Front End I Electronic Components Supply Network
Semiconductor industry consolidation… A customer's perspective
The electronic trade press has over the past year devoted many column inches to the ongoing consolidation activities within the semiconductor industry. The process is usually reported from the perspective of the financial analyst with particular focus on how a merger will drive growth and position the organisations involved to launch new products and penetrate emerging markets. And oh yes, there's always the cost reduction promises that shareholders love so much. Whilst much management effort is expended in executing their exciting new plans it’s important that the new organisation doesn’t overlook how their M&A may impact existing customers and how they can best support them throughout the process. Adam Fletcher, ecsn chairman, tells us more
Adam Fletcher T
he merger and acquisition activity in the semiconductor market is significantly higher today than at any historical period and is therefore likely to affect a wider range of organisations. Supplier consolidation is rarely good news when viewed from a customer perspective because the change it engenders is unlikely to have a positive impact on their organisation. Possible negativity ranges from the administrative cost of amending the internal approved supplier list, to the need for an expensive product re-design in order to replace a component that will no longer be available, and the uncertainty occasioned by longer term changes in the competitive environment.
'Commodity’ v ‘Proprietary' Most semiconductor products can be divided into two groups: ‘Commodity’ – parts available from multiple manufacturers
10 April 2017
that are ‘form, fit and function’ compatible, and ‘Proprietary' – parts only produced by one or possibly two manufacturers. The typical customer of the global electronic components supply network uses a combination of both groups in the equipment they produce, some because the part enables the desired functionality to be achieved at a sensible price and others because there is simply no viable alternative. Over the past 20 years the proportion of ‘Commodity’ products available in the market has been rapidly declining, whilst conversely the range of ‘Proprietary’ products available has risen, primarily due to increased integration of useful features that make them more attractive to designers without adding significantly to the cost line. In deciding the product 'mix' in a design the customer has to weigh the risk of a price hike, lack of availability, device function and support against alternative scenarios before striking a rational choice balance that reflects their organisation's end market, it’s planned production volumes, risk adversity and the anticipated life cycle of their product.
Consolidation in the semiconductor industry impacts both ‘Commodity’ and ‘Proprietary’ product groups. It can reduce competition in the 'Commodity' product group (which may not be negative as pricing stability often improves long term availability) and may also impact ‘Proprietary’ products that fail to meet revised revenue goals, need to be produced in a particular manufacturing site, or are deemed to be outside the strategic direction of travel of the merged organisation.
Different market needs Many European customers' equipment is sold into the large but highly fragmented ‘Industrial’ market (which includes medical, instrumentation and test equipment). This market demands long product life-cycles,
Components in Electronics
10 years+ being fairly normal. By contrast the product life cycle in the Asian ‘Consumer’ and ‘Computing’ markets, which today account for over 50 per cent of global electronic components consumption, is often less than two years. As a result, semiconductor manufacturers are seeking to support a global customer base with very diverse needs. The European ‘Industrial’ market comprises 100s of small medium sized customers (50 to 500 employees) who typically manufacture and sell eight-to-10 units of end product in volumes of 5,000 to 30,000 units per annum, and who only develop one or two new products per year. These organisations are recognised within the electronic components supply network as good solid customers. A few of the largest may be served directly by the manufacturer but the mass market is primarily served by the manufacturer's authorised distributor network.
Component selection The selection of which electronic components to design-in is decided primarily by the customer's small professional engineering team, guided by procurement and quality assurance personnel. Covering most disciplines, the engineering team will have invested heavily in training in the use of development tools, compilers and debuggers for the ‘Proprietary’ microprocessor or microcontroller family that is often central to the design's functionality and therefore the critical product differentiation within their target market. Many of these organisations remain loyal customers to several generations of a family of microcontrollers produced by their chosen supplier as they develop their end products firmware infrastructure around it. These engineering teams are generally supported by an authorised distributor whose manufacturer trained application engineers provide technical support if required during the design process, which is normally completed within six-to-12 months. From the commercial perspective, the distributor also negotiates pricing with
the procurement team, manages the customer’s orders, holds an agreed buffer inventory and sends regular shipments to meet their production needs. It's no surprise therefore that the acquisition of the customer's current microcontroller manufacturer by another large manufacturer of similar products can come as something of a bombshell. The customers’ legitimate concerns about the medium and long term product availability, pricing, possible product rationalisation etc., causes considerable anxiety as they need constant availability of the products for their current equipment and possibly future designs.
Support Obviously, no merging or acquiring organisation wants to jeopardise existing long term relationships with its customer base so all parties in the semiconductor supply network recognise that customers of ‘Proprietary’ products have to be provided with additional protection when organisations merge and are fully supported through any transition period. For their part ecsn's authorised distributor members stand ready to provide the additional support needed by holding sufficient volumes of products to support any extended last-time-buy period, and/or by helping their customers to transition to another suitable product within their product portfolio. This support often includes the supply of and training on the use of new software tools for the engineering team by their FAEs and the manufacturer concerned. Customer concerns are natural in uncertain times but by voicing their concerns with their authorised distributor and through them, with the semiconductor manufacturer itself in a timely manner, customers can be assured of an appropriate response to their needs. The electronic components supply network is very robust and authorised distributors are well used to successfully and professionally managing this sort of change.
www.ecsn-uk.org www.cieonline.co.uk
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