66
REGIONAL
As profit dwindles, semiconductor market
becomes less forgiving says iSuppli
F
acing dwindling profits, fewer opportunities to success for semiconductor suppliers is to go out and capture
expand by taking market share from competitors value from their customers by designing more of the total system
and a shrinking roster of star performers, the with system level chips built around proprietary intellectual
semiconductor industry has entered a period of lowered property (IP). Companies that pursue such strategies are
expectations and diminishing options, forcing chip suppliers to consistently more profitable and faster growing than their peers.
rethink their strategies for success, according to iSuppli Corp. For example Qualcomm, MediaTek and Linear Technology.
“Semiconductor profitability has eroded steadily since mid Another strategy is to milk established cash cow products in
2004, with quarterly net profits having fallen into the single the industry. Such cash cow products typically are trailing edge
digit range in 2008, down from the 17 percent to 19 percent devices that have passed through their commodity stage, have
range in 2004,” said Derek Lidow, president and chief executive steady pricing and have a dwindling number of suppliers that are
officer of iSuppli. “The semiconductor industry now is less willing to devote their best people to designing and managing
profitable as a percentage of revenue than the notoriously low products that most semiconductor cowboys would find boring.
margin PC business, something that hasn’t occurred before, Sellers include Microchip, Diodes, Microsemi and Rohm.
except during a period of the severe market downturn in 2001.” Finally, well heeled semiconductor suppliers can use their
The attached figure presents historical, quarterly operating resources to massively outspend their rivals in the areas of
profit margins for the global semiconductor industry. products and manufacturing and thus maintain technical and
“To a degree, conditions in the semiconductor industry have scale dominances in competitive market segments. Companies
been impacted by short term events, such as the market volatility like Samsung Electromics, Intel and TSMC.
in 2006 due to inventory write offs and price wars in major As semiconductor companies attempt to pursue such
product segments like DRAMs and microprocessors,” Lidow strategies, they will have to face the reality that the electronics
observed. “However, the long term trend indicates that the industry has become increasingly unforgiving of mediocrity in
semiconductor industry, which historically has been good at any area because such under performance drains profits as well
capturing profits in the electronics value chain, seems to have as device and operational performance. Furthermore,
lost its money making touch.” semiconductor buyers expect their suppliers to be first rate in all
As profit has diminished, the semiconductor industry has re- pursuits, ranging from process technology to marketing, a
segmented itself into new groups, according to Lidow. standard that many companies can meet.
During the period of 2001 to 2004, semiconductor companies “In this day and age, semiconductor suppliers have the
seemed to fall into three categories: a small group of firms opportunity to outsource any or all of their operations to third
whose growth outperformed the market; a middle performing party sources that offer world class work,” Lidow observed.
group consisting of most suppliers and a set of low performers at “Those semiconductor companies that are unable to achieve top
the bottom. The top caste of suppliers typically employed quality and performance in all processes, either through
predatory business strategies that enabled them to take market outsourcing or by using internal resources, will be punished in
share from weaker competitors. The lowest performers often the marketplace.”
served as the market share prey for the predators and the middle Beyond the strategies described above, very daring
range of suppliers. However, during the just completed semiconductor managers have another option: building a scalable
semiconductor business cycle from 2004 to 2007, the prey in the acquisition process that would allow a semiconductor company to
lowest caste of suppliers went extinct, and so did the success of grow by buying other companies or selected parts of companies.
predatory strategies, creating a larger group of middle “Developing such a process would allow a company to achieve
performing players. unprecedented scale and vast wealth,” Lidow said. “With
“The number of low performing companies decreased by so semiconductor processing becoming increasingly commoditised,
much that there now are only two major distributions in the such an endeavour is becoming practical.”
industry: a few outstanding performers and the rest,” Lidow
said. “The number of competitors achieving growth of more than
100 percent 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.”
How to break out?
For a semiconductor company to break out of the current market
dynamics to outperform the industry, one proven strategy for
Information kindly supplied by iSuppli
www.euroasiasemiconductor.com November 2008
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