NEWS RELEASE                                                                                         November 2018

Contract Manufacturing Impact on the Combust, Flow, and Treat (CFT) Industry

Contract manufacturing is having a significant impact on the CFT industry in two ways

• Some of the largest customers in semiconductors and pharmaceuticals are contract manufacturers
• CFT suppliers are sub-contracting larger percentages of the components, e.g. castings

Semiconductor Contract Manufacturing: McIlvaine editors were too busy at a Semicon West exhibition in San Francisco in the 1980s to take advantage of the opportunity to interview an entrepreneur who had decided to build a foundry in Taiwan. The whole idea of someone other than a semiconductor company building chips seemed strange. In retrospect this was the beginning of the end of U.S. dominance in chip manufacture. Today only a handful of companies have the sales volume to operate as integrated device manufacturers operating their own fabrication facilities. Other chip firms are “fabless” meaning that they design and market semiconductors but contract production to “foundries” that manufacture semiconductors to order. Taiwan Semiconductor Manufacturing Company (TSMC) operates the world’s largest foundry.

The semiconductor production process has three distinct components:

1. Design

2. Front-end fabrication, in which “fabs” create microscopic electric circuits on silicon wafers

3. Back-end testing, assembly, and packaging, in which wafers are sliced into individual semiconductors, encased in plastic, and put through a quality-control process.

The majority of design work, performed by computer engineers, now occurs in the United States. The designs are then placed on a wafer of silicon or other material in a sequence of more than 250 photographic and chemical processing steps using equipment produced by firms such as Applied Materials, ASML Holdings, and Lam Research. This front-end fabrication process typically takes about two months.

Around 87 percent of advanced worldwide fab capacity is now located outside the United States. Back-end production is where chips are assembled into finished semiconductor components and tested for defects. This stage of the manufacturing process is the most labor-intensive and is often performed in countries such as China and Malaysia, where labor costs are lower than in the United States, Japan, and Europe. The final stage of manufacturing involves the installation of the chips into consumer goods.

Most CFT products and services are used in front end fabrication. So the foundries are large customers. In the 1980s U.S. CFT companies were the world leaders in supply to the semiconductor industry. Today American Air Filter is part of Daikin and has nine manufacturing facilities in Asia. TSMC is now the third largest CFT purchaser in the semiconductor industry.

Pharmaceutical Contract Manufacturing: The global pharmaceutical contract manufacturing market accounts for a little under 10 percent of the total market.  Sales were over $90 billion last year. This market is expected to grow at close to 8 percent over the next five years. The percentage of CFT equipment and services purchases to total sales is much higher than for the pharmaceutical companies. So that more than 20 percent of the CFT purchases will soon be made by contract manufacturers.

Owing to the growing demand for generic medicines and biologics, capital-intensive nature of the business, and complex manufacturing requirements, many pharmaceutical companies have identified the potential profitability in contracting with a CMO (contract manufacturing outsourcing) for both clinical and commercial stage manufacturing. Moreover, the pharmaceutical companies have been directing their priorities toward the core areas of competency, and prefer not to use available resources, expertise, and technology on formulating the final dose of medicines. The biggest factor driving the growth of CMOs in the pharmaceutical industry is the growing need for state-of-the-art processes and production technologies, which have proven highly effective in meeting regulatory requirements.

The need for state of the art processes is most critical in biopharmaceuticals which represent 20 percent of the total. McIlvaine is conducting a series of webinars in the first quarter to analyze the biopharmaceutical process evolution First Quarter 2019 Webinars will Focus on Biopharmaceuticals

Among the contract pharmaceutical leaders are

• Catalent
• Patheon
• Baxter
• AbbVie
• Lonza
• Pfizer
• Lonza
• Evonik Degussa
• Royal DSM
• Boehringer Ingelheim
• Fareva
• Aenova
• Famar
• Vetter
• Almac
• Delpharm
• Siegfried
• Corden
• Recipharm
• Aesica
• Nipro
• Daito
• Teva API
• Esteve Quimica
• Euticals
• Zhejiang Hisun Pharmaceuticals
• Zhejiang Huahai Pharmaceuticals
• Shandong Xinhua Pharmaceuticals
• Aurobindo Pharma
• Divis Laboratories

Catalent is the world leader in contract manufacturing. It employs over 11,000 people, including over 1,400 scientists, at more than 30 facilities across five continents, and in fiscal 2017 generated over $2 billion in annual revenue.

CFT Subcontracting: Many CFT companies are sub-contracting components, tanks, vessels, and housings. Valve and pump companies are closing down foundries and sub-contracting with Asian foundries for their castings. In China the tons of valves produced soared from 2 million tons to over 10 million tons in just a decade. Formerly most of the valves produced were under sub contract to international suppliers but increasingly China is becoming an exporter of the finished products.

Scrubbers, fabric filters and precipitators consist primarily of steel vessel fabrications. Many are too large to be shipped long distance by rail or truck and need to be fabricated locally. The advantage to international suppliers is that they can supply their products anywhere in the world. The disadvantage is that the ease of fabrication make them vulnerable to local competitors. To preserve their market positon it is necessary to continue to develop new and better products and stay ahead of local fabricators who can only utilizes the existing technology.

Contract manufacturing in several forms will be increasingly important to CFT suppliers. The impact of this trend on markets is covered in the various market reports at http://home.mcilvainecompany.com/index.php/markets

Databases with activity by contract manufacturers is explained at http://home.mcilvainecompany.com/index.php/databases

For more information contact Bob McIlvaine at This email address is being protected from spambots. You need JavaScript enabled to view it. 847 784 0012 ext. 122.