Major Industry Trends
If there is one sector that is changing the nature of the world we live in faster than any other, it is electronics. From mobile phones to the internet, from telecommunications to satellite TV, electronics are ubiquitous and advancing by leaps and bounds, with more power being crammed into less space year on year. It is fashionable at this point to quote Moore’s Law. Geoffrey Moore was the co-founder of the PC chip company, Intel, and the man famous for predicting that the number of transistors on the same-sized piece of silicon would double every two years—without bothering even to imply an end date for this process.
A few years ago, it was thought that Moore’s Law was running out of steam, as circuits were (a) becoming small enough for quantum effects to introduce instability in current flow, and (b) becoming crowded enough for the heat generated from operating the chip to start to be a real problem. However, advances in silicon substrate technology (the introduction of metal oxide gates, for example) opened up the door again, and Moore’s Law still holds good. Instead of Intel merely producing one central processing unit (CPU, the calculating “heart” of a microcomputer) on a chip, it produced first two CPUs per chip, then four, then eight, and we are very close to 16-CPU chips, with higher multiples possible and planned beyond this.
Simultaneously, the software industry is on a steep learning curve as it rewrites its applications to take full advantage of the vast amounts of processing power becoming available, whether at the server, on people’s desks, or on a plethora of handheld devices, from palmtop computers to mobile phones.
As the amount of cheap computer power available to engineers has increased, the power of electronics to transform the world has moved forward in leaps and bounds. No part of industry is now untouched. The ability to simulate real physics inside “the box” has allowed car-makers to stress-test both virtual parts and the whole design, long before metal goes anywhere near being machined. In advanced medicine, biosciences companies model molecules and processes to predict drug interactions on target proteins or cell constituents, before any real-world work is done. In the oil and gas sector, vast data sets from seismic and advanced scanning of reservoirs are turned into visual, three-dimensional models that geologists can “walk through,” to examine reservoirs “from the inside” before any well is drilled.
The ability to create and explore real physics through virtual models increases dramatically with each new breakthrough in processing power. Advances in electronics truly have the power to change the rules for whole industries.
The electronics manufacturing sector is generally separated from the electrical manufacturing sector by a technical distinction. Under this, the term “electronics” refers to the flow of charge through non-metal conductors, such as silicon in semiconductor implementations, and “electrical” refers to the flow of charge through metal conductors. Electrical is all about wires, and electronics is all about semiconductors, broadly speaking. The latter leads to printed circuit boards (PCBs) and memory chips, while the former leads to white goods and power stations (with the proviso that almost all electrical goods these days have some PCB control circuitry somewhere).
Market Analysis
From an industry perspective, electronics has spawned a vast range of specialist industries, from the IT industry (dominated by the likes of IBM and its competitors at the mainframe end, and Intel and AMD at the PC end), to the mobile-phone market. It includes TV-set manufacturers, video-game consoles, and, across an array of industry sectors, a vast army of specialist control-systems manufacturers, not to mention the aviation and auto sectors, both of which could not exist in their present forms without massive input from the electronics sector. Then there is the medical devices market, and so on and so forth.
Asia, today, is regarded as the powerhouse of PCB and memory-chip production, yet it all began through a combination of some breakthrough research in Japan, and US companies outsourcing first PCB assembly, then PCB fabrication, to Asia to take advantage of cheap labor rates. Today, Asia’s dominance in motherboard and memory-chip manufacturing has reached the point where a US air force colonel, Charles Howe, was prompted to write a strategic study looking at the potential impact on US national security of having so much of the electronics industry outside the US.
The point is not without irony, as the semiconductor industry began in the US with innovations such as Texas Instruments’ invention of the integrated circuit in 1958, and Intel’s production of the first 8-bit microprocessor, the 8008, in 1972. Howe’s study gives a very clear account of the integrated circuit (IC) design process. The basic design process requires electronic design automation (EDA) software in the hands of experts. Fabrication involves “etching” or imprinting the designs onto silicon wafers.
Each new generation of chip tends to require either a totally retooled fabrication plant (“fab”), or a new plant built from scratch. Each plant costs around US$3 billion, which means that each new generation of chip represents a huge bet by the manufacturer that it can sell vast numbers of its chips to the various global markets.
Very few companies in the world can bet on that scale and get it wrong twice, so semiconductor chip manufacturing is a game with very high entry costs, and is played for very high stakes. Asian chip companies generally play a safer game, and focus on producing not CPUs, but peripheral components, such as motherboards and memory chips.
The entire semiconductor industry is tremendously vulnerable to downturns in the economy, as in all markets, from PCs to mobile phones, the sale of new products is predicated on global growth. There is no doubt that the semiconductor industry is suffering from the global downturn. The industry recorded its first year-on-year drop in sales, at the end of 2008, since the dot.com crash in 2001.
According to the Semiconductor Industry Association (SIA), total sales for 2008 amounted to US$248.6 billion, down slightly from the $255.6 billion figure for 2007 (−2.8%). The sales for December highlighted that sharpness of the downturn, with sales falling from US$22.3 billion in December 2007, to just US$17.4 billion in December 2008, down 22%. There was also a steep decline month on month, in that November 2008 sales were US$20.9 billion, which meant that December’s figure represents a fall of 16.6%.
What made the December figures worse is that the fourth quarter is traditionally a strong quarter for the industry, boosted by Christmas sales of new PCs, laptops, and handheld devices in the retail market. However, SIA president, George Scalise, commenting on the results, said that weakness was experienced across the semiconductor industry, including automotive products, PCs, cell phones, and corporate IT products. The steepest declines, though, he pointed out, were in the memory sector, where manufacturers cut prices hugely in order to boost volume.
According to the SIA, consumer demand now accounts for 50% of the worldwide drive for semiconductors, which means that the fortunes of the chip industry “are increasingly linked to macroeconomic conditions such as GDP, consumer confidence, and disposable income.”
However, global demand still exists, and Asian producers, particularly, are seeing strong orders for memory for cell phones and PCs, which is driving up the total “bits shipped” figure. The reason for this is the seemingly irreversible hunger of devices of all kinds for more and more internal memory. As the world moves to more video content over mobile phones, for example, the pressure for more memory grows and grows.
Video is massively more memory-hungry than voice, which itself is more demanding on memory than text. However, price pressure on the sector is intense, and margins are being slashed.
“Over the past 12 months, DRAM [a memory chip] content in the typical PC grew by 44%, to an average of 1.8 gigabytes, while the NAND content of a typical cell phone increased by 244%,” the SIA says. Yet the industry is basically making a lot more memory for a lot less money, and revenues are in decline.
The Asian Semiconductor Industry
The Asian semiconductor industry began in the 1960s, with small pockets of foreign investment. Japan established a semiconductor industry in the 1970s, and in 1979 Fujitsu became the first company to mass-produce 64 KB memory chips, with Japan cornering the world market in memory chips by the mid-1980s, passing the US in semiconductor production volumes. By the late 1980s, South Korea had developed a thriving memory-chip industry, with companies such as Samsung enjoying rapid growth. Taiwanese investment generated the world’s first “on-demand, fab-for-hire” plant, and Singapore, Malaysia, and China have all developed significant chip industries.
According to Colonel Howe’s study, the first US outsourcing investment in the sector was by Fairchild Semiconductor in Hong Kong in 1961. Outsourcing began with chip assembly (bringing the various components together to complete a printed circuit board), then moved to fabrication, and, later, in the 1980s, to chip design.
Asia’s dominance of many aspects of the world chip industry today is illustrated by the fact that its share of the US$248 billion global sales in the sector for 2006 amounted to more than 60%. Until the current downturn, Asia was also the fastest-growing semiconductor arena, with a 12.8% compound annual growth rate (CAGR) in the years from 2002 to 2006.
By contrast, Europe’s semiconductor sales grew by just 4.2% CAGR, and the US by 8.5% (source: Datamonitor). In 2006, the largest end-markets for semiconductor products were PCs (44%), consumer electronics (17%), and cell phones (17%), in all of which Asian manufacturers figure strongly.
According to the Electronic Industries Alliance (EIA), a national trade organization that includes the full spectrum of US electronics manufacturers, national paranoia about where semiconductor work is done, or who “owns” what, has the potential to be hugely counterproductive to the sector. As a sector that thrives on R&D and innovation, the greater the number of participants, and the freer and more open the semiconductor “universe” is, the better it will be for the sector, and for the global economy, the EIA argues.
In a new initiative titled “The Technology Industry at an Innovation Crossroads,” the EIA argues strongly against what it sees as the possibility of protectionist policies stifling innovation in the sector. “The core value of a knowledge-based company or society should be innovation,” it says. The US and other Western countries should not be worrying about the possibility of China or India dominating the semiconductor industry in years to come; they should be working to develop a vision and a strategy for the sector, the EIA says.
This opens up one of the really important themes for the sector. Electronics has enabled the globalization of business, and the electronics sector has itself, in turn, been shaped by globalization. “The resulting reorganization of manufacturing (in all sectors) along global lines, plus the creation of new, globally competitive service and knowledge-based industries (of which the semiconductor industry is a prime example) poses unprecedented challenges. . .,” the EIA says.
Countries with weak science and mathematics education, and with a dearth of R&D funding, will fall behind countries that prioritize these areas. Similarly, countries that stay open to what the EIA calls “the brightest foreign minds,” and that allow their companies to recruit the best from around the world, will prosper, while those that seek to restrict high-paid knowledge jobs to their own nationals will fall behind.
The semiconductor industry has already enabled software designers to go some way down the road to “virtualizing” our world, creating immensely powerful tools for solving real-world problems far faster than ever before, and enabling new products, new drugs, and new forms of entertainment (of which the video-games console and the mobile phone are two stunning examples) to be brought to market extremely rapidly.
It is a safe bet that this sector is going to change life as we know it almost beyond recognition over the coming decades. As such, it is certainly a sector worth watching.
www.qfinance.com