The Industry’s Wild Ride in 2015 & Thinking Two Steps Ahead in 2016
By Denny McGuirk, SEMI President & CEO
“In like a lion, out like a lamb” is just half of the story for 2015. While initial expectations forecasted a double-digit growth year, the world economy faded and dragged our industry down to nearly flat 2015/2014 results (http://www.semi.org/en/node/60181).
However, 2015 will be remembered for its wild ride that fundamentally changed the industry. In 2015 a wave of M&A activity swept across the industry supply chain—unlike any single year before—with scores of transactions and notable multi-billion dollar companies absorbed. In 2016 we’ll be working within a newly reconfigured supply chain.
Increasingly in this business landscape, collaboration is required simultaneously across the extended supply chain—customers’ customers’ customers are now routinely part of the discussion in unit process development. Facilitating interaction and collaboration across the extended supply chain is part of what SEMI does and I’ll be updating you in next week’s letter, but first, let’s review what’s happened and what’s happening.
2015 down 1%. In Like a Lion, Out Like a Lamb
2015 had an optimistic start with a strong outlook and good pace in Q1 and 1H. In January 2015 forecasters projected semiconductor equipment and materials growing in a range of 7% to nearly 14% vs. 2014. Global GDP, as late as May 2015, was pegged at 3.5% for 2015 after coming in at only 3.4% in 2014. In August, estimates dropped to 3.3%, in November estimates dropped further to 3.1% for the year.
As our industry has matured, semiconductor equipment and materials growth rates are ever more tightly correlated to shifts in global GDP. With the global GDP unexpectedly dropping, the second half saw declining book-to-bill activity and the year will likely end flat or slightly negative for 2015. Though nearly flat, the numbers are still impressive with a healthy $37.3B annual revenue for semiconductor manufacturing equipment and $43.6B for semiconductor materials.
What is notable is since the 2009 financial crisis, electronics, chips, and semiconductor equipment and materials markets have been much more stable year-to-year than in the years prior to 2009. Also, the movement of the three segments is much more synchronized compared to the earlier years of boom and bust. For SEMI’s members this means cycles are becoming more muted—enabling members to shift business models accordingly to better maintain prosperity.
2015 $125B+ M&A. New Business Cards for Silicon Valley Icons and Global Titans
2015 is a year that will be viewed as an inflection point in our industry. The unprecedented M&A volume (more than $125B for semiconductor related companies) and the size of individual deals through the electronics supply chain will permanently change the industry.
While there have been waves of consolidation for semiconductor Integrated Device Manufacturers (IDMs) in the 80s and 90s, and semiconductor equipment and materials in the 90s and 00s, the fabless semiconductor companies are the latest wave undergoing consolidation. Although, in 2015, not just fabless, but all segments saw major deals—even iconic chemical brands DuPont and Dow Chemical announced their intention to merge.
Large and familiar brands like Broadcom (Avago), SanDisk (Western Digital), Altera (Intel), Freescale (NXP), and KLA-Tencor (Lam Research) have been purchased and will continue forward as part of their acquirers. China is on the move with its ambitions to quickly grow its indigenous semiconductor supply chain with recent acquisitions of ISSI, OmniVision, NXP RF power unit, and notably Mattson in the semiconductor equipment segment.
In an age when new fab costs are pushing double-digit billions of dollars and leading edge device tapeouts are surpassing $300M per part, consolidation is a strategy to increase scale, leverage R&D, and compete better. For SEMI’s members, the winner-take-all stakes increase and raise expectations for technology, product performance, application development, speed, and support. This, in turn, means that SEMI members have an increased need for a newly drawn pre-competitive collaboration model along the extended electronics supply chain and for Special Interest Groups (SIGs) to drive collective action in focused sub-segments and for specific issues.
2016 up ~1%. Stay Close to Your Customer and Your Customer’s Customer and …
Current projections for semiconductor equipment and materials suggest that 2016 will not be a high growth year. The span of forecasts ranges from almost -10% to +5%. At SEMI’s Industry Strategy Symposium (ISS), 10-13 January, we will be taking a deep-dive into the 2016 forecast and on the business drivers and will have a much better picture of the consensus outlook.
However, it is already quite clear that following this enormous wave of consolidation, the industry will look different and will offer new opportunities. Listening to SEMI’s members, I’ve heard that during this period of upheaval it’s absolutely critical to stay close to one’s customers – but more than that – to have access and ongoing direct dialogue with the customer’s customer … and customers’ customers’ customers.
In light of the cost of research and development, the magnitude of risks, and the speed of new consumer electronics adoption, SEMI members find that they need to intimately know emerging requirements two to three steps away in the supply chain, and may require rapid and innovative development from their own sub-suppliers to meet product delivery in time. In parallel, we see system integrators (electronics providers) staffing up with semiconductor processing engineers and equipment expertise, both for differentiation of their own products and for potential strategic vertical manufacturing.
2016 will see an acceleration of collaboration and interdependence across the extended supply chain. Next week, I’ll provide an update letter on SEMI’s activities with an overview of what SEMI is doing to meet the realities of a reshaped industry. SEMI’s role is evolving and more important than ever in helping the industry achieve together, what it cannot accomplish alone.
January 5, 2016