Chipmaking profitability spirals down

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, according to iSuppli.

“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 per cent to 19 per cent range in 2004,” said Derek Lidow, president and CEO of iSuppli. “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.

“To a degree, conditions in the semiconductor industry have been impacted by short-term events, such as the market volatility in 2006 due to inventory write-offs and price wars in major product segments like DRAMs and microprocessors,” Lidow observed. “However, the long-term trend indicates that the semiconductor industry—which historically has been good at capturing profits in the electronics value chain—seems to have lost its money-making touch.”

As profit has diminished, the semiconductor industry has re-segmented itself into new groups, according to Lidow. During the period of 2001 to 2004, semiconductor companies seemed to fall into three categories: a small group of firms whose growth outperformed the market; a middle-performing group consisting of most suppliers and a set of low performers at the bottom. The top caste of suppliers typically employed predatory business strategies that enabled them to take market share from weaker competitors. The lowest performers often served as the market-share prey for the predators and the middle-range of suppliers.

However, during the just completed semiconductor business cycle from 2004 to 2007, the prey in the lowest caste of suppliers went extinct—and so did the success of predatory strategies, creating a larger group of middle-performing players.

“The number of low-performing companies decreased by so much that there now are only two major distributions in the industry: a few outstanding performers and the rest,” Lidow said. “The number of competitors achieving growth of more than 100 per cent during the period of 2004 to 2007 declined to nine, down from 19 during the period of 2001 to 2004.

“This shows semiconductor companies can no longer break out of the pack by taking market share away from weaker rivals.

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