We all know the semiconductor business is a high-risk, high-cost, and when successful, high-profit industry. For those companies whose mainstream business is the design, development, manufacture and marketing of chips, their lifeblood and corporate longevity comes from the creation of innovative products aimed at burgeoning and booming application areas.
However, what about those companies that have semiconductor interests but it isn't their core activity? For them, the investment risk and roller-coaster revenues can become a fiscal ball and chain.
So, when Philips announced some time back that it wanted to get away from the high-volume semiconductor business, it understandably prompted a burst of speculation amongst industry pundits on how they would achieve that. Philips' reasons were plain enough. The company has strong revenue streams in business areas like domestic appliances, home entertainment, lighting, and medical products. The company likes these business sectors. They provide good profit and, importantly, they do so in a predictable manner. Just how shareholders and bean counters like it.
Now all of this is crystal clear and perfectly logical. So why hasn't anything happened yet? Philips said at an early stage it liked the idea of merging its chip division into a rival semiconductor company, possibly one of the European ones. Nice plan, so why no takers?
The problem lies in the fact that most semiconductor companies who lived through and survived the industry crash at the start of this decade have corporate plans that don't fit with Philips' ambition. Today, chipmakers are keen to concentrate on specific, clearly defined areas of business that they know will prove profitable. This is not to say that Philips' chip business would necessarily prove to be a financial risk. It's just that semiconductor companies want to focus on specifics rather than adopt strategies that would increase company size and hopefully market share in a wide variety of chip application areas.
As I said earlier, the chip business is high risk, and even large semiconductor companies these days want to move forward carefully. For many of them, the safest approach is to find small companies with smart, specialised products that promise high profit margins in specific application areas, and then pull out their corporate wallets and acquire those companies.