Semiconductor Industry - Needs more than Moore's Law


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"With today’s explosive use of semiconductor technology in all walks of life,
the current reality is that it now takes more than Moore's Law to win."

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Semiconductor Industry - Needs more than Moore's Law

  1. 1. IBM Global Business ServicesIBM Institute for Business Value ElectronicsMore than“Moore” to winOptimization strategiesfor success in a maturingsemiconductor industry
  2. 2. IBM Institute for Business Value IBM Global Business Services, through the IBM Institute for Business Value, develops fact-based strategic insights for senior executives around critical public and private sector issues. This executive brief is based on an in-depth study by the Institute’s research team. It is part of an ongoing commitment by IBM Global Business Services to provide analysis and viewpoints that help companies realizebusiness value. You may contact the authors or send an e-mail to for more information.
  3. 3. More than "Moore" to winOptimization strategies for success in a maturing semiconductor industryBy George Bailey and Wendy Huang The impact of higher costs and other key disruptive trends on the semiconductor industry – especially competitive landscape changes, technology convergence and greater global connectedness – mean that traditional business models just no longer work. Nor will the promises of Moore’s Law be enough to provide sustained competitiveness. Future success will require innovative changes to existing business models that optimize capabilities in the areas of integration, customer centricity and collaboration. Industry costs are skyrocketing. R&D costs and the five-year compound annual growth are expected to rise by a compound annual rate (CAGR) for industry revenue dropped rate of 12.2 percent per year between 2004 from more than 15 percent in 1990 to less than and 2010, while the industry revenue growth 4 percent by 2005. 1 rate remains only 6.0 percent per year. The total R&D cost for the semiconductor industry FIGURE 1. Five-year CAGR of semiconductor industry revenue, was reported to be US$45 billion in 2006 1985 to 2005. and analysts believe that it will reach US$100 2 US$ billion Percent billion by 2010. In addition, process develop- 250,000 20 ment costs for 32nm manufacturing could hit 200,000 15 US$3 billion, which is twice the cost for 65nm 150,000 3 10 process technologies. This does not include 100,000 50,000 5 other development costs such as new chip 0 0 fabrication facilities (“fabs”), or new processes, 1985 1990 1995 2000 2005 tools and equipments. Sales 5 year CAGR Market indicators show the industry is, in fact, Source: IBM Institute for Business Value analysis of Semiconductor Industry Association/SICAS data. maturing. Revenue growth has slowed dramat- loads/shares.pdf. ically in the past two decades (see Figure 1), 1 More than “Moore” to win
  4. 4. And yet, in today’s world of pervasive To better understand current industry trends computing, it seems semiconductor devices, and their impacts, as well as how to win in this or “chips,” can be embedded practically new environment, IBM conducted the 2007 everywhere: in vehicles to monitor the need for Semiconductor Industry Optimization Study replacement parts, in humans to detect heart- (SOS). SOS looked in detail at the top 60 semi- beats and brain activity, and even in growing conductor suppliers by size of revenue, which plants to communicate needs for water or includes a mix of companies. Some of the top fertilizer. With no end in sight to “ubiquitous 60 design and manufacture their own chips computing” and “embedded networks and (Integrated Device Makers or “IDMs”), some controls,” these examples are but the tip of the design, but do not manufacture chips (fabless) iceberg of potentially endless opportunities for and four top companies manufacture, but do the semiconductor industry. not design chips (foundry players). Our study included face-to-face interviews, analysis of Historically, Moore’s Law offered strong hope financial results and industry best practices, of continual cost reduction and continued along with substantial secondary research. prosperity for chip makers in the face of ever- increasing demand. The1965 prediction by SOS results led to some stark conclusions for Gordon Moore of Intel postulated that the this maturing industry. No longer can competi- number of transistors on a chip would double tive advantage be found solely in continued every one to two years due to advances in technology advancement, as espoused by 4 technology. With today’s explosive use of Moore’s Law. The growing pervasiveness of semiconductor technology in all walks of life, chip use across industry and society requires the current reality is that it now takes more companies to re-examine their respective than “Moore” to win. business strategies and supporting business models to properly adjust for the dynamic Today, rumors of mergers and acquisitions competitive landscape, increasing technology (M&As) run rampant in the chip industry. In convergence and growing global connected- recent years, the increased costs of staying ness. Only well-considered choices can lead competitive have driven many companies to the stable financial results necessary for to increase their collaboration with peers, in survival and success as the industry faces forms ranging from joint development to M&A. significant disruption. Companies failing to properly manage their bottom-line financials are increasingly targets for takeover, especially as private equity firms take a more active role in the industry.22 IBM Global Business Services IBM Global Business Services
  5. 5. More than “Moore” to winOptimization strategies for success in a maturing semiconductor industry The seven Cs: Today’s disruptive developments require at least two mask sets industry trends to get to production, this can put a big dent in Along with industry maturation, seven disrup- the semiconductor suppliers’ wallets. tive trends – we call them the “seven Cs” Competition: An industry in flux thanks to – are reshaping industry players, as well as China, India and private equity their relationships within the ecosystem and The competitive landscape is constantly shifting the value chain itself. And like the changing. Within ten years, it is estimated that “seven seas” of Earth, these seven Cs may 40 percent of today’s semiconductor vendors require special attention to navigate choppy are likely to leave the industry as a result of waters ahead. These disruptive semiconductor 9 intense global competition. The number of industry forces include complexity, commod- Chinese fabless companies increased from 15 itization and consumerization, along with four in 1990, to an astounding 479 in 2005 and still others that this paper will examine much more 10 growing. closely: cost, competition, convergence and connectedness. India, too, is a rising contender. India boasts 125 fabless companies that have grown from Cost: Doing business is more expensive around US$1 billion to US$3 billion, and they across the board are slated to reach US$40 billion in sales In virtually every dimension of the semi- 11 by 2015. Most of these Chinese and Indian conductor industry, costs are increasing companies are not well known, but it is only a exponentially. With each successive leading matter of time before some will become cred- technology, the level of complexity grows in ible contenders. conjunction with the cost. R&D costs asso- ciated with leading technology IC design, Private equity activities have also intensified process and equipment can be attributed to in the past few years. The high-profile lever- the escalating cost of semiconductor industry aged buyouts of NXP and Freescale alone R&D. According to analysts, process tech- accounted for US$27 billion in 2006 (See nology R&D costs alone jumps from US$2.4 Figure 2). The private equity playbook consists billion at the 45-nm node to US$3 billion at of first leveraging the strong cash position 5 32 nm. A 300-mm, 45-nm wafer is about 10 of the target company to borrow money. times more expensive than a 200-mm, 250-nm Next, investors restructure and improve the 6 wafer. company’s bottom line by driving inefficiency out of the business, then later either sell the Mask costs also jumps significantly with each company or take it public. Such deals have leading edge technology. For instance, mask been able to generate returns of 30 percent to costs at 90-nm are about US$800,000 – at the 12 7 40 percent. As a result, private equity-owned 65-nm node, they reach about US$1.2 million. companies are setting new business operation For a 45-nm node, mask costs alone can total 8 standards for all of the industry players. more than US$2 million. Because most chip 3 More than “Moore” to win
  6. 6. Traditional FIGURE 2. semiconductor industry Semiconductor private equity activities. business models are Year Deal Price tag being threatened by 1997 Citicorp Venture and Credit Suisse buy Fairchild from National Semiconductor. US$550 million 1997 Texas Pacific Group buys Zilog. US$527 million seven disruptive trends 1999 Citicorp Venture and Credit Suisse buy the semiconductor division of Harris. US$520 million in cash and a in particular: higher Renames the company Intersil. promissory note of US$90 million costs, competitive 1999 TPG buys the semiconductor components group of Motorola. Renames it ON US$1.6 billion Semiconductor. landscape changes, 2004 CitiGroup Venture Capital, Francisco Partners and CVC Asia Pacific buy part of US$828 milliontechnology convergence Hynix and rename it MagnaChip Semiconductor. and greater global 2004 Francisco and TPG buy Smart Modular Technologies from Solectron. US$100 million connectedness. 2005 Kohlberg Kravis Roberts & Co. (KKR) and Silver lake Partners buy Agilient US$2.7 billion Technologies’ semiconductor unit renaming it Avago Technologies. 2006 Bain Capital buys Texas Instruments’ sensors-and-controls business. US$3 billion 2006 Consortium including KKR and Silver Lake Partners buys majority stake in US$10 billion Philips Semiconductor. Renames it NXP Semiconductors. 2006 Consortium including Blackstone Group and TPG buys Freescale US$17.6 billion Semiconductor. Source: Harbert, Tam. “Private equity chips away at semiconductor industry: Investors see stable cash flows and need for consolidation.” Electronic Business. December 1, 2006. Convergence: Semiconductors are the ingly difficult for semiconductor suppliers to common “fabric” binding digital content find new high-volume semiconductor applica- Convergence happens when common tech- tion that they need to offset the exponentially nology creates growing overlaps to create new increasing costs associated with keeping up consumer value. Convergence and perva- with technological advancement. siveness are now redefining the market, as boundaries among application categories are Connectedness: A flatter world brings dissolving. This blurs the lines of chip applica- people closer tion and business offering mixes. It seems that nearly everything today is becoming interconnected. From the social One area in which convergence trend has networking and user-created content of Web been most visible is with mobile handsets 2.0, to the ever-increasing number of mobile increasingly adopting the capabilities of PCs. telephone and Internet users worldwide, While the product functionality is converging, people want to connect and “talk.” The total semiconductor suppliers continue to intro- number of worldwide Internet users surpassed duce more brands, more platforms and more 1 billion in 2005 and is estimated to reach 2 13 feature sets. As a result, it becomes increas- billion by 2011. 4 IBM Global Business Services
  7. 7. Worldwide mobile phone sales are also Ultimately, the increased cost of doing busi- expected to reach one billion in 2009, with ness will force companies to re-examine their an estimated 2.6 billion mobile phones in current business models to remain competi- 14 use. Even companies like SanDisk, makers tive. Although the number of suppliers is of NAND-based flash storage card products increasing drastically – especially within the that are used in various consumer electronics Indian and Chinese markets – the top 50 semi- products, are increasing focus on developing conductor supplier companies comprise 84.5 16 mobile platforms. percent of the market. “[In] the next two to three years Even with so many semiconductor suppliers, the industry is so capital-intensive that it’s everything will be wireless, every increasingly difficult to make a significant kind of devices would be wirelessly impact in the marketplace. As a result, the connected to everything else and number of new entrants that are significant enough to be called out by iSuppli has therefore the distinction between dropped sharply, from 25 in 2002 to just two in a cell phone or an MP3 player is 2006. 17 going to be somewhat blurred.” For the top 60 semiconductor suppliers, our – Eli Harari, CEO of SanDisk 15 analysis shows that return on equity ranged from a low of -67 percent to a high of 46.2 .5 18 When it comes to semiconductors, the race for percent in 2006. Operating profit margin also “smaller, faster and cheaper” is still on, but the fluctuated widely for this group: from a low of 19 traditional focus on product and technology -14.9 percent to a high of 51.6 percent. During innovation alone is not sufficient to survive this period, sales growth for this group was the seven Cs – especially skyrocketing costs, the most volatile measurement of all, ranging dynamic competition, digital convergence and from a low of -9.5 percent to a high of 102.2 20 greater global connectedness. percent. Emerging types of industry players As the fabless model gains increased Companies’ responses to the industry disrup- momentum in the marketplace, the traditional tions of the seven Cs will ultimately determine integrated device maker (IDM) model remains whether they win big or lose big. Chip under pressure to transform. Since 2003, production increasingly resembles a gourmet fabless players achieved higher operating restaurant kitchen, where numerous chefs profit margin than both IDMs and foundry line up to add just the right spices to the mix; players; in 2005 and 2006, fabless players no longer can one company single-handedly doubled IDM and foundry players in return on bring value to the end user. equity (see Figure 3).5 More than “Moore” to win
  8. 8. FIGURE 3. Operating profit margin and return on equity analyses. 30% Operating profit margin analysis Return on equity analysis 20% 10% 0% -10% 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 -20% IDM Fabless Foundry -30% Source: IBM Institute for Business Value analysis of Thomson financial data. Three major roles emerge for IDMs Super Suppliers – This category describes With the imminent industry shake-out, we suppliers that can continue to “operate its believe three different types of IDM players will own game” by being a big influencer in the emerge: Super Suppliers, Alliance All-stars and industry. Today, Intel is the only IDM that fits this Market Creators (see Figure 4). description. Unlike other IDMs, Intel has the luxury to buy up value chain players to build FIGURE 4. and strengthen its vertical integration model. Three emerging types of IDM players. Through its global investment arm, it can help shape the greater ecosystem in which it oper- Self-sufficient and powerful. Super ates. Super supplier can continue to operate its Suppliers own game by being a big influencer in Since 1991, Intel Capital has invested US$4 the industry. billion in more than 1,000 startups in over 30 21 countries. Two recent examples include Suppliers that form alliances not only Alliance to create new value proposition in the purchasing London-based social network site All Stars marketplace, but also to fight the rising Bragster for a reported US$3.5 million and cost of R&D and manufacturing. making substantial investment in UK-based FREEDOM4 Ltd, formerly known as Pipex Suppliers that focus on core Market competencies and remain focused on Wireless Ltd, to accelerate Intel’s strategic differentiating their business offerings mobile WiMAX deployment. 22 Creators in the marketplace. Source: IBM Institute for Business Value.6 IBM Global Business Services
  9. 9. Three types of “We try to make sure that all the Market Creators – These suppliers focus on core competencies and aim to differentiate integrated device relevant players in the ecosystem their business offerings in the marketplace. makers (IDMs) are ready about the same time.” Like some Alliance All-Stars, Market Creators are expected to are beginning to embrace the fab-lite strategy – Arvind Sodhani, president of Intel Capital23emerge: The Super and to outsource much of their manufacturing.Suppliers, Alliance Alliance All-Stars – This group consists of Given that considerable capital investment will All Stars and suppliers that form alliances, not only to be needed to move to 32-nm manufacturing create new value in the marketplace, but also Market Creators. and beyond, this “asset-light approach” is of to fight rising R&D and manufacturing costs. critical strategic importance, especially to Some Alliance All-Stars are also beginning to companies with strained balance sheets. As embrace the fab-lite strategy, a model in which process technology becomes less differenti- they no longer maintain their own manufac- ated, market-specific system know-how – an turing operations for components with chip ability to understand the end-product and how structures above a specific size. different chips integrate with one another – is Examples of Alliance All-Stars include fast becoming the true competitive advantage. Freescale, IBM and Infineon, each of which is As Market Creators focus more on design focused on nurturing collaboration with part- and less on manufacturing, their business ners as a core competency. When it comes models will begin to resemble the fabless to developing new technologies, Alliance model. Companies like Sony, AMD and Texas All-Stars would share the costs and risks of Instruments have publicly announced their designing new manufacturing processes fab-lite strategies; however, they have not by forming alliances. The alliance approach clearly defined their new business models allows each partner to later incorporate the and transition strategies. Only time will tell co-designed processes into its own manu- which industry participants will emerge as true facturing environments. One major benefit Market Creators. of this collaborative innovation approach is that Alliance All-Stars can continue to retain competency across the entire semiconductor “It’s really about what the customer manufacturing value chain without having to wants and what the end customer invest in the entire manufacturing capability. experience is going to be.” “You can’t be the leader by yourself – Phil Hester, CTO of AMD 25 anymore. The technology is just too complicated and expensive.” – John Kelly, Sr. VP of IBM Research24 7 More than “Moore” to win
  10. 10. Considering the “To fab or not to fab” Recommendations question With the seven Cs and so much resulting In the 1990’s, the cost of building a fab reached industry volatility, the proven strategies of the above the US$1 billion mark.26 Today, it would past may bring failures in the future. For ages, cost a company US$5 billion or more to build innovation has been a technology-led affair, 300mm wafer fabrication facilities, with additional with most big breakthroughs coming out of operation and maintenance costs.27 It is becoming giant and secretive research labs. It was an increasingly non-profitable for a company to have era when big corporations in developed coun- its own fab, except in cases where a very broad tries accounted for most R&D spending. product offering caters to different customer segments and the economies of scale can justify Our study has shown that higher R&D spent the fab’s operating costs. doesn’t help ensure better performance in IDMs must not assume that having a fab is a terms of growth, profitability or shareholder competitive advantage. In fact, some fabless returns. The game is changing from individual players have fared well without a fab. Unless IDMs to “ecosystem” competition. No one player can show that owning fabs will translate into can make it alone. What’s more, in order to tap higher profitability, they will likely face shareholder into the next growth wave of the industry, the pressure to pursue fab-lite or fabless strategies. traditional model of focus on technology prod- When making this decision, some key questions ucts and geographic markets will need to be for IDMs include: make room for a new business model, which emphasizes providing the right mix of business 1. Investment. Do you have the investment capacity offerings to a new set of end-user markets (US$4 billion or more over two years)? (see Figure 5). 2. Research. Do you have in-house research capability to support on-going research in the As companies navigate in today’s rapidly semiconductor designs, materials and process changing global business environment, their technology needed to remain competitive? ability to shift direction and introduce business 3. Demand volume. Do you have the volume model innovation is proving to be a critical necessary to keep the fabs fully utilized? success factor. In the IBM 2006 Global CEO Study, which was based on interviews with 765 FIGURE 5. The rules of the game have changed. Becoming end user-centric Past Future Technology product Business offering Geographic market End-user market Source: IBM Institute for Business Value.8 IBM Global Business Services
  11. 11. Business model corporate and public sector leaders worldwide, 2) The Enterprise Model approach involves we found that the financial outperformers put innovation in the structure of the enterpriseinnovation can happen twice as much emphasis on business model and the role it plays in new or existing value by bringing about innovation as underperformers. We also found chains. This approach focuses on redefiningchange to one or more organizational boundaries. that business model innovation had a much of the following: the stronger correlation with operating margin 3) The Revenue Model approach involves industry model, the growth than other types of innovation. 28 innovation in how companies generate enterprise model and revenues by reconfiguring offerings (product/ Neither the CEOs we spoke with, nor a review the revenue model. of the current literature, provided a clear defi- service/value mix) and/or by introducing new nition of business innovation. Nor did either pricing models. This approach leverages reveal what type of business model innovation customer choice and preferences, as well as yields the best results. To find those answers, new technologies. we conducted a follow-up study that identified These approaches to business model three distinct approaches to business model innovation can either be used alone or in innovation: via revenue models, enterprise 29 combination. models and industry models (see Figure 6). Choosing the right course of business model 1) The Industry Model approach involves innovation is only one part of the equation. innovation in the “industry value chain.” This Business capabilities must also be devel- can be accomplished via: moving horizontally oped to optimize the ability and likelihood of into new industries (for example, Virgin’s focus succeeding to innovate innovating success- on superior skills in consumer management), fully. These capabilities include the abilities to redefining existing industries (such as Apple’s center on end-user needs, collaborate and iTunes) or developing entirely new industries or integrate (see Figure 7). industry segments (such as Google and other search engine companies). FIGURE 6. Three ways to enact business model innovation. Industry model Solution Change the way your whole industry works Business model innovation Manufacturer Distributor Retailer Consumer Business offering Enterprise model Redefine what you do Status quo yourself and where you collaborate Product Revenue model A B C D E F Change the way you charge Old New your customers End user market Price Source: IBM Institute for Business Value. 9 More than “Moore” to win
  12. 12. FIGURE 7. Infineon: Becoming a customer-focused Three key optimization areas. enterprise Infineon Technologies AG engages in the design, Integration Collaboration Solution development, manufacture and marketing of semiconductors and system solutions addressing Business model innovation three central challenges to modern society: Business offering energy efficiency, connectivity and security. In 2003, Infineon set out to transform from a Status quo traditional product business into a complete solutions business and focused on acquiring new Centricity competencies while continue to capitalize on its Product competitive advantages.30 Old End user market New To build stronger customer relationships and become a customer-focused enterprise, Source: IBM Institute for Business Value. Infineon reorganized itself into smaller, relatively independent business units. Business units were Centricity: Strengthen connections with instructed to work closely with systems makers both customers and end customers in core market areas like cellular to resolve As the manufacturing of chips becomes technology problems at the R&D level.31 It also less of a marketplace differentiator, semicon- redefined market segments more specifically to ductor suppliers, especially IDMs, need to match customer needs. For instance, Wireless go beyond the manufacturing to understand was divided into Wi-Fi and Bluetooth. what customers are making and demon- By working closely with its customers, Infineon strate systems “know-how.” To do so, the has been more successful at translating go-to-market approach needs to take a more customers’ ideas into actual products, systems intimate form. The traditional marketing depart- and solutions. As a result, Infineon reached ment function of conducting marketing studies, number one in power semiconductors, access establishing demand and developing product products for broadband communication and in lines to address demand will no longer high-frequency solutions for wireless communi- work. Instead, companies must engage with cation.32 customers early on during the R&D phase and incorporate customer input throughout the Collaboration: Aim for radical collaboration product development lifecycle process. by thinking and acting “big” To meet the demanding needs of the customer Cultivating the ability to truly understand while addressing the escalating financial what customers and end users are thinking and intellectual capital needed to remain in and where the market is going is important; the business, ecosystem collaboration is no however, cultivating the ability to transform longer a luxury, but a necessity. Going it alone the organization and ways to do business is not only risky but also impossible, given based on the understanding of customer, end that semiconductor suppliers are becoming user and market needs is the key competitive more and more dependent on multi-enterprise advantage. Being a customer-focused enter- supply chain and fulfillment networks to meet prise is not about just the company strategy; it customer needs. Therefore, to meet customer is primarily about the execution.10 IBM Global Business Services
  13. 13. Along with selecting the needs and also stay financially viable, many to smart phones like the Apple iPhone – companies have embraced collaborative inno- companies rely on others in the ecosystem right course of business vation – sometimes even collaborating with to integrate new technologies more effec- model innovation, potential competitors. tively and provide one seamless solution forsemiconductor companies end customers. Semiconductor suppliers must hone essential To establish effective collaborative capabilities, can no longer afford to push pre-designed companies should focus on fully utilizing many business capabilities, chips to potential buyers. Truly addressing helpful collaborative tools (for example, Web end customer needs requires a broader, including the abilities to 2.0 tools) available today to enhance informa- system-focused view – a “holistic design”center on end-user needs, tion sharing among ecosystems. They should approach. They can no longer restrictcollaborate and integrate. also readjust company strategy and individual themselves to their original core fields of performance goals to make collaboration a expertise, and they must learn to how to inte- required part of how business is done. By grate ecosystem style. combining resources (both financial and intel- lectual), companies are no longer bounded by Different types of integration can be their own limitations. The power of many can achieved, based on the level of financial help meet increasingly challenging industry participation and risk. The level of integra- demands. tion can range anywhere from adopting an arm’s-length contract to pursuing M&A that Integration: Tighten ecosystem integration helps build vertical integration capabilities. to bring differentiated value to the end Companies should first take a deeper look at customer customer needs and then determine which As end-devices become increasingly complex ecosystem integration approach to under- – for example, consider the transition from take. the first mobile phone (the Motorola “Brick”) IBM: Pursuing collaborative innovation via an “open ecosystem” IBM Microelectronics Division is a top maker of application-specific integrated circuits (ASICs) and static SRAM chips, and a major supplier of chips for communications applications, including wireless phones and networking equipment. It also offers extensive contract manufacturing, or foundry, services, through which it manufactures chips for other companies. For IBM, collaborating in an “open ecosystem” was not an option – it was matter of survival. In 2003, IBM’s Microelectronics Division had just “lost US$1 billion in 2002 and was on its way to losing US$252 million in 2003.” 33 Investors wanted IBM out of the microelectronics business; however, IBM viewed keeping up with leading-edge chip technology as its key competitive advantage in the development of powerful servers. 34 To keep up with the rising cost of technology innovation development while running a profitable business, IBM built its “open ecosystem” strategy, also known as Common Platform Alliance. Currently, IBM has an “open ecosystem” of chip R&D with three Manufacturing Alliance Partners, which include Chartered, IBM and Samsung, and four Joint Development Partners, which include Freescale, Infineon, STMicroelectronics and Toshiba.35 This alliance has enabled the IBM division to keep generating cutting-edge technology for its servers and at the same time, make a profit despite a cyclical downturn in the chip industry.36 11 More than “Moore” to win
  14. 14. NXP: Generating new business through A self-assessment for chip makers nurturing a struggling ecosystem Industry participants will need to take stock of NXP, a newly independent semiconductor their current situation in the maturing semicon- company (founded by Philips), focuses on ductor environment. Thinking through answers providing semiconductors and associated to the following questions can help companies software that aims to deliver better sensory identify ways they can begin to adapt their experience in the areas of mobile communica- own business models in order to stay competi- tions, consumer electronics, security applications tive amid great change on many fronts. and others. As part of its growth strategy, NXP set its eyes on India’s entry-level wireless handset Strengthen connections with both market (such as handsets that are priced between customers and end users US$60 and US$149), which is the largest wireless • How do you segment your customers in handset market segment in India, accounting for order to understand their specific needs? 40 percent of the total Indian wireless demand.37 • How much user-based research does your To win the market share battle in this highly company currently incorporate into product competitive market, NXP is working to boost the design and development? Why and how Indian manufacturing ecosystem for wireless does this process need improvement? handsets and products for new applications, such as near-field communications, mobile TVs, point- • To what extent does your company’s of-sale terminals, GPS navigation systems, mobile product influence a customer’s buying payment and fixed-wireless terminals. decision? Lacking a venture capital arm, it began investing Aim for radical collaboration by thinking in companies that will set up electronics and acting “big” manufacturing units in India and also are • How does your company view information potential customers for its semiconductors. In sharing outside the organization, and what addition, NXP hopes to boost the weak Indian must you do to make it more feasible and manufacturing ecosystem by working with the more likely? Indian Banks Association and others to develop mobile-payment systems. It has actively engaged • To what extent does your company have some Taiwanese ODMs (“Original Design formal or informal relationships with adjacent Manufacturers”) by providing Indian market value chain partners? In which areas information, helping them in field trials and can you see the greatest need for tighter validation in the country, and even hosting their connections and communication? travel to India.38 • How can you build the support among your company’s employees – across all levels of the business – that is necessary to enact “collaborative innovation?”12 IBM Global Business Services
  15. 15. In the maturing industry, Tighten ecosystem integration to bring differentiated value to the end customer companies should • How much of the value chain does your assess their current company perform directly, versus relying onsituation in order to look others? beyond the expected • How well does your company understand benefits of Moore’s the economics of each part of its opera- Law, and plan to make tions? innovative business • What is your company’s plan to foster a model changes that strong reputation for working fairly with can optimize their business partners? capabilities. Conclusion The effects of the seven Cs are forcing semiconductor players to move away from traditional business models and re-evaluate what industry roles can offer the greatest returns. The old race of smaller, faster, cheaper every two years alone will not ensure success any more. To achieve sustained competitive- ness, they’ll need to look beyond the expected benefits of complying with Moore’s Law, and make innovative business model changes that can optimize their capabilities, particularly in the areas of customer centricity, collaboration and integration. 13 More than “Moore” to win
  16. 16. Authors Contributors George Bailey was recently appointed General Ken Englund, Partner, IBM Global Services – Manager of the IBM Microelectronics Division. Americas In this role, he has responsibility for IBM’s Karan Kapoor, Consultant, IBM Global semiconductor business. Previously, he was Services – India IBM General Manager and Global Leader Steven Kind, Business Solution Professional, of the IBM electronics industry organiza- IBM Global Services – Americas tion. He previously led a worldwide network of nearly 5,000 IBM employees focused on Waishan Leung, Senior Managing Consultant, electronics industry clients, and the develop- IBM Institute for Business Value ment of business and technology solutions to Michael Maslack, Executive Consultant, IBM meet industry needs. George has appeared Systems and Technology Group on American television and radio business Stephen Pierce, Business Solution programs, including CNBC TV’s “Power Professional, IBM Global Services – Americas Lunch,” and has been frequently quoted in The Wall Street Journal, Fortune, Industry Deepak Sharma, Managing Consultant, IBM Week, and other management publica- Global Services – Americas tions and newspapers. He is the author of Hideto Wakui, Partner, IBM Global Services – Irresistible! Markets, Models, and Meta-Value Japan in Consumer Electronics and A Thousand Tribes: How Technology Unites People in Great About IBM Global Business Services Companies. George can be contacted at With business experts in more than 170 countries, IBM Global Business Services provides clients with deep business process Wendy Huang is a Managing Consultant within and industry expertise across 17 industries, IBM Global Services in the Americas, special- using innovation to identify, create and deliver izing in human capital management consulting value faster. We draw on the full breadth of IBM within the industrial sector. Wendy has more capabilities, standing behind our advice to than 10 years of business consulting experi- help clients implement solutions designed to ence and has worked with clients across the deliver business outcomes with far-reaching electronics industry in a wide variety of busi- impact and sustainable results. ness transformation efforts. Wendy can be reached at IBM Global Business Services
  17. 17. References 10 Pausa, Ed. “China’s Impact on the 1 Wang, David T “IEDM 2005: Selected . Semiconductor Industry, 2006 Update.” Coverage.” Real World Technologies. http:// PricewaterhouseCoopers. 2007 http://www. . =RWT123005001504&p=2 web-X.pdf 11 2 Borst, Chris. “Advancing Nanoscience “Should India gamble on microchips?” through R&D Consortia.” March 25, NanoChina. February 28, 2007 http://www. . 2008. columns/?article=183 ntent&task=view&id=743&Itemid=182. 12 3 “Gartner pulls down its chip industry Harbert, Tam. “Private equity chips away at forecast.” EE Times India. January semiconductor industry: Investors see stable 16, 2007 . cash flows and need for consolidation.” ART_8800497850_1800007_NT_0be531e6. Electronic Business. December 1, 2006. HTM 13 4 “Moore’s law made real by Intel innovation.” Internet World Statistics “Internet Growth Intel Corporation. Statistics: Today’s road to eCommerce and nology/mooreslaw/?iid=search global trade.” http://www.internetworldstats. 5 com/emarketing.htm LaPedus, Mark. “Schemes strip cost out of 14 chip R&D.” EE Times. July 16, 2007 http:// . “Gartner Says Mobile Phone Sales Will;jsession Exceed One Billion in 2009.” Gartner press id=XZW3CAYR5HSLCQSNDLRSKHSCJUNN release, July 2005. 2JVN?articleID=201001339 press_releases/asset_132473_11.html 15 6 Hilkes, Rob. “Under the Hood: Uncovering Cooper, Charles and Tom Krazit. hidden chip costs.” EE Times. October 22, “Newsmaker: SanDisk CEO flashing forward 2007 . to phones.” C-NET News. August 31, 2007. jhtml?articleID=202402983 7 forward-to-phones/2008-1041_3-6205436. Ibid. html 8 “Next Generation Lithography Technologies 16 IBM Institute for Business Value analysis of for the Production of Advanced iSuppli data. Semiconductors.” Nanotechnology News. 17 Azonano. August 28, 2007 http://www. . Ibid. 18 IBM Institute for Business Value analysis of 9 “Gartner Says 40 Percent of Today’s Thomson Financial data. Semiconductor Vendors Likely to Leave 19 Ibid. the Industry Within 10 years.” Gartner 20 Ibid. press release. September 13, 2004. asset_104967_11.html.15 More than “Moore” to win
  18. 18. 21 28 Roberts, Bill. “Show me the technology.” “Expanding the Innovation Horizon: The Electronic Business. 8/1/2006. http://www. Global CEO Study 2006.” IBM Corporation. 22 29 Mutschler, Ann Steffora. “Intel funds Giesen, Edward, Saul J. Berman, Ragna Bell social network site Bragster.” Electronic and Amy Blitz. “Paths to Success: Three News. February 13, 2008. http:// ways to innovate your business model.” IBM . Institute for Business Value. June 2007 http:// . html?nid=3351&rid=1918692984 23 Helft, Miguel. “Venture Investing as ibvstudy/gbs/a1028552?cntxt=a1000401 30 a Strategy, Not to Make Money.” The “Focus on Customers: Expansion of New York Times. September 22, 2006. solutions business.” Infineon Technologies. “ business/22venture.html?_r=1&n=Top/ icht2003/english/2_1_customer_focus.htm Reference/Times%20Topics/People/H/ 31 Merritt, Rick. “Chip makers must shift from Helft,%20Miguel&oref=slogin fabs to systems.” EE Times. January 15, 24 Hamm, Steve. “Big Blue Goes for the Big 2008. Win.” BusinessWeek. February 28, 2008. jhtml?articleID=205800635 32 “Infineon Technologies at the Annual content/08_10/b4074063309405.htm General Meeting 2007: Headway Made in 25 Sperling, Ed. “Ecosystem vs. IDM: Is AMD Realignment - Successful Reorganization onto something?” Electronic News. March of Unprofitable Operations - Concretized 20, 2007 . Earnings Target of 10 Percent.” Infineon press CA6429394.html?industryid=47037 release. 26 Sidener, Jonathan. “Who needs fabs infineon/detail.php?pr_id=1244&lang=en 33 anyway?: Chip developers have found Hamm, Steve. “Radical Collaboration.” success without manufacturing capa- BusinessWeek. August 30, 2007 http:// . bilities.” February 8, 2008. aug2007/id20070830_258824.htm business/20080208-9999-1b8fabless.html 34 Ibid. 27 “IDM firms go for ‘fab lite.” EE Times Asia. 35 Common Platform: Joint Development March 16, 2007 . Partners. ART_8800456825_480200_NT_92ccf68e. about/joint_development_partners.asp HTM16 IBM Global Business Services
  19. 19. 36 Hamm, Steve. “Radical Collaboration.” BusinessWeek. August 30, 2007 http:// . aug2007/id20070830_258824.htm 37 Krishnadas, K.C. “NXP working to boost Indian manufacturing ecosystem.” EE Times. March 7 2008. , showArticle.jhtml;jsessionid=LMRG2SFYHQ 3H4QSNDLPSKHSCJUNN2JVN?articleID=2 06902451 38 Ibid.17 More than “Moore” to win
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