Demand Uncertainty and the Choice of Business Model in the Semiconductor Industry

Yingyi Tsai ; Ching-Tang Wu

Assistant Professor, Department of Applied Economics, National University of Kaohsiung, Nan-Tzu Dist., Kaohsiung 811, Taiwan, Tel: +886-7-591-9189 yytsai@nuk.edu.tw
Associate Professor, Department of Applied Mathematics, National Chiao Tung University, Hsinchu 30050, Taiwan, Tel: +886-3-513-1220 ctwu@math.nctu.edu.tw

JEL Classification: D24, D40, D81, E22, L23

Abstract

In this paper, we provide another reason that may explain the wide adoption of outsourcing approach in the semiconductor industry. We show the fab-lite business model of outsourcing wafer fabrication to foundries is optimal in the presence of demand uncertainty. This is because outsourcing helps the integrated device manufacturer (largely the brand-producing firm) to lower its cost of capital investment in the case of low demand and to improve its capacity allocation in the case of high demand.

Keywords:

Outsourcing, Capital investment, Uncertainty

Acknowledgments

We thank the Editor, anonymous referees, Justin Yifu Lin, CY Lu, Preston McAfee, Abhinay Muthoo, Roderick James McCrorie, and Hao Wang for their valuable suggestions and comments. We would also like to thank the seminar participants at the China Center for Economic Research (CCER) for providing important comments. The authors are greatly indebted to the National Science Council, Taiwan for the research grant (#NSC 92-2115-M-39-002-).

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