October 9th, 2008
Economy-pinched semiconductor industry: How to ride the storm
The credit crisis and overall economic downturn is starting to hit the semiconductor industry, which saw 5.5 percent sales growth in August. Research firm iSuppli has cut its 2008 sales growth forecast for the semiconductor industry from 4 percent to 3.5 percent and potentially even more if economic conditions continue to worsen, according to a report on Tech Trader Daily.
ISuppli said the industry is taking hits from several different sides, among them Wall Street, where the demand for electronic equipment is expected to drop, as well as from companies that, unable to get credit, will slow down their demand and consumers, who have low confidence and are expected to slow spending. iSuppli President and CEO Derek Lidow wrote in a report:
Semiconductor profitability has eroded steadily since mid 2004, with quarterly net profits having fallen into the single-digit range in 2008, down from the 17 percent to 19 percent range in 2004. The semiconductor industry now is less profitable as a percentage of revenue than the notoriously low-margin PC business, something that hasn’t occurred before, except during a short period of the severe market downturn in 2001.
So how do they ride the storm? Lidlow says one proven strategy is for suppliers to “capture value from their customers by designing more of the total system with system-level chips built around proprietary Intellectual Property (IP).” Financially-stable suppliers also have the option of outspending rivals on products and manufacturing to “maintain technical and scale dominances in competitive market segments.”
A third approach might be to “milk established cash-cow products in the industry,” he said.
Such cash-cow products typically are trailing-edge devices that have passed through their commodity stage, have fairly steady pricing and have a dwindling number of suppliers that are willing to devote their best people to designing and managing products that most semiconductor cowboys would find boring.
There is one more option, albeit a daring one, he said. Build a scalable acquisition process and grow by buying other companies or selected parts of companies. “Developing such a process would allow a company to achieve unprecedented scale and vast wealth,” he said. “With semiconductor processing becoming increasingly commoditized, such an endeavor is becoming practical.”
Sam Diaz is a senior editor at ZDNet. See his full profile and disclosure of his industry affiliations.
