Practical Chip Design

We are seeing some encouraging signs in the electronics industry. Fab utilization seems to be up, the supply chain appears to be adjusting inventory levels up—after emptying the shelves in the first half. And now researchers suggest that consumers are starting to spend again on electronics, albeit at bargain prices. Great news!

On the other hand, economists warn that layoffs are going to continue for the foreseeable future. More corporate bankruptcies are likely, many directly forced by the continuing lack of available credit. And there are warnings of a coming wave of smaller bank failures as more companies default on their debt and more US consumers give up on servicing massive credit-card bills. So were are we going?

It seems that many people are waiting for the economy to "go back to normal." But there is a very real chance that the consumer-driven growth we saw up through 2007 was not normal, and is not coming back soon. The semiconductor industry needs a strategy stronger than just waiting it out.

The problem is with end-user demand. Much of the growth we enjoyed before the calamity came from just one source: affluent consumers buying stuff. We bought everything from BMWs to iPhones. In much of the world, consumers paid for their new goodies with either savings or surplus income. In the US and to some extent the UK, we financed our binge with credit: either unsecured credit cards or home-equity loans.

But the catastrophe wiped out much of the world's surplus income and—more importantly—the sense of job security that made people willing to spend some of their income instead of saving it. It crushed credit-card spending limits and evaporated home equity. Spending screeched, not to a halt, but to a more deliberate, sub-binge level.

Since then, governments have attempted to restart consumer demand with stimulus spending. Tragically, pouring a huge sum of money into a bureaucracy or handing it to a legislature was about like delivering a feast to a pig and expecting it to host a banquet. Much of the money poured out by the US, EU countries, and China has not gone to stabilizing consumers and restoring markets. It has been wasted on life-support for huge but brain-dead banks and manufacturers, sloshed into make-work projects invented by influential special interests, or simply consumed by graft. Governments have come close—we don't know how close—to exhausting their own credit without addressing the underlying issues that led to the credit freeze and recession.

Consumer demand cannot grow until the perception of job security returns in exporting countries like Germany, Japan, and China. And these workers can't feel secure until consumers in the US—the world's primary market for consumer goods—feel comfortable about their own jobs, and their balance sheets. So return to growth in consumer demand and the industries that depend on it will likely take years, not months.

That seems to leave the semiconductor industry with two real choices. One is to adjust to the new lower level of activity, cutting costs and consolidating until companies are profitable at a lower sustained level of activity. This option probably does not fund enough R/D for companies not supported by their governments to remain competitive. So it probably means a gradual erosion of the industry in the US.

The other choice is to find a new growth driver that doesn't depend on affluent consumers. The most likely candidate, I believe, is the non-affluent population of the developing world. A huge number of people engaged in subsistence or low-wage, but vital, work can generate fast returns on investment for technology purchases that change their lives. This doesn't mean BMWs or iPhones. It means things like low-end data-capable handsets to connect farmers and fishermen to local markets, ingenious aids to small-scale agriculture, individual or community-level projects to provide safe water, small-scale plants to produce clean energy.

The obvious argument is that there may be billions of such people, but they have no money. Yet the experience so far with low-cost handsets has shown that when the return-on-investment is there for the user, service providers and retailers can find ways to finance the purchase, and everyone benefits. Not only can it work, it is working in rural India and China, without huge government subsidies.