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

September 30, 2008

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.”

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