Are there ARM controllers for small applications (like Cortex M0) available in small packages with maximum say 20 pins? I have the impression that in this area they don't quite are a threat for the usual suspects, like PIC and AVR.
Smaller packages, more specifically packages with less pins, are usually less expensive. Usually, because it also depends on the technology; QFP technology for instance is cheaper than CSP (Chip Scale Package). I presume this WLP (Wafer Level Package) for the LPC1102UK
is the smallest ARM package to date, body is 2.17 x 2.32 x 0.6 mm, with 16 bumps. That's damn small, yet it costs almost USD 5.00 quantity one (Digi-Key). Even at 3000 pieces the price is still over USD 2.00. (Remember, this is a Cortex M0, the lowest end ARM.)
From recent limited research I found that there are few Cortex M devices in very small packages, I haven't found anything like a SOT23-8, for example. Apart from the TI LM3S101 in a Fred Flintstone Package (aka SOIC-28) most packages seem to be QFP and QFN, and more of the former than the latter.
The explanation is demand, of course. Apparently most customers don't need the smaller space of the QFN (yet). Some manufacturers are pretty flexible about packaging, and may be prepared to introduce a new package for an existing device if you buy, say, 100k devices per year. This has more administrative than technical implications. So while ARM is widespread most customers will either need smaller quantities or don't really need the new package.
Unlike DIL DFN is not limited to a specific width. This table
shows how many variants there are available from just 1 manufacturer. So there is always a solution for a specific number of pins and die size.
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NXP LPC1102 16 pins http://www.nxp.com/documents/data_sheet/LPC1102.pdf
There are also several 32 pin M0 and M3 parts in NXP's range
However for very small apps, 8 bit MCUs often still have advantages, even if cost is similar, e.g. lower density packages, wider supply voltage, onboard eeprom, lower power consumption.