Front End I Electronic Components Supply Network
Semiconductor industry consolidation - a semiconductor manufacturers perspective….
The sudden increase in consolidation within the semiconductor industry may be put down to a single reason or a range of reasons, dependant on the motivation of acquiring organisations. Reasons include: slowing industry growth, changing demand drivers, cheap money, access to new markets or technologies, economies of scale, shareholder pressure etc. In previous issues of Components in Electronics, ecsn chairman Adam Fletcher examined consolidation within our industry from the perspective of the customer and the authorised distributor, as the media generally reports only on the financial implications and ignores the effects on other players. In the third part of his overview, Fletcher examines the impact of consolidation on the supply network from the semiconductor manufacturer's perspective
companies outsource 100 per cent of their manufacturing to third party partners. It’s very likely that greater than 70 per cent of all the semiconductors available in the market today have been substantially or entirely manufactured by a company whose name does not appear on the device.
Adam Fletcher A A semiconductor company today
lmost all semiconductor manufacturers today are highly reliant on third party organisations
for the outsourcing of some or all of their wafer fabrication, packaging and test. Some even outsource the development and maintenance of their intellectual property (IP). Larger semiconductor manufacturers may have a ‘fab-lite’ strategy, where they outsource 40 per cent of their manufacturing to partners whilst remaining responsible for 60 per cent of their output. At the other end of the spectrum ‘fabless' semiconductor’
10 June 2017
A complex infrastructure of semiconductor foundries, IP sources, packaging providers, test houses and the logistics that links them is required to support this outsourced manufacturing model but sadly for brand owners the number of Integrated Device Manufacturers - IDMs - (defined as organisations able to complete most of the design, manufacturing and support processes in-house) has declined in recent years. The financial dynamics of the semiconductor market today is making it difficult for these companies to maintain the huge investments in product development and manufacturing required to consistently hit the process yields required for continued sales revenues and profitability.
Statistics show that across all industries the stated financial and other aspirational outcomes of M&A activity are often not realised. The outcome for merging or acquiring semiconductor companies, their external and internal supply network and for their customers varies in each individual case and can take several years to be fully realised. If anything, the sheer complexity of semiconductor manufacturing and the likely multi-dimensional puzzle of IP licensing, software and hardware technology transfers, elongated global
Components in Electronics
supply networks, the actions of competitors and the multitude of unknown unknowns make this process even more risky for semiconductor manufacturers. A positive outcome becomes more likely if the acquisition was carefully considered and planned for by both parties, with synergies clearly identified and a plan on how best to proceed agreed in advance.
Integration actions… Some semiconductor manufacturers have a M&A track record and executive management are able to draw on previous experience. They will focus on redefining the new merged organisation and how shareholder return can be maximised. Company structure and resources will be extensively reviewed, as will the target markets to be served, the product families to be offered and yes of course, the customers. This is a highly complex task with huge variation in the process and there are no perfect solutions. Most organisations initially attempt to operate both organisations as separate entities and then phase-in the integration process once they have a better understanding of how all the pieces of the puzzle fit together and how the value chain can be maximised. Either way, an M&A heralds a period of great uncertainty for the semiconductor company, its employees and its entire supply network. In the short-term human nature suggests that everybody wants to know how the consolidation is likely to affect them and what they need to do to look after their own or their organisation's best interests. It’s debatable whether a quick and dramatic reorganisation or a longer, carefully planned approach yields the best long-term results.
Sales revenue division… There is a mutual dependence between direct and in-direct customers of semiconductor companies. Approximately 60 per cent of all semiconductor products by sales revenue value are sold by the semiconductor company directly to a single or small number of very large customers, some 40 per cent of which are memory products used in very high volumes with significant pricing volatility. Responsibility for the remaining 40 per cent of all semiconductor products by sales revenue is passed to authorised distributors whose role it is to support the mass market customer base. Whilst the direct customers keep manufacturing volumes high, enabling economies of scale to be realised, the profitability on these sales is much lower than for in-direct customers. Along with the risks of potential reliance on a limited number of direct customers, the wide diversity of customers and
applications continue to make sales to the in-direct sector vitally important.
Customer engagement By any measure effective communication with the customer base(s) is an essential part of the M&A process. No
semiconductor company wants to alienate it customer base and will attempt to provide accurate and timely information, but recent experience shows that the provision of this often lags a long way behind the implementation of other activities. Perhaps this reflects just how critical all the other executive management actions are? Fortunately, the trade media, email and social media platforms enable fast and wide dissemination of information, be it positive or negative, which of course depends on the recipients' perspective. Such communication will often raise a multitude of questions, the answers to which may be commercially sensitive or yet unknown. In these circumstance competitors are often perceived as being the more effective communicators. The M&A processes inevitably throws up an overlap in the sales and marketing functions and - particularly with semiconductor companies - also within the channel partner network, where some form of rationalisation is to be expected. As channel partner (authorised distributors) have the primary customer facing roles within the network it’s important that the merging organisations quickly draw a line under this uncertainty and maintain uninterrupted delivery of goods ordered on time. Secondary activities to be maintained include booking new customer orders and securing new customer design wins for future business. The longer the level of uncertainty persists the harder it will be to achieve these secondary objectives, with the inevitable loss of customer confidence and sales revenues.
Improved communication My best advice is for all parties affected by an M&A to continue, and where possible enhance, their engagement both up and down their supply network. Timely, positive discussions will make a major contribution towards identifying solutions that amicably meet their competing needs.
www.ecsn-uk.org
www.cieonline.co.uk
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