The semiconductor industry’s profitability to be ‘volatile’ over the next five years, predicts a report by accountants KPMG.

The KPMG report surveyed 94 C-level execs at the top 100 semiconductor companies. 99 per cent of the executives expect revenue growth in the next fiscal year, with 52 per cent estimating growth in excess of 10 per cent.

The growth projections appear to be more moderate this year compared to last year, when 60 per cent of respondents indicated they thought growth would exceed 10 percent.

The executives expect competition in emerging markets, manufacturing and product innovation to lead to increased M&A activity.

33 per cent of execs said profits would be flat over the next five years, 26 per cent said volatile and unpredictable, 15 per cent said profits would decline, and 27 per cent said profits would rise. 

However, 53 per cent reckoned that 2008 or 2009 would be the best profit years over the next five, while 49 per cent indicated that 2006 or 2007 would be the worst profit years.

The mixed outlook on profitability is attributed to the need to invest in design and process technologies for the foreseeable future, regardless of the impact on near-term profitability. 

The study found find that executives felt that fabless companies 64 per cent would be the most profitable industry segment over the next five years.

"Industry executives will have to continue to make capital and R&D investments to stay competitive, but the size of these investments will be tempered by the uncertain outlook and likely industry consolidation", said Crispin O’Brien, KPMG's head of technology, "ultimately growth through M&A will probably lead to greater profitability in the long run, than new products or continued cost-cutting."

The report reckons that China, the US and Europe were the top three geographic growth markets.

60 per cent of executives expect M&A activity to increase over the next five years, with 52 per cent saying that product positioning and increased competitiveness will be the driving force behind the consolidation. 

72 percent of execs believed that 11-30 per cent of M&A activity over the next three years will involve private equity funding.

Further indicating the volatility in the semiconductor industry, KPMG found that only 57 per cent of respondents expect capex spending to increase next year – a sharp decline from 72 per cent in 2006. 

Similar to R&D spending, the level to which capex spending is expected to increase is also diminishing - only 36 per cent of 2007 respondents expect the spending to increase by six percent or more, compared to 53 per cent of respondent last year.