New fab projects will carry high depreciation costs, and the aggressive recruitment efforts by semiconductor manufacturers will raise the cost of personnel needed for fab operation.

Furthermore, prices of bulk silicon wafers have gone up as the strong demand for them worldwide has outpaced the overall supply. Within the short/medium term, the construction and operation of these new fabs poses enormous financial risks for their owners.

The operational cost structure of a newly built wafer fab can be divided into upstream materials, direct operating personnel (i.e. technicians working at the fabrication line), indirect personnel (i.e. R&D engineers) and depreciation.

If a newly formed semiconductor company has a 28nm fab with an initial production capacity of 10,000 wafer starts per month, the depreciation cost would account for 49% of manufacturer’s annual revenue.

By contrast, the existing first- and second-tier foundries would have depreciation cost account for around 23.6% and 25% of their total annual revenues, respectively. Under this analysis model, the fab depreciation cost of a new manufacturer could be nearly double that of the existing foundries.

Besides, new semiconductor companies would have to offer highly attractive salaries that are twice or three times as much as the industry’s average to get key positions filled in their newly built facilities.

The rising labor cost include people who are directly participating in the fabrication and indirect personnel. The indirect personnel are engineering talents employed to reduce the learning curve for production ramp-up and strengthen relationships with clients.

TrendForce estimates that the cost of the indirect personnel for a new semiconductor manufacturer (one that is under the conditions mentioned in the above analysis model) could make up as much as 34% of its annual revenue.

For the existing first- and second-tier foundries, the shares of this particular cost in their annual revenues are on average 10.2% and 17.5%, respectively.In terms of upstream materials, the bulk silicon wafers could make up around 30% of the total material cost for a foundry company.

Due to demand exceeding supply this year, some recently formed Chinese semiconductor manufacturers are reported to have offered prices that are as much as 20% higher than prices offered by the first- and second-tier foundries.

Besides rising prices of bulk silicon wafers, optimizing a newly set up fabrication process with freshly recruited technicians and engineers will also involve additional wafer losses, thus driving up the material cost during the initial operation period.

Also, the costs of upstream materials also correlate to a company’s ability to negotiate with the suppliers. Therefore, new entrants in the industry will incur higher material and direct personnel costs compared with the first- and second-tier foundries.

In addition to being in a disadvantageous position cost-wise, a new entrant in the foundry market will be competing against established players that are much larger in scale and more advanced in technology.

First-tier foundries, for instance, can often leverage their technological leads to have short-term dominance over certain IC markets. While later entrants may have the same processing nodes as established players, they lag behind in yield rates and this constrain their ability to negotiate with customers.

They may even have to lower their prices to get orders, thus limiting their cost recovery options. In short, new semiconductor manufacturers that are now building or planning to build fabs are at risks of incurring huge financial losses in the short/medium term.

China’s National IC Industry Investment Fund was established in 2014 to help domestic semiconductor companies in their formational period, during which they would have funding problems.

The national fund and related policies encourage local governments to invest in the industry and develop tax incentives and other subsidies. Under this policy framework, domestic companies will be able to lower their operational costs and risks in the early phase of their development.

With the government support, they will have a chance to grow into major entities within the country’s semiconductor chain in the long run.