Global Competition Demands New Models, Policies
Alexander E. Braun, Senior Editor -- Semiconductor International, 4/8/2008 8:23:00 AM
The semiconductor industry has experienced dynamic growth almost from its inception . However, global demand drivers are rapidly changing, and poor planning complicates competition.
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| Rick Hill, Novellus Systems COB and CEO |
According to Hill, the telecommunications infrastructure built during the 1990s, with the Internet and broadband networks, changed world response dynamics. There is not only a free flow of capital from country to country, but also a free flow of intellect. This shapes the world and challenges that the industry faces in identifying opportunities in emerging businesses worldwide.
Consumer electronics, a major industry driver, does not exist in isolation. This is significant because financial markets are currently crumbling around us, and it is the financial community that enables the purchase of sophisticated microprocessors and memories. According to Hill, the current economic structure rests on a house of cards. “We must get through this crisis before we can see a rebound in capex, because without strong capital spending from these financial markets, here and around the world, electronics’ growth rate will decline because, eventually, the consumer is impacted,” he said.
In the United States, the housing market’s debacle has dislocated the economy. The home has been the American consumer’s piggy bank since the 1950s. As home values rose, the consumer refinanced, took the equity and rolled it over to credit cards. As the equity continued rising, the cycle repeated. Now equity prices are declining and the ability to extract equity to transfer to the consumer market is diminished. Unless the financial and communications infrastructure and consumer demand are balanced, a strong electronic industry is unlikely.
Hill stated that one can only do two things to create a viable business: innovate or replicate. The United States has taken an innovation path, mostly foregoing replication. Without Intel (Santa Clara, Calif.), the industry’s financial viability in the United States shows no economic return to capital. Unsurprisingly, business has migrated wherever return possibilities exist. It went to Japan, which started replicating, but brought a new discipline into the IC business and innovated in memory production. Government subsidies produced a strong Korean market and now Samsung (Seoul, South Korea) represents over 50% of worldwide memory production.
The question is how the industry should evolve now. OEMs are being pressured to manufacture locally. “What to do?” Hill said. “If we manufacture in Korea today, are we shooting behind the duck? If you go to China, do you risk losing your IP and your shareholders’ revenue stream?”
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| Return on investment (ROI) for semiconductor companies has declined over the past decade, according to data compiled by Mark FitzGerald, Bank of America Securities. |
The sustainable growth model shows that to grow by 20%, based on gross margin, operating expenses, debt-to-equity ratio and tax level, one must either have enough funds to grow or somehow secure them. Traditionally, in the United States, the industry has operated on a model where if 55% gross margin is obtainable, 30% operating expenses can be attained. This level of expenditures makes 20% per annum growth rates sustainable.
Strategies at work are changing this, creating replication models. To be successful, these models need a policy of low interest rates or local government subsidies. “Unfortunately, in the U.S. we lack the foresight necessary to make policy — we have no policy for energy or for technology or education,” Hill said. Others do, particularly China. When Japan, Korea and Taiwan subsidized the start of their semiconductor industries, the effects were minor because these countries’ economies are relatively small. However, two major developments have taken place. Taiwan elected a government friendly to China, and the Chinese government now offers companies a 15% discount in operating taxes and five tax-free years if the company has invested in submicron processes for over 10 years. This favors domestic operations, such as Grace Semiconductor (Shanghai) and Semiconductor Manufacturing International Corp. (SMIC, Shanghai). Combined with a market of roughly 1.5 billion people, this potential economic engine could be powerful enough to change the planet’s economic face.
Hill contends that there are only two ways to compete. “First, you must innovate, which should get you good gross margins, low debt, good returns to your investors, and the ability to grow in a rapid rate. But you also must replicate; we can no longer afford to ignore this market. We must compete on low gross margins, use debt to our advantage, and accept lower CAGRs.”
