iSuppli: semi industry more profitable now than in past decade
Thanks to the increasingly aggressive management of costs, capacity and competitive positioning, the global semiconductor business is currently more profitable than it has been at any time in the last decade, market researchers at the El Segundo, Calif. market research company said. In addition to capacity management, iSuppli believes the profitability rebound reflects a more fundamental shift in the competitive structure of the global semiconductor industry.
By Ann Steffora Mutschler, Contributing Editor -- EDN, March 15, 2010
Reflecting the industry’s increasingly aggressive management of costs, capacity and competitive positioning, the global semiconductor business is currently more profitable than it has been at any time in the last decade, market researchers at El Segundo, Calif.-based iSuppli Corp. reported today.
Industry profitability escalated last year, rising throughout the year after falling to negative 5.3% in Q1 2009 due to the impact of the global economic downturn. Then, overall semiconductor supplier operating profitability rose to 21.4% in Q4 2009, which was the highest level since Q4 2000 when it reached 24.7%, the market research company said.
The rise to the decade-high level was hastened by strategies and structural changes within the semiconductor industry, while the profitability rebound last year was partly driven by the economic and industry recovery during the year.
“Chipmakers in 2009 reacted quickly and aggressively to meet the downturn by cutting costs and improving cash flow. And as the market began to turn back up, the industry showed great restraint against adding production in order to avoid any overcapacity situations. This allowed the companies to recapture their pricing power to boost profitability,” explained iSuppli President and CEO Derek Lidow in a statement.
Global spending on semiconductor manufacturing equipment is expected to show a rise last year after three consecutive years of decline, but expenditures will remain at historically low levels -- less than half of what they were in 2007 and 2008, iSuppli noted. The planned spending by semiconductor manufacturers will be mainly focused on implementing advanced packaging to support new types of products, rather than investing in overall wafer fabrication capacity expansion.
As such, this spending restraint has limited the growth in supply, keeping pricing under control.
After falling by 5.4% in Q1 2009, global pricing for electronic components, including semiconductors, began to stabilize in Q2 2009, then rose sharply in the second half, according to iSuppli’s Procurement Pricing Index (PPI). Pricing declined by slightly more than the historical average rate in Q2 2009, down by 2.7%, then rose by 2.2% in Q3 2009 and by 2.7% in Q4 2009.
In addition to capacity management, iSuppli believes the profitability rebound reflects a more fundamental shift in the competitive structure of the global semiconductor industry.
“The semiconductor industry has almost completely eschewed the broad-line model that once was the hallmark of the largest players in the business. Instead, chipmakers now are concentrating on specific market segments, allowing them to focus on areas where they have pricing power and a competitive advantage. This has allowed them to improve profit margins and to cut overhead,” Lidow continued.
Previously, large chipmakers attempted to compete in as many semiconductor segments as possible in order to capture maximum market share, and while this approach achieved growth and revenue expansion during the era of rapid growth for the semiconductor industry, it has proven to be a losing strategy as the chip business has entered a stage of greater maturity.
“Broad-line suppliers constantly must fend off hordes of smaller competitors nipping at their heels. With a more narrow focus, semiconductor suppliers can gain greater efficiency and profitability. This allows them to become more competitive and to concentrate on profitability, rather than on market share,” he added.
Examples of companies with this type of strategy include Infineon Technologies AG of Germany, which divested its operations in the memory and communications markets among other areas, in order to focus on its core business in semiconductors and system-level ICs for automotive, industrial electronics, wireless and security applications.
This shift away from the broad-line model and toward a narrower focus has boosted profitability throughout the semiconductor industry, iSuppli reminded. Lidow believes this trend will continue in the coming years as Japanese semiconductor supplier divest themselves from various product segments and embrace more narrowly focused product lines.
“The return to strong profitability should be source of a pride for the semiconductor industry, proving that with smart management and shrewd strategic thinking, that there is still money to be made,” he concluded.
presents semiconductor quarterly industry profitability from 2000 to 2009.
