Vertical vs Horizontal

Today the vertical vs horizontal debate about the right approach to the technology industry has been decided in favour of horizontal, but ten years ago it was still very much a current issue.

In 2007, NXP, the re-named Philips Semiconductors which had recently been spun out of Philips, was run by Frans van Houten, now CEO of Philips.

Most consumer electronics companies are de-verticalising their supply chains”, said van Houten back in 2007, “selectively de-verticalising the supply chain means Philips Semiconductors works with de-verticalised customers to make the chips.”

This contrasted with the position of the Japanese “How you make the product attractive to consumers in terms of features and quality decides the competitiveness of the product,” said Satoru Ito, at that time president and CEO of Renesas, “that is more suited to the integrated vertical business model of the Japanese companies.”

Ito, and other Japanese chip industry leaders, saw their vertical business model as being inherently superior when it came to consumer electronics than the horizontal business model of the US companies, which bought components from a host of suppliers and assembled them anywhere in the world.

Ten years ago, van Houten was inclining to the American view.

“I strongly believe that you need to work with suppliers that are best in class. De-verticalising is a strategy to work with the best partners in the supply chain,” says van Houten.

He dismissed the Japanese predilection for the vertical model, saying simply: “There are some companies in Japan that are behind in terms of out-sourcing.”

He insisted: “De-verticalisation doesn’t stop our customers from working interactively on what is defining the silicon.”

Another surprising attitude, for an IDM, is that van Houten didn’t believe that having its own fabs necessarily gave Philips Semiconductors an edge in the market.

“Pure CMOS technology is more and more of a commodity which does not necessarily give competitive advantage,” he said, “we invest in process technology, and it’s important to have access to process technology, but it’s not important that we manufacture the products ourselves.”

And that is the way the world went, while much of the Japanese semiconductor industry disappeared.


Comments

7 comments

  1. Good point Duncan, horizontalism needs supplier competition to work well – and competition in memory has diminished and is diminishing – unless China gets its act together.

  2. I too think Peter is right. When you are down to three or four suppliers for critical components and one of them is your main competitor there isn’t much scope for shopping around for a good price on memory.

    In going from a company that made things like keyboards for the Sinclair Spectrum to being the one of the worlds largest consumer electronics companies Samsung shows that vertical integration can work. They are probably the only company capable of making a phone completely using in house manufactured parts, so all the profit stays with the company.

  3. I think you’re right, Pete, cyclical fashion is the answer. Back in the days when the Japanese vertical conglomerates ruled the electronics industry it was thought you needed to be like them – and STC started building 256K DRAMs and 64K SRAMs at Footscray in emulation. Then Apple made horizontalism the fashion and now Apple’s verticalising. Maybe these high-powered execs just hanker after new strategies.

  4. I expect it’s cyclical, a bit like Makimoto’s Wave demonstrates/predicts a cycle between standardisation and customisation for electronic components. What we seem to be seeing at the moment is a verticalisation (or would that be de-horizontalisation?), with Apple, for example, developing its own chips rather than buying the best-in-breed from semiconductor vendors.

  5. Right on Fred and AnotherDave, I’ve always thought this ‘Real Men/Windsurfers/Sheepshaggers do it standing up’ is a load of absolute rubbish. Supply chains and rumpy-pumpy are best implemented horizontal.

  6. AnotherDave – totally agree – I much prefer the horizontal to the vertical position myself..

  7. I’m a big believer in de-verticalisation. I find that routine nocturnal de-verticalisation promotes increased ocular excitation and hippocampal defragmentation.

    It is important, critical in fact, not merely to lie down. You must properly de-verticalise, even if only selectively. But outsourcing your hippocampal defragmentation can be fatal. Definitely don’t do that.

    I expect the same is true with supply chains.

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