders in 2012, according to the 2013 McClean Report.

Typically, the process technology required for each new generation of ICs becomes increasingly difficult to develop. As a result, fabless and fab-lite companies have come to rely on TSMC, the industry’s largest pure-play foundry, not only to fabricate their wafers, but also to help bring their IC designs into existence. Not surprisingly, TSMC’s R&D spending-to-sales ratio has gradually risen over the past six to eight years (see the figure, again).

TSMC’s spending ratio reached 8% in 2001, but that was heavily influenced by dwindling sales caused by the industry recession that year. The company’s R&D spending has grown every year since 1998 (other than a slight dip in 2009) at an average annual rate of 25%. Over that same timeframe, its sales grew at an average rate of 19% per year.

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