Changing semiconductor industry forces changes to growth strategies

"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," says Derek Lidow, iSuppli's president and CEO.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 9/18/2008

Semiconductor industry profits, opportunities, and star players are shrinking, according to iSuppli Corp, which this week painted an honest but somewhat bleak picture of the market.

According to the research company, the semiconductor industry is now in a period of lowered expectations and thinning options, forcing chip suppliers to rethink their strategies for success.

“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% to 19% range in 2004,” said Derek Lidow, iSuppli's president and CEO, said in a statement. “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."

What could be considered short-term trends, said Lidow, are instead examples of a changed industry.

“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,” he said. “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.”
 
As profit has diminished, the semiconductor industry has re-segmented itself into new groups, iSuppli said. What once was an industry divided into companies that outperformed the market and preyed on mid-performing suppliers and low performing companies for additional market share, now no longer allows for the lowest rank of suppliers, minimizing growth opportunities for top performers.

“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% 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.”
 
Strategies for success

Pointing to Qualcomm, MediaTek, and Linear Technology as evidence of success, iSuppli suggested semiconductor suppliers go out and capture value from their customers by designing more of the total system with system-level chips built around proprietary IP (intellectual property). The research company said that semiconductor industry players that pursue such strategies are consistently more profitable and faster growing than their peers.

ISuppli also advised companies "milk established cash-cow products in the industry," like 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 those products.

The research company further suggested major industry players 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." ISuppli pointed to Intel, Samsung, and TSMC as companies that could profit from such moves.
 
Beyond those strategies, iSuppli said risk-taking semiconductor companies can look to a scalable acquisition process that would allow growth 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."