Currently profitable global semicon industry needs to remember lessons of downturn!

Early this week, iSuppli reported that the global semiconductor industry is currently at its ‘most profitable level in a decade.’ So, I asked iSuppli whether it was too early to call the semicon industry most profitable, given that we’ve survived the worst downturn and the fact that lot of capacities are being built up? However, this is indeed a noteworthy performance.

According to iSuppli, ‘The overall semiconductor supplier operating profitability rose to 21.4 percent in fourth quarter of 2009, the highest level since the fourth quarter of 2000 when it reached 24.7 percent. Industry profitability soared in 2009, rising throughout the year after falling to negative 5.3 percent in the first quarter due to the impact of the global economic downturn.’

Derek Lidow, president and CEO of iSuppli.

In a quick chat, Derek Lidow, president and CEO of iSuppli, said: “The semiconductor industry profitability is likely to improve further from this point as fab utilization rates improve and also because prices have been going up recently due to spot shortages and long leadtimes. So, we do not think this is too early to congratulate the industry on a job well done.”

So far firms have done a great job in checking against overcapacity situations. How long, before we all get greedy all over again? (LoL) And well, the whole thing starts! Crisis has led to newer styles of management — so, have the firms really learned?

Lidow added that the industry executives have demonstrated more restraint on capacity additions than in any previous recovery. “Indeed, the slowness to add assembly and test capacity has lead to the spot shortages, that the industry has then used as a reason to increase prices.  This has further re-enforced the benefits of being more cautious on major capacity increases.

“Another noteworthy factor in this restraint is that a larger proportion of all semiconductors are being produced from wafers fabricated at independent foundries. With such a high concentration of production going through relatively few foundries, the industry is much better able to balance wafer supply and demand – and, again there are fewer incentives to add capacity speculatively.

“Of course, the memory producers have been the most prone to add speculative capacity in the past and in this cycle the major memory producers have been in weaker financial condition, Samsung excepted, than ever before, so they have been ‘constrained to be restrained’.

Has the industry learned its lessons?
The key question remains: Has the industry really learned its lessons from the past year?

Lidow said: “The semiconductor industry has learned, the question is whether they will remember the lessons! The industry has learned that when capacity is added slowly, pricing is better. They have learned that often OEMs, their customers, are willing to reduce margins on their TVs and cell phones in order to keep up consumer the demand, and that the semiconductor supplier can keep some of the benefits of their economies of scale and still keep the industry growing.”

Finally, with all these signs of recovery, are the VCs now taking some interest in the senicon industry or is it still out of bounds?

Lidow’s reply is interesting. He added: “VCs have started to come back, but with more semiconductor companies than ever (the downturn did not stimulate any meaningful industry consolidation!), the criteria for investing in a new semiconductor startup are higher than ever.”

Thanks a lot, Jon and Debra.

What can the global semicon industry do to get back its money-making touch!

It is very well known that the global semiconductor industry has had a year full of turmoil. The ongoing global financial has been not been of any help either.

The key question: Has the semiconductor industry really lost its money making touch?

According to iSuppli, facing dwindling profits, fewer opportunities to expand by taking market share from competitors and a shrinking roster of star performers, the semiconductor industry has entered a period of lowered expectations and diminishing options, forcing chip suppliers to rethink their basic strategies for success.

Thanks to Jon Cassell at iSuppli, I caught up with Derek Lidow, president and CEO, of iSuppli, to find out more about why the global semiconductor industry has become less forgiving. He has offered a range of suggestions for the global semiconductor industry to adopt and follow. The beauty of the advice lies in its simplicity, and I hope the industry is reading!

Facing dwindling profits and fewer opportunities to expand by taking market share from competitors and a shrinking roster of star performer, how difficult is the market today?

According to Derek Lidow, at the moment, the makers of electronics have started slamming on the brakes as they have decided that the financial turmoil will effect Christmas spending.

In this scenario, what strategies should the players: a) fabs; b) NAND; c) DRAM; d) materials devise, to ensure some turnaround?

Lidow says that the fab players should consolidate fabs to make them more efficient.

Both the NAND players and DRAM players should push out capacity expansion plans. Makers of devices should make variations of the existing products that customer would like to have, and don’t turn down opportunities to lock in orders for specials.

If semiconductors have actually lost their money-making touch, it is really an alarming sign. However, Lidow advises that the semiconductor business is maturing and every industry, as it matures, must undergo transitions.

Leaders can’t ignore looming changes
“Often, these transitions come as a surprise and many companies go through hard times,” he says. “Semiconductor companies don’t have to go through the turmoil of the steel or automotive industries if it doesn’t want to. The leaders of the industry just can’t ignore the looming changes.”

Is there a way that semiconductor companies break out of the current market dynamics to outperform the industry?

Lidow suggests the semiconductor companies should STOP doing things that they are not good at! He adds: “Each company will have to follow a recipe that eliminates where they are mediocre and focuses on where they add real value. Next, they should change their business models so that semiconductor technology is the tool, not the objective.”

According to him, designing more total systems with system-level chips built around proprietary Intellectual Property (IP) should be enough.

He says: “The electronics industry is $1.5 trillion dollars in size, and the semiconductor industry is $270 billion in size. There is a lot more value to capture. However, the value is more complex to unlock and requires as much or more software expertise as it does semiconductor expertise. They have to get married together to succeed in developing proprietary IP.”

Areas to outspend rivals
As for the areas where companies can massively outspending rivals in areas of products and manufacturing, these would be leading edge wafer foundries, memory chips, and the most complex system-on-chips (SoCs).

Why won’t this massive outspend simply to maintain technical and scale dominances in competitive market segments be risky?

Lidow says you can only use this strategy if you know you can outspend your rival! “We see the problems of a spending race in the memory market where many companies are trying to keep up with Samsung’s massive investments and it is hurting everyone,” he points out.

iSuppli has also advised adopting a scalable acquisition process that would allow a semiconductor company to grow by buying other companies or selected parts of companies.

Lidow says: “I think the point of my article was that there haven’t been any success stories to date. So, this strategy is unproven, but very tantalizing, considering the state of the maturing industry.”