RealTime IT News

Business Getting Harder For Chip Makers

The semiconductor industry is facing a perfect storm of consolidation, commoditization and accelerated development, all of which combines to make the market extremely unforgiving of mistakes and puts these firms under even greater pressure.

That's the gist of a report released by market researcher iSuppli Thursday, which found that the consolidation of the market has resulted in thinner profits, not more profit and little chance of grabbing market share.

Semiconductor profits have declined since mid-2004, with profits dropping every quarter, from 19 percent in 2004 to the single digits in the most recent quarters. Inventory write-offs and the DRAM price wars have only made the situation worse, although there are signs of memory prices going up.

"Our analysis shows that the semiconductor industry is so competitive you can't be mediocre at anything and be successful," said Derek Lidow, president and chief executive officer of iSuppli. Lidow is a very rare exception in the world of market research firms in that he's a CEO who is actively involved in research along with his analysts.

He points to the race in manufacturing as an example. One of the biggest pain points for AMD (NYSE: AMD) has been the firm's inability to keep its manufacturing up to par with Intel (NASDAQ: INTC), which invests very heavily in its fabrication plants.

That's why chip design companies like nVidia don't even own a fab, instead farming out manufacturing to an independent manufacturing firm Taiwan Semiconductor Manufacturing Company (TSMC), which is considered the leader in chip making.

"If TSMC is going to be more effective at producing your chips, have higher yields and have shorter cycle times, you almost have no choice but to go with the most efficient provider of that service," said Lidow. That means TSMC's competitors have to invest in fabrication plants as fast as TSMC or even faster, just to keep up.

Chip makers release products at as fast or faster pace than ever, and chips are increasingly complex. Intel was making chips with millions of transistors in the 80s. Today, it is making chips with billions of transistors. That means more R&D in the same time period.

Lost profits across the board

At the same time, PCs have fallen into commodity status, selling for a fraction of their former prices. Back in the 1980s, a 386-based computer with 640k of memory would run $3,000. Today, a Core 2 Quad with 2GB of memory is $400. That translates into lost profits across the board, from Intel to the OEMs.

"The semiconductor industry was in a unique position, but over this last business cycle, semiconductors are no longer the most profitable portion of the electronics value chain. It's no more profitable than the computer industry," said Lidow.

There are strategies for success. One proven strategy for success for semiconductor suppliers is to design more of the total system with system-level chips built around proprietary intellectual property. Another strategy: outspend your opponents, so you can be more than one generation ahead and always keep your competition in catch-up mode.

Whatever strategy a semiconductor firm uses, they will have to stick to it, because Lidow sees no alleviation of this strain on the industry. "That's a really important message. You can't be mediocre at anything you do or your entire profit margin will slip away because of that," he said.