ATREG recently had the opportunity to spend quality time with a group of senior executives from leading semiconductor companies and discuss some key industry topics, issues, and concerns. As strategic planning gets under way in coming weeks, I thought I would share a quick recap of these discussions in this column. I cordially invite you to share your thoughts on these topics with me at firstname.lastname@example.org.
Europe and Asia
Europeans are realizing they have a fundamental problem – social reform has begun and every country has moved up retirement ages and reduced social benefits. Having said that, a high level of talent can be found in Europe and two bright spots are working in the region’s favor – the growth of the IP industry led by ARM, as well as ASML’s success as the undisputed market leader for advanced lithography equipment. Europe is also pursuing impressive investment initiatives around 450mm production, arguably the last scale-up for the industry. So while volume manufacturing is on the decline, Europe remains a provider of important technology advancements.
Like Europe, the Japanese recognize they have a problem and there is an awareness of their former insular activities – stemming from having been part of large, vertically integrated electronics companies for many years. There is a need for globalization and expansion outside Japan as well as the need to accelerate the decision-making process within Japanese companies. It is not possible to restructure the entire Japanese semiconductor industry – there is a need to focus on the parts that work while shedding those that don’t.
With regards to China, the country has the labor, capital, and infrastructure to succeed in front-end IC manufacturing and closing the production / consumption gap is a monumental opportunity for domestic suppliers. However, the Chinese semiconductor industry has failed to execute and has not taken full advantage of its market. Reasons for this discrepancy include an opaque business environment, antitrust and regulatory barriers, import / export controls, a lack of process and product technology, and, most importantly, a lack of sufficient IP protection.
Given the current market’s stagnant growth, M&A can offer a way for companies to grow. However, data shows that there has been a major reduction in M&A activity over the last couple of years, with 85 deals comprising $24.1 billion in 2011 to 18 deals comprising $3.2 billion in 2013 (year to date, source: ATREG data). The reduction in M&A may be pointing to a maturing market that is forcing start-ups to have a well-developed plan to leverage their products in the market. From an investor perspective, many semiconductor start-ups don’t provide good returns due to the $100+ million that it costs to simply get a product into any sort of production phase. In addition, the time to develop and get a product to market makes semiconductor investments relatively risky. In terms of M&A between mature companies, decisions are made on
technology, customer base, and size. If products can be integrated to offer customers a better or more complete solution and expand an existing market, M&A becomes very appealing to companies. Large super-platform OEMs will increasingly integrate silicon and customize products for system efficiency and optimized performance.
When tablets and smartphones are taken out of the equation, annual industry growth of consumer electronics has been negative for several years. With tablets heading towards maturity as the number of laptops and desktops they replace dwindle, the new question is – what will drive silicon demand in the future? Connected technology, driven by sensor-related devices, will be the market to watch. The rising levels of information intensity and connectedness are building momentum and will form a synergistic effect resulting in unbounded business model innovations that will impact all industries and social institutions.
ATREG’s long-term view is that the next wave of consolidation will further blur the traditional demarcation lines in the industry as growth slows, further functionality is embedded onto ICs, and OEMs such as Apple and Samsung pursue greater vertical integration. As TSMC gains even greater manufacturing dominance through increased market share, companies will seek to establish alternative manufacturing models to
gain greater control and access to IC capacity while mitigating the high cost of manufacturing at leading-edge technology nodes. ATREG expects to see at least one significant collaborative, shared-capacity manufacturing deal to take place in the next 12 months.
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