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Future casts a dreary outlook for industry

Posted: 31 Oct 2008 ?? ?Print Version ?Bookmark and Share

Keywords:IDMs? MEMS?

For most observers, currently the financial crisis looks like the toughest challenge for the semiconductor industry. But there are others, and some with similar impact, said an iSuppli researcher in the run-up to the electronica trade fair.

The profitability of the semiconductor industry is on a long-term decline, said Jeremie Bouchaud director and principal analyst MEMS for iSuppli, during a presentation at a pre-electronica press event in Munich. The profit margins of IDMs during the past year have approached the notoriously tight single-digit margins of computer manufacturers. However, there is a positive exception in the chip business: Foundries have managed to keep their margins high, oscillating between 20 and 30 percent.

Since the low margins will tend to prevent the necessary R&D investments in the long run, the situation for the chip industry will continue to deteriorate, the researcher said. Actually, there are only three groups of business models among chip vendors that have realistic chances to keep their ROI high. The first group is that of the fabless vendors who design systems around proprietary IP. Examples for this group are Qualcomm and LinearTek, Bouchaud explained. The second group follows a 'milk the cow' approach with strong cash cows in their product portfolio and stringently optimized production processes, with Microchip being the most prominent example. The third group finds its success on outspending their respective rivals. Since not many vendors can afford this business model, this group is rather small: Samsung, Intel and TSMC.

Harsher climate
For these reasons, the competition climate within the industry will become tougher, and, according to iSuppli, the industry will become even less forgiving of anything mediocre. A 'decent' ROI will be in reach only for companies which have truly unique know-how, or for companies that do the 'boring' stuff "discrete semiconductors, for example," said Bauchaud, "or analog." And, of course, the ones with extremely deep pocketsdeep enough to buy unprecedented scale. "All other companies will slowly lose their ability to compete, surviving on dwindling cash flow," the study warns.

In terms of manufacturing, iSuppli said it expects the transition to 450mm wafers to begin about the year 2015. However, this transition will bring huge challenges for the industry. "The key question will be how to justify the investment," Bouchaud commented. And the investment necessary will be huge. Further consolidation will be "inevitable," the study concludes.

Who thinks that these perspectives are gloomy should look at the memory market. According to iSuppli, the current massive oversupply and the resulting price pressure will cause many players to run out of cash soon. "This will happen in two to three quarters," the market expert predicted. The consequences? Bouchaud declined to elaborate.

As to the impact of the ongoing financial crisis, the market researcher said it is too early for any assessments. The stock market is still too volatile, and it has to be seen how effective the government programmes will be, the market researcher said. Bouchaud announced that iSuppli will publish updated forecasts for the semiconductor industry in December.

- Christoph Hammerschmidt
EE Times Europe

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