Trouble in East Fishkill? IBM chip group struggles

IBM Corp.'s server business is coming off one of its better quarters, but its new sibling in the Systems and Technology Group, IBM's microelectronics division, continues to struggle as yield problems plague its new manufacturing facility in East Fishkill, New York.

IBM's chip business has lured some high-profile customers away from foundries in Taiwan such as Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United Microelectronics Corp. (UMC) However, the business remains unprofitable, in part due to yield issues cited by John Joyce, senior vice president and chief financial officer at IBM, in a conference call last week.

A chip maker's yield is the number of working processors that can be cut from a silicon wafer.

In the first quarter of 2004, IBM Microelectronics lost about US$150 million, Joyce said. Joyce also brought up an issue chip makers are usually very reluctant to address by flatly stating that yields would have to improve in the second quarter for the Microelectronics group to make a profitable contribution to the Systems and Technology Group.

Yield is seen by customers and financial analysts as an indicator of the health of a company's manufacturing technology because it costs the chip maker a fixed amount of money to produce a wafer regardless of whether that wafer generates one working chip or thousands. Most chip companies decline to discuss poor yields in public.

IBM is attempting to engineer two changes to its chip business in the same period. It is rolling out its 90-nanometer process technology at the East Fishkill plant for building chips with smaller features than the previous 0.13-micron process generation, and sifting through the merger of the microelectronics business unit and the server business unit that was announced in January.

The Armonk, New York, company's manufacturing facilities are responsible for churning out IBM's own Power products, such as the Power 4+ processor used in IBM's servers and the PowerPC 970FX used in Apple Computer Inc.'s XServe. The Power4+ processors are built in Burlington, Vermont, on an older process technology generation, an IBM spokesman said.

The foundry business also produces chips based on different architectures with different requirements for customers such as Nvidia Corp. and Intersil Corp. Nvidia's new GeForce 6800 graphics chip is made alongside the PowerPC 970FX in East Fishkill on the new process technology, the spokesman said.

Yield problems are not uncommon when a chip maker shifts to a new process technology, said Peter Glaskowsky, formerly editor-in-chief of the Microprocessor Report and now an independent industry analyst.

Integrating a new process technology is a difficult undertaking, especially when that technology needs to adapt to a wide variety of chip architectures. Companies such as Intel Corp. that ship a relatively small number of products in huge volumes can fine-tune their yields from a new process technology generation over a testing period, said Nathan Brookwood, principal analyst with Insight 64 in Saratoga, California.

Even so, Intel's 90-nanometer Prescott Pentium 4 chip was delayed past the original ship date after the specifications for the chip were changed. And at the processor's launch in February, the company announced the fastest 90-nanometer Pentium 4 processor would be available in limited volumes to start. Chips that will work at higher clock rates are more difficult to extract from new silicon wafers.

Poor yields can also lead to shortages or price jumps in processors depending on how the foundry and the client set up their pricing agreement, Brookwood said.

Some foundries, such as TSMC and UMC, charge their customers for the silicon wafers and therefore aren't hurt when yields are poor, Brookwood said. But the vendor who purchased those chips from such a foundry must raise prices to their customers in order to salvage a profit if their silicon wafer doesn't produce enough working chips.

Customers such as Apple that produce premium products are usually more interested in buying individual chips, putting the yield risk squarely on IBM's shoulders, he said. The IBM spokesman declined to comment on IBM's pricing structure.

When IBM was primarily concerned with its internal server customers, the focus was about making sure yields were acceptable, rather than exceptional, Brookwood said. Since large multiprocessor servers are a low-volume/high-margin product, it wasn't as important to generate high yields, he said.

While Apple's market share doesn't compare with PCs based on Intel processors, it accounts for more units than IBM's server business at lower margins, Brookwood said. Therefore IBM has a vested interest in increasing its yields, especially if Apple isn't buying entire wafers, but doesn't seem able to do so, he said.

Apple doesn't appear to be happy with IBM's performance in the last quarter, blaming IBM on its own earnings call for the late arrival of the XServe G5 based on the new PowerPC 970FX processor. This is the first generation of Apple processors in which IBM hasn't shared the role of supplier with Motorola Inc.'s chip division, Brookwood said.

Last week, IBM sold its embedded Power PC processor technology to Applied Micro Circuits Corp. (AMCC), and earlier this year sold its network processor business to Hifn Inc. in order to raise intellectual property revenue for the IBM Microelectronics. The company also hopes to draw more customers to chips based on the Power architecture through a recently announced collaboration initiative.

The AMCC deal will bring US$227 million into IBM's coffers in the second quarter, but unless the company gets a handle on its yield issues in East Fishkill this year, it will continue to lose money on semiconductor manufacturing, Joyce said last week.

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