UNPRECEDENTED SEMI CHALLENGES WILL DRIVE A NEW WAVE OF CONSOLIDATION IN 2013
At the end of September, we hosted ATREG’s second annual Semiconductor Leadership Summit in Seattle during which a number of key executives and influencers from the world’s leading semiconductor companies examined the current major issues facing the industry and the implications moving forward. While the one guarantee we can always give about this incredibly dynamic industry is change, it seems that there are a number of new challenges and new forces that are reshaping the landscape of the semiconductor industry like we have never seen before. The industry is clearly in the consolidating phase as it grapples with significantly reduced growth rates since the beginning of 2000. To put things in context, over the last 10 years, the number of publicly traded semiconductor companies in the U.S. has continued to shrink as we have witnessed large companies such as NetLogic Microsystems, AMI, National Semiconductor, SST, ATI, Agere, Xicor, and Elantec disappear, not to mention medium-sized companies such as Authentec, Catalyst, California Micro Devices, Zoran, Sigmatel, Ramtron International, and Advanced Analogic Technologies to name a few.
The larger force in industry consolidation is not M&A-driven, but rather Darwinian as the gulf between the stronger companies and their weaker competitors continues to widen, particularly in the more commodity driven market segments. The one sector where this is most apparent is the DRAM industry where we have watched Qimonda, Elpida, ProMos, Mosel-Vitelic, Winbond, and RexChip either exit the industry through bankruptcy, fire sale M&A processes, or become virtually irrelevant through severely diminished market share. We believe these Darwinian forces will drive continued consolidation in the Japanese semiconductor market as major icons disappear and Japan, Inc.’s percentage of the overall market continues to decline due to a shrinking consumer electronics business. We also believe that the scale advantage enjoyed by Texas Instruments due to its acquisition of National Semiconductor will drive a new round of consolidation in the analog sector.
The force that will be driving a new wave of industry consolidation, however, is different than what we have seen in the past through the coming of age of foundry manufacturing, and it is fascinating and frightening at the same time. As the larger, mega OEMs are increasingly competing with each other in every segment of the market such as computers, smartphones, and tablets, Apple has carved out a significant competitive advantage through its vertical integration of various parts of the silicon supply chain. It is one of the reasons why Apple is able to generate over 50% gross margins on tablets and smartphones while its primary competitors on Android platforms struggle to make margins greater than 20% on these same products. Apple even manages to make breathtaking margin on commodity flash memory. Consider that the price for the new base model (16GB) iPad mini is $329 and the same model with 32GB of memory is sold for $429. The incremental cost to Apple of adding this 16GB of NAND flash memory is approximately $10 and represents an incremental gross margin of 90%. This has not gone unnoticed by its primary competitors. Thus the next key battleground is shaping up at the OEM level and many of these companies have capital firepower that dwarfs many of the leading global semiconductor companies.
As Apple’s primary competitors (Google, Microsoft, Intel, and Samsung) mull over Apple’s competitive advantage in silicon, these large, well-resourced companies are developing and re-examining their own silicon strategies. They are undoubtedly looking at the mosaic of the semiconductor industry and going through the machinations of various levels of vertical integration or greater aggregation moves ranging from emerging strategic to radical and landscape redefining. Whichever of these companies decides to make the first bold move, we can be assured that the competitive response will be quick and lead to a flurry of large-scale M&A activity.
ATREG is heavily involved in helping key clients think through and develop proactive strategies on how to deal with these impending changes. As always, I welcome your perspectives and would be happy to share more of our detailed views on this next wave of industry consolidation.
President / Managing Principal
KEY FINDINGS OF WHARTON-ATREG IDM INDUSTRY STUDY NOW AVAILABLE
The full report of the Wharton-ATREG IDM research study – Managing Complexity & Change in the Semiconductor Ecosystem – is now available. Based on an extensive survey conducted by Wharton management professor Dr. Rahul Kapoor which collected detailed responses from senior executives at 23 publicly listed IDM companies, including 11 of the 20 largest IDMs, the study reveals that IDM firms are faster to market with new product designs on existing manufacturing processes whereas fabless companies are faster to market with new designs on new manufacturing processes. The average time-to-market, defined as the period from design start to mass production, is about 11 months for a revision of an existing product design. It increases to about 17 months for a new product design.
While IDMs are much faster to commercialize new designs on existing manufacturing processes, they seem on average slower to commercialize new designs on new manufacturing processes. This could reflect inherent differences in the extent of design manufacturing customization between fabless and IDM companies. The difference could also be due to the fact that fabless companies essentially contract for a newly available manufacturing process at a foundry whereas IDMs internally develop a new manufacturing process. The key findings of this IDM study were compared with those from fabless companies collected during an earlier study conducted by Dr. Kapoor in conjunction with GSA. Email us to receive a copy of the report.
ATREG INVITED TO SPEAK AT ISS EUROPE 2013
Held at the Regina Palace Hotel in Stresa, Italy from February 24 to 26, ISS Europe 2013 will explore how Europe continues to harness its potential and position to take advantage of global markets despite the ongoing global economic turmoil.
As part of this SEMI event, ATREG will be presenting Semiconductor 2015: The Evolution of Semiconductor Manufacturing on February 25th. The global semiconductor industry is at a crossroads due to a number of intersecting trends that are impacting all companies, including reduced growth rates and continued margin pressure, continued reductions in public market valuation multiples, cost for new fab construction continues to rise, the center of gravity shifting from the U.S. and Europe to Asia, existing foundries are having problems meeting the needs of their clients, and fabless companies are exploring alternative manufacturing models.
These pressures are leading to changes in conventional wisdom as many new manufacturing models are emerging and will continue to take shape. In addition, large and medium‐sized companies are reevaluating their strategic positions, core competencies, and business models. These factors will reshape the industry and competitive landscape in a dramatic new fashion during the next three to four years. In this presentation, ATREG highlights the implications for semiconductor businesses over the next three years, and explore the future of semiconductor manufacturing.
After attending this presentation, attendees will learn the drawbacks and limitations of existing semiconductor manufacturing models, new manufacturing models likely to be explored by both IDMs and fabless firms in the coming year, as well as new industry business models and the rationale for change. Email us to receive a copy of our presentation.