The semiconductor industry is facing key challenges. In recent years, M&A mega deals have led to consolidations within the market, while the industry continues to mature. This leaves rather moderate growth prospects for the next three years. Companies have to consistently utilize limited organic growth sources and deal with the resulting areas of activity. To be successful in the long term, they must recognize the potential of the disruptive technologies and new markets that the Internet of Things will bring.
Growth sources for the semiconductor industry – how can companies relive previous success in the mobile consumer segment?
In the 1990s and even early 2000s, growth booms in the industry with annual sales growth of 30 to 40 percent were the norm. Thanks to the sharply increasing demand in the consumer market for PCs, laptops, and mobile phones, many smaller technology companies were able to grow into giants in the semiconductor business. However, since 2011, the industry has had to manage its growth expectations for the consumer market. With an average annual growth rate of 3.4 percent expected from 2015 to 2020, the strong growth period seems to be over and the dynamic start-up atmosphere of the past appears to be more or less history. The entire industry already has a market size of over 350 billion euros, with intense rigid competition among existing players. M&A mega deals are currently reshaping the industry and consolidating the market.
Is this the end of the period of constant growth outperformance? Not at all. Simon-Kucher project experience shows that even organic growth sources based on dynamic market trends can be tapped, meaning companies can relive success in the mobile consumer sector. However two fundamental strategic questions need to be answered: Where will growth come from? And how can the imminent stagnation be avoided? We have identified three sources of organic growth that will play a central role in the future of the semiconductor industry.
New disruptive technology silicon carbide brings sector to tipping point:
From a product perspective, semiconductors based on silicon carbide (SiC) are a strong candidate for future growth. They are considered as a market breaker compared to those made of regular silicon, promising increased speed, robustness, and efficiency. A few players have already secured a favorable starting position in the market. Due to strong medium-term growth forecasts, the current market volume in this emerging product segment (about 200 million US dollars) still offers attractive entry potential for second and third movers. Hype will become reality within the next five to eight years, particularly due to the growing demand in hybrid and electric mobility, regenerative power generation, and industrial applications. According to a Simon-Kucher analysis, global demand in the SiC technology segment and its sister technology gallium nitride (GaN) will amount to more than three billion euros in 2025, with double-digit annual growth rates.
The technology is still cost-intensive and more complex in production primarily due to insufficient sales quantities, which is what makes SiC and GaN a rather prominent example of a niche market. However, having achieved first significant design-wins, first-moving companies are proof of the future market potential. The remaining manufacturers need to adapt their innovation strategies or risk getting left behind. To successfully implement the SiC and GaN system solution, it’s essential to closely orient new products towards the market needs, starting in the development phase. Here semiconductor companies have to identify the applications where customers already demand high switching voltage and speed, low switching losses, and a minimum size and weight. Only in doing so can they expect customer-oriented market success from design-in to design-win.
New markets in the Internet of Things – don’t get left behind
The Internet of Things (IoT) is another important growth source for semiconductor companies, but its immense potential is more difficult to harness. Rather than watching this market trend from the sidelines, semiconductor companies should see the IoT as part of the future market’s DNA. Significant revenue contributors can be expected especially in the area of microcontrollers, sensors, memory, and connectivity. The current challenge is that there isn’t one killer app, but rather a multitude of smaller niche opportunities that promise overall attractive growth potential. Operating companies are very widely spread – no market-dominant players have yet been able to fully establish themselves in this highly diversified market. Particularly interesting are smart home applications, medical electronics, and connected cars. The IoT will turn these niche segments into game changers for the semiconductor industry.
Furthermore, demand in the consumer sector (fitness bracelets, smart watches) is also growing. Still difficult to grasp, but decisive for the success of the semiconductor industry is the idea to combine hardware and software components along the value chain and ultimately, offer a seamless IoT solution. Semiconductor companies already focusing on seamless security, communication intelligence, and ease-of-use can strengthen their positioning. However, to remain a step ahead, companies need to prioritize resources and invest in IoT growth sources instead of existing “bread and butter” segments. In addition, many manufacturers are still unfamiliar with this growth source’s company-specific market potential and most semiconductor companies see a blurred horizon for the Internet of Things. This can only become clearer by conducting an in-depth analysis of their current situation and competitive positioning.
- New sales approach: from selling products to offering a system business
New growth sources for the semiconductor industry are not only emerging in products and markets, but also through sales dynamics. Many market players are already integrating chips, drivers, software, and sensors to offer partial system solutions. A holistic approach with a clearly defined system promises particularly impressive results. However, sales divisions are still fumbling in the dark, since selling systems requires a different set-up to selling components. To offer the product portfolio as a system solution, companies have to establish effective cross-industry channel management on the sales side and develop powerful alliances with partners along the value chain. Successful players will be those in the market with the capability to provide modular solutions that interlink products with security, software, and system consulting services.
This article has first been published (in german) in Elektronikpraxis.