Semiconductor Industry Analysis Report

Microsemi is a technology firm that designs, manufactures, and markets high performance analog and mixed-signal integrated circuits and high reliability semiconductors. The company operates in the global semiconductor and electronic parts manufacturing industry where it faces steep competition from industry leaders, including Intel Corporation, Raytheon Corporation, Texas Instruments Incorporated, and Samsung Group (a formidable South Korean company in the information and technology industry). As a mid-sized firm, Microsemi faces high entry barriers that impact its overall market position. This industry analysis highlights the critical role of research and development in increasing market share and obtaining an industry advantage.

Industry Overview

The semiconductor industry is critical because it produces electronic components that are utilized in everyday items. The electronic products that consumers enjoy depending on the supply of affordable and effective semiconductors and circuits. While microprocessors account for the majority of the electronic components manufactured in the industry, the industry exhibits a significant level of segmentation. This section will examine the outlook and segmentation of the semiconductor and circuit manufacturing industry.

Industry Definition and Outlook

Microsemi competes in the semiconductor and circuit manufacturing industry. IBISWorld defines the industry to include businesses that manufacture semiconductors and related devices and parts, such as integrated circuits, memory chips, microprocessors, diodes, and transistors (Ulama 2). The scope of this report is contained to the domestic industry within the United States. Semiconductors are a ubiquitous product because they are found in a wide range of electronic goods. Devices that individuals use daily, including computers, cell phones, and televisions all rely upon semiconductors in order to operate (5). Firms within the industry focus on the manufacturing of semiconductors. The primary activities conducted by firms in the industry include diode manufacturing, fuel cells and solid-state device manufacturing, and integrated microcircuits manufacturing (2). Currently, there are 832 businesses in the industry with revenue in 2014 approximating $80.4 billion (4). Overall, the industry is expected to experience inconsistent annual growth. An annual growth rate of 5.1 percent is projected between the years 2009 through 2014 while an annual growth rate of .1 percent is projected between the years 2014 to 2019 (4). These figures paint a mixed picture for the industry. While short-term growth looks favorable, anemic growth levels are expected in the long-term.

Product Segments

An analysis of segmentation in the industry reveals distinct trends in the industry overall. According to industry statistics, microprocessor manufacturing consists of 58 percent of industry activity, microcontrollers account for 10.9 percent of activity, silicon wafers account for 10.3 percent of activity, and other semiconductor devices account for 10 percent of activity (4). As this figure suggests, microprocessor manufacturing is the dominant activity of the industry. The following chart illustrates the segmentation of the market for 2014.

(Figure 1 omitted for preview. Available via download)

The semiconductor and circuit manufacturing industry is also characterized by the type of chips that are produced. The main dichotomy between semiconductor chips distinguished between chips that are based on bipolar or metal oxide technology. Bipolar technology refers to bipolar transistors that operate by sending a pulse across a base, which enables electrical signals to flow between “emitters” and “collectors” (Armacost 16). While this technology was used in the first transistor and holds the benefit of supporting high-speed applications, it is less favored because it requires large amounts of energy (16). In contrast, metal oxide technology has improved upon bipolar technology to address its primary flaws. Metal oxide technology is considered to be the dominant technology in chip design and combines layers of conductive materials in order to control the flow of electrical signals (17). The reduction of power consumption through this process is a primary advantage of metal oxide technology.

In addition to these two primary categories, there are different types of semiconductors that manufacturers specialize in. The first category, discrete semiconductors, are nonintegrated devices that are designed to perform a single function and are featured as part of a larger circuit design (17). Analog semiconductors process signals from external sources in the environment, such as light, heat, pressure, and sound, and are used in computers, cell phones, and industrial products (17). The most distinct category of semiconductors is digital semiconductors, which include semiconductors that are found in computer applications, including microprocessors, memory chips, and logical devices (17). A consideration of overall segmentation trends reveals that the category of digital semiconductors is most significant when assessing the overall health and trends of the industry.

Industry Performance

Overall, the semiconductor and circuit industry has experienced lackluster performance. Though the industry is projected to grow by 5.1 percent over the next five years, analysts contend that this growth is to make up for poor post-recessionary conditions in 2009 (Ulama 5). Further, overall revenue for the industry is expected to decrease by 2 percent in 2014 because of a lack of demand for US-made semiconductor contracts and the availability of efficient and low-cost alternatives (5). Beginning in 2012, other identified contributors to the sluggish industry performance include the increase of production outsourcing and price reductions that reduced revenue growth (5). The performance of complementary industries has also taken a negative toll on the semiconductor and circuit manufacturing industry. For example, because digital semiconductors are the most significant segment of the market, the industry depends upon the health of the computer manufacturing industry. However, the growth of revenue for the domestic computer manufacturing industry decreased by 17.9 percent over the previous five years (5). In light of these factors, the current snapshot of the industry points to abysmal performance.

Industry Trends

Though the semiconductor and circuit manufacturing industry provides an essential product that can be applied to a wide range of consumer products, the industry is significantly impacted by competition. This section will evaluate industry trends and review the impact that international competition has on the industry as a whole.

Performance Forecasts

Trends in the semiconductor and circuit manufacturing industry point to poor market conditions in both the short and long run. Between 2014 and 2019, it is projected that revenue will increase by .1 percent to $80.8 billion, representing anemic growth in the industry overall (5). Unfortunately, past periods of growth do not point to potential for future growth in the industry. The limited growth that the industry has experienced is due to less reliable sources of growth. For example, in 2009, revenue in the industry dropped sharply by 17.3 percent because consumers and businesses decreased their spending on technology (7). From this standpoint, the revenue increase by 26.5 percent in 2010 was much more modest when compared to the previous year’s losses (7). Further, the growth was attributed to the increase in the smartphone industry, which had utilized United States electronic components (7). However, an assessment of the trends demonstrates that weak growth is expected to be the norm for the industry in the upcoming years.

Industry Threats

Overseas manufacturing of semiconductors and circuits in the chief threat to the United States industry. The Pacific Rim in Asia, especially in Taiwan, has increased their production of chips since the 1990s (Armacost 10). Further, industry reports determine that China will lead the next business cycle because of increased consumer consumption and a recent shift from low-end assembly and manufacturing to the production of advanced technology products (10). China presents a challenge to domestic manufacturers because of its ability to utilize low labor and land costs, develop effective infrastructure, and provide skilled labor to attract foreign investments (10). These factors make Asia a desirable location for semiconductor and circuit manufacturing.

The rise of consumption in developing countries provides a similar challenge to United States firms. In the past five years, imports of domestically produced semiconductors and circuits have increased to developing countries. Between 2009 and 20014, imports to Costa Rica have increased to represent 19.2 percent of industry imports, imports to Malaysia have increased to 17.6 percent, imports to Taiwan have increased to 10.8 percent, and imports to China have increased to 10.6 percent of total industry imports (Ulama 8). As the trend demonstrates, the international market will critically shape the industry in the upcoming years. By 2016, the leading countries for PC consumption will be China, followed by the United States, and then Brazil, Russia, and India (Armacost 10). Further, in 2012, merging markets represented 69 percent of total PC shipments (10). Yet, a consequence is that the United States must compete in markets that are unable to pay higher prices for semiconductors and related products. The increased demand for electronic goods utilizing digital semiconductors has resulted in the accelerated degrease in prices (10). Thus, domestic companies, faced with higher production costs that overseas companies, struggle to maintain profitability in face of increased pressure to compete in international markets.

Industry Opportunities

Despite a generally bleak outlook for the domestic market, there are a few opportunities for growth in the industry. As original equipment manufacturers (OEM) outsource the integration of semiconductor and software components to third parties, firms in the industry have the opportunity to partner with OEMs. The trend of adopting system-level solutions that integrate multiple integrated circuits allows companies with higher levels of expertise, software capabilities, and testing capabilities to provide tailored services to OEMs (Ulama 10). Thus, the demands of OEMs provides a growth opportunity for domestic firms that possess the technical expertise necessary to meet these demands.

Research and development provides opportunities for competing firms in the industry. Though the semiconductor production is increasingly migrating overseas, businesses domestically and internationally can compete for a competitive advantage through technological innovation. There are several limitations in semiconductor technology that research and development can be used to address. For example, improvements in the price and performance of semiconductor technologies benefit manufacturers of a wide range of products, including PCs, mobile phones, and televisions (16). Research and development is critical to competition in the industry. It is estimated that current firms in the industry allocate between 16 to 20 percent of revenue on research and development (Armacost 15). Research and development is critical to key competitive strategies in the industry. For example, discovering new processes or inventions enables firms to hold intellectual property rights to new technologies (15). A firm that is first-to-market within cost-saving technologies can capture a larger market share.

Further, businesses within the industry can obtain a competitive advantage through producing or catering to new products that use semiconductors (17). Developing applications that meet the needs of upcoming products can also enable a firm to gain a dominant position in the market. Finally, the life span of semiconductors is considered to be insufficient, which the average semiconductor lasting between eighteen months and five years (17). The development of semiconductors that increase the lifespan of electronic goods increases value for consumers and can provide semiconductor manufacturers with a competitive advantage in the industry. The need for innovation to improve upon semiconductor technology highlights the critical role that research, and development currently plays and will continue to play in the future.

Competitive Environment

Several large firms dominate the semiconductor and circuit industry. In order to identify an effective business strategy for Microsemi, the competitive environment must be outlined. This section will assess the external environment that impacts the strategic decisions of Microsemi.

Market Share Concentration

As a distinct feature of the industry, a small group of firms capture a significant portion of the semiconductor and circuit market. In 2013, the four largest firms in the industry accounted for 35.8 percent of industry revenue while concentration increased within specific product segments (23). For example, the companies Intel and Advanced Micro Devices Inc. lead the industry because of their dominance in the computer central processing unit markets (23). Further, while the United States is losing ground to Asian firms, US semiconductor firms have been able to increase their market share by making acquisitions that enable them to expand domestically and overseas (23). However, the power of large firms in the industry cannot be overlooked. Microsemi reports annual revenue of $676 billion as of FY 2012 (Annual Report 2013). To demonstrate the gap between Microsemi and lead firms, the following table compares the revenue of Microsemi to the revenue of the largest competitors in the industry.

(Figure 2 omitted for preview. Available via download)

As the chart demonstrates, the revenue of lead businesses in the industry far outpaces the revenue reported by Microsemi. The leading company in the industry is Intel Corporation, the largest chipmaker in the world (Armacost 7). The company’s top products include the Intel Atom processor, the Intel Pentium processor, and the Intel Core processor series (Intel Corp). In 2012, Intel received 90.7 percent of market shares in the microprocessor segment (Armacost 8). As a basis of the firm’s competitive advantage, it is able to achieve economies of scale through its advanced manufacturing and testing facilities in Malaysia, China, the Philippines, and Costa Rico (9). The following table charts Intel’s performance in the semiconductor industry over a six-year period.

(Figure 3 omitted for preview. Available via download)

Samsung Electronics is a South Korea-based company with significant presence in both the United States and international markets. Currently, Samsung is the largest manufacturer of memory chips in the world (8). Further, the company is number one in dynamic random-access memory (DRAM) and NAND memory segments and possesses respective market shares of 42.1 percent and 40.8 percent (8). Contrary to industry trends, semiconductors only account for 15 percent of Samsung’s revenue (8). Yet the company demonstrates the importance of dominating a specific segment in order to achieve a competitive advantage. The following table charts Samsung’s performance in the semiconductor and circuits industry over a six-year period.

(Figure 4 omitted for preview. Available via download)

As the evaluation of the lead businesses demonstrate, larger firms possess a strong competitive advantage within select segments of the market. For example, Texas Instruments develops semiconductors in the analog and embedded processing segments (Texas Instruments). The company enjoys the competitive advantage in both segments because of its established position in the market. Both new entrants and smaller firms face a significant disadvantage of maintaining profitability while competing with these internationally recognized firms.

Barriers to Entry

There are high barriers to entry in the industry. According to industry analyses, intellectual capital barriers, the high cost of manufacturing operations, and the dominance of major competitors prevent new entrants from successfully competing in the market (Ulama 26). As the trends section discussed, research and development is becoming a critical component of competition in the industry. However, the high costs of funding an effective research and development team remains a barrier for new entrants (26). Further, successful competitors must have access to the latest technological items in order to successfully tailor semiconductors and circuits to emerging technologies (26). These barriers provide larger firms with the resources to hire the best research teams the competitive advantage in the industry.

Conclusion

As manufacturing continues to move to the Pacific Rim and other developing countries, the domestic semiconductor and circuits industry can continue to experience stagnant revenues. The rise in consumers abroad challenges domestic companies to expand overseas in order to increase economies of scale and distribute products efficiently in low-wage markets. While companies overall are experiencing declining revenues, several United States companies still remain competitive because of their ability to capture specific market segments. For example, Intel leads the industry because of its dominance in the central processing unit market segment. Further, Samsung focuses on memory products, which overall account for a small percentage of the products manufactured by the industry. As a review of the industry reveals, successful companies must adhere to two trends in the future. First, they must lead in research and development in order to increase market share in an emerging technological application. Second, they must utilize acquisition strategies to expand their holding abroad and achieve economies of scale in overseas markets. Because the semiconductor is a ubiquitous product, there will always an opportunity to develop a profitable enterprise in the industry. However, the advantages that top businesses enjoy will transform it into a winner-take-all industry.

Works Cited

“Annual Report 2013.” Microsemi. 29 Sep. 2013.

Armacost, Christin. “Industry Surveys: Semiconductors.” S&P Capital IQ. Oct. 2013.

“Intel Corp.” Mergent Online. 2014.

“Microsemi.” Mergent Online. 2014.

“Texas Instruments.” Mergent Online. 2014.

Ulama, Darryle. “Semiconductor & Circuit Manufacturing in the US.” IBISWorld. Mar. 2014.