The secret of semi success

A mix of strategies is what propels the winners to the top spots

By John Edwards -- EDN, May 1, 2006

It's always good to be a market leader, but these days, it's particularly good to be a semiconductor industry market leader.

Take a look at the numbers. Industry giant Intel's sales climbed 14 percent in 2005, according to statistics compiled by IC Insights, a semiconductor industry research firm. The next three sales leaders—Samsung, Texas Instruments and Toshiba—saw their sales rise 13 percent, 8 percent and 7 percent, respectively.

Gene Frantz, a TI principal fellow, credits his company's success to building good relationships with its customers. "Listen to their wants, and create their needs," he says.

That's sensible advice, but there's far more to semiconductor industry success than providing excellent customer service. Bill McClean, IC Insights' president, says there are many reasons why some semiconductor companies succeed while others stagnate or backslide. "I don't think there's really one business model that gets you into being a market leader or one business model that's more successful than another," he says.

The key, according to McClean and other industry experts, is to find a mix of strategies—be it a hot new chip technology, external sales versus internal technology transfers, fab or fabless operation or exploiting regional strengths—and then exploit that game plan to the hilt. "There are a lot of different ways you can approach the industry," says McClean. "Whichever one you pick, you have to give it your all."

Reshaped industry

Years of slowing growth, consolidation and technology evolution have combined to reshape the semiconductor industry. These days, thanks to rising costs and heightened competition, companies can no longer be all things to all customers. "Companies that are successful now tend to be very focused on key device types for specific applications," says Richard Gordon, a semiconductor industry analyst at Gartner, a technology research firm.

“Listen to their wants, and create to their needs.” —Gene Frantz, TI principal fellow

Gordon points to the former "Big 5" Japanese semiconductor manufacturers—NEC, Hitachi, Mitsubishi, Toshiba and Fujitsu—as companies that failed to keep pace with changing times. "Even today, the remaining companies are still fairly broad-based and defocused," he says. "They've lost market share systematically since the big downturn in 2001."

NEC, for example, saw its sales fall by 14 percent in 2005, according to IC Insights' sales list. Yet J. J. Yamaguchi, executive vice president of NEC Electronics, remains hopeful that growing prosperity will help boost sales of the company's broad-based chip line.

"The continued expansion of the U.S. economy following the 2001 recession is driving healthy U.S. domestic consumption and corporate IT spending," he observes. "Second, the rapid economic growth in China and India, on top of stable growth in developed regions, is expanding the total available market for semiconductors," Yamaguchi says.

Yet Gordon doesn't hold out much hope for companies that insist on sticking to a broad-based marketing strategy. "They continue to lose market share year over year even when the market's been growing," he says.

Specialization can generate spectacular results for companies that have the foresight—or the plain luck—to focus on hot technologies. In the robust microprocessor segment, for example, Advanced Micro Devices' growth has far outpaced that of archrival Intel, which has a wider and more dispersed product line. Whereas Intel's sales climbed 14 percent in 2005, narrowly focused AMD—which ranked No. 16 on IC Insights' sales list—saw sales rise 48 percent, the industry's fastest growth pace. "AMD is basically a microprocessor company," says McClean. "Companies need to get focused on one or two products they can do well."

Hot technologies

Finding a hot technology can turn almost any semiconductor maker into a superstar. Take, for example, SanDisk, which has focused on flash memory technology for nearly two decades, (see profile of SanDisk). The company is now reaping the rewards of its vision, as products such as digital cameras, mobile media players and portable mass storage systems drive the demand for flash memory to new heights. SanDisk posted 29 percent revenue growth in 2005, according to IC Insights' sales list, allowing it to move up 11 slots from 2004, to reach No. 26.

“Rapid economic growth in China and India is expanding the total available market.” —J.J. Yamaguchi, EVP, NEC Electronics

Sumit Sadana, acting CTO and senior vice president of strategy and business development for Freescale Semiconductor, believes that with the growth of new media technologies, consumers rather than enterprises are now driving the semiconductor market's direction. "Clearly, the important shift that took place in 2004 was that, for the first time ever, the consumption of silicon through products bought by consumers exceeded the consumption of silicon through products bought by corporations," says Sadana. "That is a very significant inflection point."

With the demand for entertainment products soaring, many successful semiconductor vendors have turned their attention to developing and marketing devices that support digital audio and video technologies—"such as digital TV, whether it's the tuner itself or display technologies such as LCD and plasma panels," says Gordon. The trend is reflected in the top 10 companies on IC Insights' sales leaders list, where companies such as Samsung, Toshiba, Renesas, Philips and Sony are all deeply involved in consumer semiconductor technologies.

Although many seemingly pivotal tech innovations—such as PDAs and Zip drives—turn out to be little more than temporary sales opportunities, a few key technologies are able to generate heat more or less perpetually. "Everybody's talking about Apple iPods, of course, and that really has been the hottest [product application] over the past couple of years," says Gordon. "But the PC and the cell phone still dominate the semiconductor industry." Gartner estimates that about 35 percent of semiconductor revenues per year come from those two technologies. "So more than a third of the market is dependent on the PC and the cell phone," says Gordon. "So I guess you have to consider them as hot all the time, because without them, the industry would be in big trouble."

Of course, even in the reliable PC and cell phone markets, technologies change, forcing semiconductor makers to develop new products that will meet their customers' changing needs. In the PC sector, processors evolve, memory capacity grows and LCDs replace CRTs. In the cell phone market, 1G gives way to 2G and 2.5G and then to 3G and wireless technologies, transforming handsets from phones into mobile communications/entertainment devices.

TI, which rode its success in digital signal processing technology to an 8 percent sales gain, believes that it can leverage its DSP expertise into an array of new consumer and business systems. "Digital signal processing is being transformed from what might be considered a product into an enabler," says Frantz. He strongly believes that wireless communications will move out of phones and PCs to become an integral part of a wide range of items, from home appliances to clothing. "All future products will have wireless communications," he predicts.

A company's manufacturing approach can also play a pivotal role in its overall financial performance. Market success can come to semiconductor makers that produce devices at their own fabs as well as to firms that outsource production to other manufacturers. "Factories are $3 billion a pop, so they're quite expensive and not very many companies can afford them," says Gordon.

Sales leaders such as Intel, Samsung and TI all run their own fabs, yet some of the past year's fastest-growing semiconductor performers, such as storage, communications and consumer silicon developer Marvell (sales up 37 percent) and optical storage specialist MediaTek (sales up 23 percent), are fabless companies.

Life on the edge

Fabless companies face life on the edge, more so than their infrastructure-heavy competitors. Whereas fab operators can steadily recoup their capital costs and earn tidy profits by grinding out numerous products— for both themselves and contract customers—fabless companies must think fast on their feet and quickly grab new opportunities as they arise. "If you're a fabless company, you have to be on the leading edge of technology," says McClean. "That's where the better margins and profits are."

But life can be topsy-turvy for fabless companies. Skyrocketing success can quickly turn into a hair-raising nosedive. "There have been many cases over the years in the graphics IC marketplace, for instance, in which companies had a hot product that did really well for a year or two," says McClean. "Then they fell by the wayside, because they didn't follow it up with another hot design." McClean points to NeoMagic, which went from $76 million in sales in 2001 to only $3 million in 2005 and Cirrus Logic, which fell from $770 million in sales in 2001 to only about $200 million in 2005, as examples of graphics IC companies that lost their momentum.

Several companies hedge their bets by playing both sides of the production street, building and running fabs with few or no excess manufacturing capabilities. TI, for example, outsources some of its production when times are good but pulls production back in house during slow spells. "That's really worked for the company, says McClean. "It's cut down the amount it's had to spend for capital expenditures for investing in new fabs."

The idea behind semiconductor success is, of course, to sell as many products as possible, at as high a margin as possible, to as many buyers as possible. Yet for many semiconductor industry players, internally generated revenue is as important as, and sometimes even more important than, outside sales.

“We don’t see a threat from Asia any different than from in Europe or the U.S.” —Sumit Sadana, SVP of strategy and business development and acting CTO, Freescale

Vertical integration is a strategy typically followed by Asian electronics giants, such as Sony and Samsung, that manufacture semiconductors for use by their own business and consumer electronics units. "Sony has done really well with that," says McClean. "Sony is actually depending more on internal transfers than external sales."

Vertical decline

But outside of Asia, vertical integration appears to be in decline. Motorola, which used to build silicon for its own cell phones, spun off its semiconductor unit a couple of years ago, resulting in Freescale's creation. In Europe, Philips is pondering a similar move. "Its semiconductor division, it thinks, isn't fitting with its overall corporate division," says McClean.

For semiconductor makers, success isn't only a matter of what you know and to whom you sell it, but also of where you are located. Although globalization enables semiconductor firms to efficiently sell their products anywhere, regional strengths still play an important role in a company's overall success. Asian manufacturers, for example, have a strong and growing hold on commodity semiconductors—low-margin items such as DRAM chips. "If you look at the Asian companies, they generally tend to be memory companies—Samsung, Hynix and some of the Taiwanese, says Gordon.

U.S. and European companies, on the other hand, often find their strength in higher-margin proprietary technologies. "U.S. manufacturers have some fairly fundamental intellectual property the Asians can't get their hands on," he says, citing Intel's processor business as one example.

Cultural preferences also play a role in regional strengths. "The United States tends to be the innovative leader in computer technology," says TI's Frantz. "Japan has historically been the leader in entertainment technology."

For his part, Sadana says he feels quite comfortable with the niche Freescale has carved out for itself. Freescale, which offers wireless, networking, automotive, consumer and industrial silicon, ranked No. 12 on IC Insights' sales leaders list, carving out a modest 1 percent in sales growth. "Our own business is characterized by high levels of intellectual property, so we don't see a specific threat from Asia that is any different from that of companies that compete with us from Europe or the U.S.," he says.

NEC's Yamaguchi believes that the global semiconductor industry, with its regional expertise, is now serving customers' needs both efficiently and effectively. "The trend of globalization itself is leading to an intertwining of supply chains where regional expertise will be leveraged to develop new and innovative technologies to benefit people, whether they're at home, at work or on the go," he says.

Despite the perception that Asian companies have come to dominate the semiconductor industry, IC Insights' sales rankings show—perhaps surprisingly—a diverse geographic dispersion. Among the top five sales leaders, two have their headquarters in the U.S., two in Asia and one in Europe. Among the top 20 companies, seven have their headquarters in the U.S., 10 in Asia and three in Europe. The numbers tend to support the claim that high sales can be generated via proprietary or commodity products.

Setting strategies

As semiconductor companies plan their strategies, they need to think quickly and decisively and then commit all their resources to the plan, says McClean. "There really needs to be a corporate culture behind whatever model you want to pick," he says. "If you pick the fablike model, the vertically integrated model or whatever, it has to be a top-down decision and all the divisions in the whole company have to be onboard with it."

Gordon observes that only one thing is certain: Success in the semiconductor industry doesn't come to the wishy-washy or the faint of heart. "If you look at the companies that succeed, they generally tend to be very, very determined and very single-minded," he says. "You can point them out in the top ranking—the Intels, the Samsungs. Those are the companies that know what they're doing and really are very, very focused."

What do you think is the key to success for a semiconductor company? Send your thoughts to feedback@eb.reedbusiness.com.

50 Top Semiconductor Companies
2005 worldwide top 50 semiconductor sales leaders ($M)

2005 Rank	2004 Rank	Company	Headquarters	2004 ($M)	2005 ($M)	05/04 % Change
*Foundry **Fabless ***Transitioning to Fabless SOURCE: IC INSIGHTS' STRATEGIC REVIEWS DATABASE
1	1	Intel	U.S.	31,430	35,395	13%
2	2	Samsung	South Korea	15,830	17,830	13%
3	3	TI	U.S.	10,700	11,300	6%
4	7	Toshiba	Japan	8,531	9,116	7%
5	6	ST	Europe	8,756	8,870	1%
6	4	Infineon	Europe	9,180	8,297	-10%
7	5	Renesas	Japan	9,000	8,266	-8%
8	8	TSMC*	Taiwan	7,648	8,217	7%
9	12	Sony	Japan	5,070	5,845	15%
10	10	Philips	Europe	5,692	5,646	-1%
11	15	Hynix	South Korea	4,648	5,599	20%
12	11	Freescale	U.S.	5,519	5,598	1%
13	9	NEC	Japan	6,469	5,593	-14%
14	14	Micron	U.S.	4,652	4,970	7%
15	13	Matsushita	Japan	4,725	4,070	-14%
16	22	AMD	U.S.	2,659	3,936	48%
17	19	IBM	U.S.	3,230	3,495	8%
18	20	Qualcomm**	U.S.	3,224	3,457	7%
19	17	Fujitsu	Japan	3,535	3,370	-5%
20	16	UMC*	Taiwan	3,900	3,259	-16%
21	18	Sharp	Japan	3,355	2,850	-15%
22	21	Rohm	Japan	2,818	2,813	0%
23	24	Broadcom**	U.S.	2,377	2,643	11%
24	23	Analog Devices	U.S.	2,570	2,370	-8%
25	28	Nvidia**	U.S.	1,975	2,353	19%
26	37	SanDisk**	U.S.	1,603	2,067	29%
27	27	National	U.S.	2,048	1,962	-4%
28	31	Elpida	Japan	1,738	1,953	12%
29	25	Spansion	U.S.	2,342	1,912	-18%
30	29	Avago***	U.S.	1,950	1,825	-6%
31	34	ATI**	Canada	1,670	1,810	8%
32	32	Oki	Japan	1,720	1,775	3%
33	26	Sanyo	Japan	2,150	1,715	-20%
34	36	Atmel	U.S.	1,650	1,676	2%
35	35	Maxim	U.S.	1,662	1,670	0%
36	30	Agere***	U.S.	1,870	1,669	-8%
37	38	Xilinx**	U.S.	1,585	1,645	4%
38	47	Marvell**	U.S.	1,190	1,631	37%
39	33	Powerchip	Taiwan	1,716	1,603	-7%
40	45	Nanya	Taiwan	1,211	1,546	28%
41	48	MediaTek**	Taiwan	1,172	1,444	23%
42	40	Mitsubishi	Japan	1,360	1,345	-1%
43	44	LSI Logic***	U.S.	1,248	1,321	6%
44	39	Fairchild	U.S.	1,458	1,310	-10%
45	43	ON Semi	U.S.	1,267	1,261	0%
46	53	SMIC	China	975	1,172	20%
47	46	Vishay	U.S.	1,204	1,142	-5%
48	50	Chartered*	Singapore	1,103	1,132	3%
49	52	Altera**	U.S.	1,016	1,124	11%
50	49	IR	U.S.	1,125	1,115	-1%
		Top 10 Total		111,837	118,782	6%
		Top 25 Total		167,493	175,158	5%
		Top 50 Total		205,463	213,983	4%

50 Top Semiconductor Companies
2005 worldwide top 50 semiconductor sales leaders ranked by growth rate

2005 Rank	Company	Headquarters	2004 ($M)	2005 ($M)	05/04 % Change
*Foundry **Fabless ***Transitioning to Fabless SOURCE: IC INSIGHTS' STRATEGIC REVIEWS DATABASE
1	AMD	U.S.	2,659	3,936	48%
2	Marvell**	U.S.	1,190	1,631	37%
3	SanDisk**	U.S.	1,603	2,067	29%
4	Nanya	Taiwan	1,211	1,546	28%
5	MediaTek**	Taiwan	1,172	1,444	23%
6	Hynix	South Korea	4,648	5,599	20%
7	SMIC*	China	975	1,172	20%
8	Nvidia**	U.S.	1,975	2,353	19%
9	Sony	Japan	5,070	5,845	15%
10	Samsung	South Korea	15,830	17,830	13%
11	Intel	U.S.	31,430	35,395	13%
12	Elpida	Japan	1,738	1,953	12%
13	Broadcom**	U.S.	2,377	2,643	11%
14	Altera	U.S.	1,016	1,124	11%
15	ATI**	Canada	1,670	1,810	8%
16	IBM	U.S.	3,230	3,495	8%
17	TSMC*	Taiwan	7,648	8,217	7%
18	Qualcomm**	U.S.	3,224	3,457	7%
19	Toshiba	Japan	8,531	9,116	7%
20	Micron	U.S.	4,652	4,970	7%
21	LSI Logic***	U.S.	1,248	1,321	6%
22	TI	U.S.	10,700	11,300	6%
23	Xilinx**	U.S.	1,585	1,645	4%
24	Oki	Japan	1,720	1,775	3%
25	Chartered*	Singapore	1,103	1,132	3%
26	Atmel	U.S.	1,650	1,676	2%
27	Freescale	U.S.	5,519	5,598	1%
28	ST	Europe	8,756	8,870	1%
29	Maxim	U.S.	1,662	1,670	0%
30	Rohm	Japan	2,818	2,813	0%
31	ON Semi	U.S.	1,267	1,261	0%
32	Philips	Europe	5,692	5,646	-1%
33	IR	U.S.	1,125	1,115	-1%
34	Mitsubishi	Japan	1,360	1,345	-1%
35	National	U.S.	2,048	1,962	-4%
36	Fujitsu	Japan	3,535	3,370	-5%
37	Vishay	U.S.	1,204	1,142	-5%
38	Avago***	U.S.	1,950	1,825	-6%
39	Powerchip	Taiwan	1,716	1,603	-7%
40	Agere***	U.S.	1,807	1,669	-8%
41	Analog Devices	U.S.	2,570	2,370	-8%
42	Renesas	Japan	9,000	8,266	-8%
43	Fairchild	U.S.	1,458	1,310	-10%
44	Infineon	Europe	9,180	8,297	-10%
45	NEC	Japan	6,469	5,593	-14%
46	Matsushita	Japan	4,725	4,070	-14%
47	Sharp	Japan	3,355	2,850	-15%
48	UMC*	Taiwan	3,900	3,295	-16%
49	Spansion	U.S.	2,342	1,912	-18%
50	Sanyo	Japan	2,150	1,715	-20%

John Edwards is a freelance business-technology writer based in Gilbert, Ariz.