Semiconductor Trends Favor the Nimble

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The semiconductor industry is at a unique point with many signs of maturity, just as new opportunities arise in the face of major upheaval. Navigating this complex landscape will not be trivial, and nimble companies are the players most likely to be rewarded.
 

semiconductorTwenty years ago, the annual growth rate for the semiconductor industry stood at 21% — and this was a five-year rolling average, not a one-year spike. Even 10 years ago, that figure was 13%, indicating a robust growth industry. Now it is 3% — still greater than 0 but definitely more in the range of a mature industry. Other data reflects this too. According to KPMG surveys, the semiconductor industry confidence index is at a five-year low, and estimates for revenue and profit growth are decreasing. Similarly, cost control efforts are growing while R&D is declining.
 

In the midst of this maturation cycle, major changes are underway, most notably the growth of China as a supplier and consumer, a spike in M&A activity, and the emergence of new drivers such as the internet of things (IoT).
 

China’s semiconductor industry grew at over 25% annually from 2001 to 2013, and since 2014, the government has invested in the industry to keep its annual growth above 20%. China is now not just a volume supplier and consumer, but also a technology leader, with leading-edge wafer fabs as well as world-class chip designers at firms like HiSilicon and Spreadtrum.
 

On the M&A front, there were over $100B of acquisitions in 2015, when typical annual values are in the $20B range. Many of these deals are in response to a perceived need to consolidate, improve efficiency, or broaden a customer base. Much of that pressure is due to the growth of Chinese companies. All of that M&A activity is just one indicator of companies making dramatic moves to keep their businesses viable in light of the global changes. The willingness and ability to make these changes is a good sign for the companies involved – as long as they can manage the always-tricky integration process. The jury is still out on that.
 

semiconductorThe other major trend that rewards those willing to make changes quickly is the emergence of new product areas, which just might help the semiconductor industry get past the plateau reached by chips for smartphones (and for chips for PCs before that). The “internet of things” (IoT) is one area that has this potential. Broadly defined, the IoT represents internet connections for nearly anything you can think of. The commonly cited example is a refrigerator that alerts you to what groceries you need. Some more real examples are home environment automation (like Apple’s Nest products), fitness and health monitors, and the increasingly sophisticated connectivity found in cars. Most of these systems rely more on small sensors and low-cost, miniaturized control and communication chips, rather than leading-edge microprocessors. The wide variety of applications – some of which haven’t even been envisioned – creates enormous opportunities for players with novel ideas who can find a niche. Larger companies have struggled to do this, while some smaller players are getting a foothold. Agile response to consumer feedback is a key capability these days.
 

On the supplier front, a resurgent demand for niche products like sensors and controllers is helping to drive demand for semiconductor manufacturing capability that is NOT at the leading edge. Capital equipment that has been obsoleted at the most advanced fabs can be just right for companies looking to supply devices for the IoT. With the exponential growth of the expense of making leading-edge chips –- a new fab has a $10B price tag these days — there is renewed interest in making use of the significant resources already out there. Clever people will figure out these asset management challenges – and make money – in the emerging IoT-driven semiconductor landscape.

 


 

Sources

Semiconductors save Sony and Samsung from the smartphone decline

http://marketrealist.com/2016/03/slowing-computer-smartphone-sales-affect-semiconductor-industry/

http://www.forbes.com/sites/greatspeculations/2015/11/09/iot-semiconductors-among-three-key-drivers-for-samsung/#3388d40f246a

http://www.alixpartners.com/en/Publications/AllArticles/tabid/635/articleType/ArticleView/articleId/1663/Getting-Moore-out-of-Chips.aspx#sthash.f8OZZLqx.dpbs

http://www.kpmg.com/US/en/industry/technology/Documents/kpmg-global-semiconductor-outlook-2016.pdf

http://www.mckinsey.com/industries/semiconductors/our-insights/advanced-driver-assistance-systems-challenges-and-opportunities-ahead

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