Europe's semiconductor manufacturers have all experienced a drop in revenues this year, and as an industry group the decline is put at around 8% with some of the individual companies experiencing a 15% reduction. In contrast to those depressing figures, industry analysts and pundits are saying 2013 and 2014 will be positive with growth rates being quoted at between 6% and 9%.
So given those rosy predictions, answering the question about how the semiconductor industry will fare relative to the Euro zone cash dilemma looks easy. Or is it?
Europe's politicians have still not hammered out a strategy that clearly resolves the problems created by a debt laden boom period in Europe that led to the bust situation. Surprisingly, many of the senior government ministers claim that this wasn't foreseen, which is hard to believe given past industry examples like the boom/bust period that deeply effected the electronics industry back in 2000. As it stands, huge monetary bail-outs to countries that have created overwhelming debt are not providing an instant financial solution.
Hardening Attitudes
As the crisis trundles on, the situation is aggravated by the hardening attitudes of the voting population of countries that have to shoulder the major financial burden of providing bailout cash to save the Euro. A recent opinion poll in Germany found that only 25% of Germans think Greece should stay in the Euro zone or get more financial help. So against this backdrop what are the prospects for the international semiconductor companies?
Dale Ford, senior director of electronics and semiconductor research at industry analysts IHS says: “Amid rising economic concerns -- including the Euro zone crisis, slowing manufacturing growth in China and stubbornly highly unemployment in the United States -- second-quarter growth for the global semiconductor industry was highly disappointing. Approximately two-thirds of the world’s semiconductor suppliers saw their revenues decline in the second quarter of 2012 compared to the same period in 2011. This weak performance bodes ill for the semiconductor industry’s growth prospects for 2012.”
Brighter Prospect
But what about next year? A brighter prospect comes from analysis by World Semiconductor Trade Statistics. It maintains the worldwide semiconductor market will grow by 7.2% in 2013 and reach a total value of €255 billion, followed by 4.4% growth to reach €266billion in 2014.
There are some signs that this optimism could be well placed. Amongst the recent positive news about Europe's semiconductor business was the important announcement that the Taiwan Semiconductor Manufacturing Company (TSMC) has decided to invest €1.11 billion in Netherlands-based lithography specialist ASML Holding NV. By doing this TSMC has joined Intel in taking a stake in Europe’s largest chip-equipment maker to secure future technology.
For its money TSMC gets a 5% equity holding in ASML for €834 million of the total investment; €276 million will go to research and development of next- generation lithography technologies.
A key aspect that encouraged TSMC's investment is this: it will be granted access to machines under development that will reduce manufacturing costs. Intel, the world’s biggest chipmaker, agreed to invest as much as $4.1 billion last month in ASML’s industry investment programme to fund innovation.
So how are some of Europe's major chip companies doing in terms of equity value? Currently ARM has stormed into the lead when it comes to market capitalisation and is way ahead of Infineon, STMicroelectronics and NXP, making it Europe's most valuable semiconductor company. In capitalisation terms the figures are ARM $12 billion, NXP $5.8 billion and STMicroelectronics $4.8 billion.
Looking Further Afield
In terms of future revenues, companies serving international electronics, IT and communications clearly recognise the need to fully develop and financially exploit emerging markets. Many company CEOs will admit to implementing this business strategy, but do concede there remains a lot of work to be done before the full financial trading potential of such markets are realised.
A recent report from Global Intelligence Alliance (GIA) concluded that technology and telecom companies are expecting 50% of their global revenues will come from emerging markets by 2017. This is an enormous figure and one that I treat with caution given the uneasy political and financial characteristics of some countries. However GIA makes clear in its report that Brazil, Russia, India and China are still the top four most important emerging markets for 2012-2017.
Of these, GIA maintains that Russia is least favoured (with the majority focusing more on India, Brazil and China). Some of the larger technology companies are targeting Brazil as their top emerging market and surprisingly favour Vietnam to Russia as their fourth most preferred market. Also seen as worthwhile are Indonesia, Mexico, South Africa, the Philippines, Argentina, Thailand, Turkey, Malaysia, Singapore and the United Arab Emirates. That's quite a mix of countries and it will be interesting to see future trading trends for electronics companies that do push into those emerging markets.
So it would appear that despite the Euro zone crisis there remains ample opportunity for the semiconductor industry to move forward in 2013. Sectors such as automotive, medical and industrial electronics continue to provide a stable source of revenue for the chip makers. But it’s the fierce market competition between giant adversaries like Apple and Samsung in the smart phone and tablet markets that provide the semiconductor industry with very high volume orders.
Analysts at IHS recently reported that Apple is clearly the World's leading OEM purchaser of semiconductor products. This year it is expected to buy nearly $28 billion worth of semiconductors, up 15% from $24 billion in 2011.
Apple is also expected to achieve the strongest growth in chip spending among the World's Top 10 OEM semiconductor buyers and is set to expand its lead in global chip purchasing in 2013 with growth of over 12%.
Having big spenders like that sounds like a great prospect for the semiconductor companies and their shareholders, but with one very important proviso: Beware an overly dominant purchasing position held by one global OEM customer. A potential result of that could see immense pressure put on the chip suppliers to cut pricing. It’s far better to have a broad selection of profitable OEMs that are prepared to pay a fair price for semiconductor products.