iSuppli, the market research firm, thinks so. They recently released a report indicating that major changes have been taking place in the semiconductor industry. Granted that the changes have been quieter and less dramatic.
Margins decrease --They begin by saying that over time semiconductor industry profitably has shrunk. They point to a downtrend in margins and provide the following graph:
The surprising quote from the article, written byDerek Lidow, president and chief executive officer of iSuppli, is as follows:
"The semiconductor industry now is less profitable as a percentage of revenue than the notoriously low-margin PC business... 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."
An industry transformed --The report goes on to describe how, in the view of iSuppli, the semiconductor industry has changed. Previously, there were three categories of companies: the dominant companies whose growth outperformed the market, the middle tier consisting of most suppliers and the lower tier of low performers.
Now, according to iSuppli, we see the result of years of predatory take-overs to secure market share combined with failures of the weakest players. What is left is essentially a two tier system consisting of a group of top-performers and another group that includes pretty much everybody else. The result of the changes in the industry, as Mr. Lidow of iSuppli describes them, can be quantified as follows:
"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."Their take is that n0w that the industry has been transformed, one of the favored ways of attaining dominance, via buying market share, is not working anymore.
The game changes --One way to attain greater than market growth rates is to design more highly integrated chips comprising expanded functionality in system-level chips built around proprietary Intellectual Property (IP). iSuppli points to Qualcomm (QCOM), MediaTek Inc. and Linear Technology (LLTC) as companies that have successfully pursued this approach.
Another strategy is to milk established cash-cow products in the industry. Companies pursuing this approach include Microchip (MCHP), Diodes Inc. (DIOD), Microsemi (MSCC) and Rohm.
A third strategy, whose use is limited to the dominant players, is to out-spend competitors in product development and in developing manufacturing efficiency and scale. Companies who have used this approach include Samsung, Intel (INTC) and Taiwan Semiconductor Manufacturing (TSM).
With semiconductors increasingly becoming a commodity, iSuppli believes that it will soon begin to make sense for growing firms to pursue a strategy of continuous acquisitions to build a companies with great depth, large portfolios of products and the scale to deliver top quality technology with best in breed sales and marketing.
Conclusion --iSuppli seems to be saying that the semiconductor industry is consolidating, profit margins are shrinking and there is no turning back. I'm not sure I totally agree with this analysis.
With the advent of the fab-less semiconductor company, it is easier than ever for small players to enter the industry. The history of the hi-tech industry has many examples of small companies developing unexpected, disruptive products that changed the balance of power in the industry. Granted it is harder than it used to be but I don't think that tradition is dead yet.
What do you think? Will semiconductors go the way of the PC industry?
Source: As Profit Dwindles, Semiconductor Market Becomes Less Forgiving