As profit dwindles semicon market becomes less forgiving

Semiconductors

As profit dwindles, semicon market becomes less forgiving

The semiconductor industry has entered a period of lowered expectations and diminishing options, forcing chip suppliers to rethink their basic strategies, says iSuppli

Friday, September 19, 2008

USA: Facing dwindling profits, fewer opportunities to expand by taking market share from competitors and a shrinking roster of star performers, the semiconductor industry has entered a period of lowered expectations and diminishing options, forcing chip suppliers to rethink their basic strategies for success, according to iSuppli Corp.

“Semiconductor profitability has eroded steadily since mid 2004, with quarterly net profits having fallen into the single-digit range in 2008, down from the 17 percent to 19 percent range in 2004,” said Derek Lidow, president and chief executive officer of iSuppli. “The semiconductor industry now is less profitable as a percentage of revenue than the notoriously low-margin PC business, something that hasn't occurred before, except during a short period of the severe market downturn in 2001.”

The attached figure presents historical, quarterly operating profit margins for the global semiconductor industry.

Source: iSuppli

To a degree, conditions in the semiconductor industry have been impacted by short-term events, such as the market volatility in 2006 due to inventory write-offs and price wars in major product segments like DRAMs and microprocessors,” Lidow observed. “However, the long-term trend indicates that the semiconductor industry, which historically has been good at capturing profits in the electronics value chain—seems to have lost its money-making touch.”

Haves and have-nots
As profit has diminished, the semiconductor industry has re-segmented itself into new groups, according to Lidow.

During the period of 2001 to 2004, semiconductor companies seemed to fall into three categories: a small group of firms whose growth outperformed the market; a middle-performing group consisting of most suppliers and a set of low performers at the bottom. The top caste of suppliers typically employed predatory business strategies that enabled them to take market share from weaker competitors.

The lowest performers often served as the market-share prey for the predators and the middle-range of suppliers. However, during the just completed semiconductor business cycle from 2004 to 2007, the prey in the lowest caste of suppliers went extinct, and so did the success of predatory strategies, creating a larger group of middle-performing players.

“The number of low performing companies decreased by so much that there now are only two major distributions in the industry: a few outstanding performers and the rest,” Lidow said. “The number of competitors achieving growth of more than 100 percent during the period of 2004 to 2007 declined to nine, down from 19 during the period of 2001 to 2004.

This shows semiconductor companies can no longer break out of the pack by taking market share away from weaker rivals.”

Breaking away
So how can semiconductor companies break out of the current market dynamics to outperform the industry?

One proven strategy for success for semiconductor suppliers is to go out and capture value from their customers by designing more of the total system with system-level chips built around proprietary Intellectual Property (IP).

Companies that pursue such strategies are consistently more profitable and faster growing than their peers. Examples include Qualcomm Inc., MediaTek Inc. and Linear Technology.

Another strategy is to milk established cash-cow products in the industry. Such cash-cow products typically are trailing-edge devices that have passed through their commodity stage, have fairly steady pricing and have a dwindling number of suppliers that are willing to devote their best people to designing and managing products that most semiconductor cowboys would find boring. Sellers of such devices include Microchip, Diodes Inc., Microsemi and Rohm.

Finally, well-heeled semiconductor suppliers can use their resources to massively outspend their rivals in the areas of products and manufacturing and thus maintain technical and scale dominances in competitive market segments.

Companies employing such strategies include Samsung Electronics Co. Ltd., Intel Corp and Taiwan Semiconductor Manufacturing Co. Ltd.

The wages of mediocrity
As semiconductor companies attempt to pursue such strategies, they will have to face the reality that the electronics industry has become increasingly unforgiving of mediocrity in any area because such underperformance drains profits as well as device and operational performance. Furthermore, semiconductor buyers expect their suppliers to be first rate in all pursuits, ranging from process technology to marketing, a standard that many companies can meet.

“In this day and age, semiconductor suppliers have the opportunity to outsource any or all of their operations to third party sources that offer world-class work,” Lidow observed. “Those semiconductor companies that are unable to achieve top-quality and performance in all processes, either through outsourcing or by using internal resources, will be punished in the marketplace.”

Next year's model
Beyond the strategies described above, very daring semiconductor managers have another option: building a scalable acquisition process that would allow a semiconductor company to grow by buying other companies or selected parts of companies.

“Developing such a process would allow a company to achieve unprecedented scale and vast wealth,” Lidow said. “With semiconductor processing becoming increasingly commoditized, such an endeavor is becoming practical.”

Source: iSuppli

©CIOL Bureau

Would you like to Comment on this Article?

Name
Email
Comment Here
Code Verification

Be first to comment on this article

ON Semi shares jump on strong Q4 results

New solar cell could boost efficiency by 25 p.c.

IQE to raise capital, buy stake in solar cell firm

Rambus signs patent deal with Nvidia, shares jump

LG is leader in Mexico's 3D TV market

Aakash tablet booking crosses 20 lakh

'IT is like a business partner for PTI'

Sleazegate: Technology spares none

Jailbreak software released for iPad 2 iOS 5.0.1

Why this blackout, Wiki?

Subscribe to PCQuest for iPad & Android tablets

Register Free at DQ Top 20 Online portal & get insights on the Indian IT Industry

Enterprise IT News and Analysis in your inbox

Subscribe to the free PCQuest newsletter

Growth of SME Sector in India

India's EXIM Policy 2010 / 11

Interaction with SMB Association Heads

Profiles of leading SMB Associations

RBI Guidelines on lending to SMEs

Sponsored Links

Custom Sites

Demo Downloads on

1-Click News Updates