Semiconductors sit at the heart of the Fourth Industrial Revolution—bringing digital, physical, and biological ecosystems ever closer together.
Rapid industry expansion is inevitable as demand soars to facilitate greater functionality in cars, mobile phones, medical and other emerging AI-enabled consumer devices and appliances—the World Semiconductor Trade Statistics organization forecast in December 2020 that annual sales would grow by 8.4% globally in 2021, pushing the overall market close to $500 billion.
Short Supply, High Demand and Stockpiling
The market in recent years has faced monumental macroeconomic disruption and, as COVID-19 took hold globally, many production plants ground to a halt—notably automotive.
At the same time, pandemic demand spiked for other products such as consumer electronics during “lockdown” periods, and semiconductor manufacturers shifted wafers at the start of their three-month journey through fabs to serve the industries that were upping orders.
Given that the capacity in fabs’ 24-7 operating model is always booked out months in advance, manufacturers demonstrated great agility in their response to pivot and harness the continued high demand, despite the significant operational challenges presented.
The chip crisis has since been further exacerbated by saturated supply chains, hitting manufacturer allocations to the degree that prohibited them from catching up with outstanding demand from 2020.
The trade war between the US and China continues to hamper efforts to mitigate market volatility. Technological sovereignty has emerged as a key objective for the US, China, and Europe, and the semiconductor stockpiling seen last year, followed by the shortness of supply in 2021 so far, only serves to rubber-stamp this viewpoint.
With a genuine risk of complete bifurcation of the industry between China and the rest of the world—led by the US - there are complex waters to navigate, whether the decision is taken to play in one market or attempt to straddle both. With the strategic importance of digital sovereignty front of mind for European countries, giving rise to a willingness to invest, the role of European semiconductor manufacturers in this evolving landscape will be one to watch as capabilities are strengthened and alliances are built to counter the emerging global split.
How to Harness Semiconductor Growth Opportunities
Sharpening sector focus:
There are intensifying requirements from established customer groups, as well as growing demand from other industries increasingly reliant on semiconductors.
The decision of where and how to compete vertically is critical for long-term success. For example, developing cooperative arrangements with rival OEMs and key suppliers can pool demand and garner more attention from the biggest chip manufacturers as a scaled collective.
Growth could also potentially be achieved through the development of a product portfolio that targets emerging applications and markets, such as data centers for cloud computing, mobile technology, and the build-out of 5G, AI, and machine learning or the Internet of Things.
Here, additional technical skills and execution capabilities are likely required, which could emerge through organic growth or acquisitions. Last year marked a record year for the semiconductor industry in M&A, with $118 billion of potential deals announced, including between Nvidia and ARM at $40 billion; and Analog Devices and Maxim at $21billion.
Geographically, geopolitical risk mitigation presents options for building an enhanced local presence and scaling up a more far-reaching footprint in key geographies through organic growth or M&A in target territories. China will remain a dominant force and an attractive one for players to serve, tapping into the sizeable domestic and export markets backed by significant government investment.
Multi-jurisdiction company set-ups present challenges, though. Joint Ventures can fail to deliver or provide the expected portfolio synergies, while specific support will be needed to localize products and technologies, adapting them to local use cases. This will drive the need for the development of further in-market R&D capabilities and customer support resources. For example, the closure of US technology giant Qualcomm’s chipset joint venture with Guizhou's local government in Southwest China—Huaxintong Semiconductor—has been attributed in part to a poor understanding of the local market and integration difficulties with the Chinese supply chain.
A Sound Strategy Will Need Smart Execution
The semiconductor winners will be those who can overcome operational challenges driven by the need for diversification and aggressive growth strategies in a market that will continue to flourish amidst such voracious demand.
Find flexibility in symbiotic, trusted partnerships:
Building an ecosystem of partners throughout the value chain, from IP management to design, manufacture, and software development is vital. Before the appropriate time emerges for strategic M&A, a pool of trusted partners needs to provide the flexibility to explore innovative product suites that respond to changes in market demands, plus the time to assess cultural suitability for tighter integration.
Be mindful of M&A minefields:
M&A does not only equate to the acquisition of technology blocks or designs. The critical human capital of engineering resources must be locked in—not something that can be achieved financially. A strong vision and strategic roadmap are required to get the best results from any acquisition: the talented engineering teams that give rise to acquisition interest must have a sense of purpose and a meaningful, medium—to long-term vision to buy into. The proactive development and promotion of highly localized “tech clusters” in cities or even specific urban districts can help retain the services of such highly sought-after skill sets and build a premium talent pool to leverage.
Culturally, there will be trade-offs to reconcile between integrating a company by absorbing it or extending the acquiring company’s culture to the acquired asset and trying to maintain the best of both worlds to preserve the target’s agility and ability to innovate.
Plan thoroughly, implement exactly, and integrate carefully:
As the impacts of the pandemic have shown, it is vitally important to develop agile, integrated business planning processes with demand and supply planning capabilities that can rapidly alternate between constrained and unconstrained environments.
With the market now led by customer demand rather than advances in semiconductor technology itself, heightened awareness of industry product lifecycles is critical.
The accelerated pace of R&D cycles demands highly optimized development pipelines that can harness the power of exponential increases in chip complexity and reductions in component size. Executing and delivering killer feature sets at the perfect moment to capitalize on market maturity in each product cycle will allow players to benefit from maximum demand when mass production and premium pricing will reap the greatest rewards.
Through M&A integration, this challenge comes to the fore. Technology and product pathways on both sides will be at varying stages of progression at the point of integration. The strategic technologies that remain on the roadmap must be defined by product stability, performance, software ecosystem, and the key features that different chips enable, giving clarity and focus to engineering teams while strengthening the long-term vision and a sense of purpose.
Approaches to customer relationships are perilous to overlook too. The integrated business and service models must align with what customers are expecting—and demanding—as those who do not buy into integrated companies’ direction of travel will ultimately give rise to greater consequences than the loss of talent or operational glitches.
The market opportunity in the world of semiconductors is enormous, and a big step up may be required for players to execute a scalable and flexible growth strategy. A relentless focus on commercials and customers will be critical alongside unwavering attention paid to product, expanding global reach, partnerships, M&A opportunities, and execution excellence.