Exploring the Semiconductor Market

As demand continues to outpace supply, semiconductor companies can pursue various alternatives.

FREMONT, CA: Based on the data, now is the optimum time to be a semiconductor company. With surging demand for chips, annual sales grew by 9 percent in 2020, and 23 percent in 2021, a substantial rise above the 5 percent reported in 2019. Even before the pandemic, financial markets recognized the industry's rising profitability, with semiconductor companies presenting an annual average of 25 percent in total shareholder returns (TSR) between the end of 2015 and the end of 2019. As remote work became the norm and consumers and businesses increased their technology purchases, accelerating the digital revolution, stockholders witnessed average annual returns of 50 percent in the previous year.

The persistent shortage of semiconductors is becoming a common topic of conversation, especially when it pushes automakers to delay vehicle production. However, semiconductor companies face a variety of obstacles. Even with fabs operating at total capacity, they have been unable to meet demand, resulting in six-month or longer product lead times. In addition, semiconductor companies are contending with an increase in design complexity, a skills shortage, and pandemic-related concerns interrupting the worldwide supply chain that connects market participants. The scarcity is so alarming that it is causing more large technology businesses and major automobile OEMs to transfer chip design in-house, a development that might have significant market repercussions.

In other industries, manufacturers frequently increase output in response to shortages. However, fab building and production ramp-up for semiconductors are costly and time intensive. It often requires a year for considerable growth or more than three years to create a new facility, making it challenging to raise semiconductor volumes rapidly. Increasing capacity may sometimes be beneficial, but it rarely yields immediate results and often necessitates a substantial investment over several years before increased earnings, if any, are realized.

To assist semiconductor companies in developing an all-encompassing plan for success, experts have calculated the benefits of capacity growth to identify when building may be justified.

Although the semiconductor shortage frequently portrays the situation, the industry comprises numerous divisions, including memory, logic, analog, discrete, optical components, and sensors. Individual semiconductor businesses and manufacturing locations tend to concentrate on particular market sectors. In contrast, their end customers often require goods from all semiconductor segments and rely on several vendors. Even if all other components are present, the absence of a single specialized chip can block the manufacturing of final products.

Additionally, the production process is more sophisticated and multifaceted than many headline writers recognize. When all aspects of production are examined, the complete process stretches from material procurement through final assembly. Most enterprises specialize in three or fewer processes per product area and may outsource specific tasks, such as printed-circuit-board assembly, to partners. After back-end production, semiconductors enter the value chain of electronics.

Over the past two decades, the industry has been consolidating inside several value chain divisions, and a few leaders have formed in each sector. As a result, knowledge is frequently concentrated in certain areas—the United States has the biggest concentration of fabless players, i.e., chip design-only companies and equipment manufacturers. No local market possesses all the capabilities required for end-to-end semiconductor design and manufacture. The concentration of expertise along the value chain has produced a web of interdependencies.

The concentration of expertise provides certain benefits because it frequently enables rival businesses to share resources, such as electricity supply, reducing costs. Employees with the appropriate talents may flock towards expertise clusters, resulting in a large talent pool.

Obtaining and sustaining a position of leadership in the semiconductor industry

As more products and services become increasingly digital, the semiconductor industry is primed for additional development despite the current uncertainty. As evidenced by current values, more than half of the semiconductor industry's present enterprise value depends on earnings-growth expectations: investors anticipate long-term growth of 7 to 8 percent per year, given the recent margin trajectory.

But what strategies can assist the industry in achieving these objectives? While the answer may vary depending on a company's strengths and weaknesses, all semiconductor businesses might benefit from reconsidering their strategies in six crucial areas: technical leadership, long-term R&D, resilience, talent, ecosystem capabilities, and increased capacity. This last area will not give instant benefits, but it might be an integral part of a long-term strategy.