In Q4 2009, overall chip industry profitability rose to 21.4% - the highest figure it has been since Q4 2000 when it reached 24.7%, according to US analysts iSuppli.
Q1 started off 2009 badly, with the industry making a 5.3% overall loss. But from there on, profitability soared, spurred by strategies and structural changes. The upwards trend is expected to continue.
“Chipmakers in 2009 reacted quickly and aggressively to meet the downturn by cutting costs and improving cash flow,” says Derek Lidow, president and chief executive officer of iSuppli, “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.”
Although global spending on semiconductor manufacturing equipment is expected to rise in 2009 after three consecutive years of decline, expenditures will remain at historically low levels, at less than half of what they were in 2007 and 2008.
Furthermore, the planned spending by semiconductor manufacturers is primarily oriented at implementing advanced packaging to support new types of products, rather than at investments in expansion of overall wafer fabrication capacity.
This restraint has limited the growth in supply, keeping pricing under control.
After plunging by 5.4% in Q109, global pricing for electronic components, including semiconductors, began stabilizing in Q2 and then rose sharply in the second half, says iSuppli.
Pricing declined by slightly more than the historical average rate in the second quarter, decreasing by 2.7 %, and then rose by 2.2% in Q3 and by 2.7% in Q4.
Beyond capacity management, 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,” says Lidow, “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.”
Large chipmakers once attempted to compete in as many semiconductor segments as possible in order to garner maximum market share. 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,” says Lidow, “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.”
An example of a company taking such a strategy is Infineon which has divested its operations in the memory and communications markets among other areas, allowing it to focus on its core business on ICs and SOCs 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, says iSuppli.
Lidow predicts 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,” says Lidow.