Will major facets of North America’s semiconductor industry continue to be outsourced to Asian powerhouses such as China and Taiwan?

It’s a question that Ottawa’s semiconductor sector, along with other similar clusters across the continent, has pondered over the last few

years as companies continue to farm out an increasing percentage of their operations to overseas sub-contractors.

Significantly, Texas Instruments Inc., Motorola Inc. and Infineon recently announced they would gradually increase their outsourcing percentage to about 40 per cent, 50 per cent and 50 per cent respectively, by 2010, said Jodi Shelton, executive director of the Fabless Semiconductor Association.

For its part, Ottawa’s Zarlink Semiconductor has employed a model in the last few years by which it outsources its chip testing to an Asian company. Chip testing is widely regarded as the last facet of North American chip development to be outsourced to Asian companies.

“Zarlink has taken this strategy and located offices and engineers in the Far East who manage our sub-contractors,” explained Morris Tan, the company’s director of test development.

Up until a few years ago, Zarlink had several in-house testing floors. But now it sub-contracts its testing operation to the same Asian outfit that takes care of its assembly operation. Accordingly, Zarlink asks for a single price per unit. The company currently develops its tests in-house, but “once (production) goes up in volume, then we will outsource it,” added Tan.

The industry’s focus on China and Taiwan can be explained by such giant wafer foundries as Taiwan Semiconductor Manufacturing Co. and such large manufacturing precincts as Shanghai’s Zhangjiang High Tech Park. Asian semiconductors produced US$51.2 billion of the total US$140.7 billion manufactured by chipmakers around the world last year. The large Asian presence could continue to sway companies such as Zarlink to outsource more of their operations to take advantage of cheap labour costs and the convenience of doing everything in one place.

But one Ottawa company, which works on test development with Zarlink, insists there will be a continued need for local testing. And this need will keep a significant portion of subcontracting revenues within the city, said Scott Bulbrook, vice-president of engineering and operations at DA-Test, adding the companies total addressable market is $130 million per year.

Bulbrook said some Ottawa semiconductor companies are faced with traveling to an overseas test site to maintain their test program and get it up and running, which requires “a hands-on electronic de-bug procedure.”

“You can imagine how much of a hassle it is,” he said. “His (or her) efficiency is down, not to mention the expense of being there. But unfortunately (for them), the machines are over there.”

For example, Kanata, Ont.-based Sibercore has to send one of its staff members over to Taiwan to sit down in front of a tester and activate it, said Bulbrook. As a proposed solution, DA-Test has purchased its own multi-million-dollar testers so local semiconductor companies can hire DA-Test’s engineers to do the testing for them or to outsource the ownership of the $1- to $3-million testers, and get the solution up and running here.

“Once it’s actually working, then you can send (the test) to Asia electronically and replicate it over there” said Bulbrook.

Tan said the semiconductor industry will continue to outsource parts of the chip design process that can be standardized and completed by sub-contractors for less money than in-house staff. Aiding the transition is digital circuitry, the design of which is becoming more standardized. Recent digital circuit designs come with tools that help companies write the chip’s test program, says Tan. The DFT (design for test) feature means such circuits have a built-in self-test and are 10 times less costly than their conventional counterparts.

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