Semiconductors are booming. Global annual sales have surged from 1/3 of a trillion dollars in 2014 to nearly 1/2 trillion dollars in 2018. But the largest players in the industry are taking bigger and bigger bites out of the total market, which rose 13.4 percent to $476.7 billion last year, according to market researcher Gartner. To cope with the rising chip development costs, many companies are turning to consolidation.
The 10 largest semiconductor companies last year combined for $193.6 billion of sales, or more than 40 percent of the total market, according to preliminary results from Gartner. The top 25 companies are projected to grow around 16 percent and hold 80 percent market share in 2018. The rest of the market is estimated to grow 3.6 percent in 2018. Samsung and Intel together made three out of every 10 dollars in the industry.
No company sells more memory chips than Samsung, while Intel is the largest producer of processors used in data centers and personal computers. Qualcomm leads the market for smartphone chips and Texas Instruments is at the forefront of analog chips, which are used in basically every electronic device. NXP Semiconductors is the largest supplier of chips to car manufacturers, while Broadcom dominates the networking market.
Despite the recent surge in semiconductor sales, many companies are burdened by the increasing cost of building chips and pressure to keep prices down. That has led to hundreds of billions of dollars of mergers and acquisitions over the last five years. Every company out there is looking to enter new markets with new combinations of chips. They are also eyeing efficiencies of scale to help preserve profit margins.
From the first quarter of 2015 to the fourth quarter of 2018, semiconductor deals totaled around $235 billion, according to market researcher IC Insights. The consolidation started suddenly: deals totaling only $46 billion were announced from 2010 to 2013, according to IC Insights. Companies such as Broadcom and Texas Instruments have built themselves up through big deals. Others, like Nvidia and Qualcomm, have avoided them.
"The largest semiconductor supplier, Samsung Electronics, increased its lead as the No.1 vendor due to the booming DRAM market," Andrew Norwood, an analyst at Gartner, said in statement "While 2018 continued to build on the growth established in 2017, the overall gains driven by memory were half the 2017 growth rate. This is attributed to memory entering a downturn late in 2018," he added.
Since prices for DRAM and NAND fluctuate based on supply and demand, Samsung has been able to charge higher prices during the recent shortage. Last year, the South Korean conglomerate overtook Intel as the largest chip supplier. The company's rivals have also grown at a blistering pace: Micron's growth was 33.8 percent in 2018, while South Korea's SK Hynix grew at 38.2 percent in 2018.
But the company's best times may be behind it. Samsung's results last quarter were hurt by increased competition in phones and flagging demand for memory chips, its most profitable business. The company says its operating profit plunged about 30 percent in the quarter as the DRAM market started slowing down. Prices are projected to drop another 20 percent in the first quarter, according to DRAMeXchange.
Samsung has also slashed capital spending to prevent flooding the market. That would deflate prices for long-term storage and short-term memory. Other companies, which have been trying to follow Samsung's spending lead, are also reigning themselves in. Last month, Micron said that it would cut $1.25 billion of planned investment into its manufacturing output this year. The move is feeding into fears of a market slowdown.
Memory was the largest product category in the semiconductor space last year with its market share growing from 31 percent to 34.8 percent, according to Gartner. Memory chips sales surged more than 25 percent last year in part because of increasing DRAM prices. With smartphones, personal computers and data centers using more storage, the NAND market increased 6.5 percent despite prices decreasing, Gartner said.
Intel - which holds 13.8 percent of the semiconductor market, second to Samsung's 15.9 percent market share - is also skyrocketing. In the first half of the year, it reported data center sales 23 percent higher than in the first half of 2017. Cloud computing sales shot up 43 percent as Intel tapped into a surge of capital spending at Google, Microsoft, Facebook and other technology giants.
Intel's total addressable market has increased to $300 billion as the Santa Clara, California-based company has shifted into markets other than personal computers, according to chief executive officer Robert Swan. But the company has had to spend aggressively to get it there. Intel dropped $16.7 billion to acquire Altera Corporation and $15.3 billion to buy Mobileye, muscling into autonomous car space.
The pace of deals has slowed down significantly. According to IC Insights, deals in the semiconductor sector totaled $107.3 billion in 2015. The following year featured $100.4 billion of deals. But that total was slashed to $59.3 billion after Qualcomm scrapped its NXP deal, which was valued at $39 billion before being bumped up to $44 billion. The value of deals declined to $28.1 billion in 2017 and $23.2 billion last year.
The deals that fell apart last year may have been more significant than the ones that didn't. In March, President Trump stepped in to overrule Broadcom's $122 billion hostile takeover bid for Qualcomm, which annulled its $44 billion deal for NXP after it stumbled into the simmering trade conflict between the United States and China. The biggest deal ended up being Microchip's $8.35 billion acquisition of Microsemi in March.
The NXP Semiconductors deal would have been the industry's largest ever, and there may never be another like it. Avago's takeover of Broadcom for $37 billion stands as the largest, followed by Softbank's $32 billion acquisition of ARM. Because of global trade tension and rising protectionism, deals larger than $40 billion are increasingly unlikely, according to IC Insights. It's a short list of companies that can even afford them.
Qualcomm is spending the savings from the NXP deal to buy $30 billion of stock from shareholders. Other companies may be concerned about the cost of failure: Qualcomm ended up paying $2 billion in penalties to NXP after the deal was canceled. Others may want to avoid the complexities of integrating tens of thousands of products and tens of thousands of employees. Broadcom has also started looking at smaller chip deals.
Regulatory roadblocks could stop another deal like Qualcomm's from working out. The bid fell apart after China dragged out its decision about whether to approve the deal more than a year. With the deal canceled, both firms are struggling make up for lost time. Other companies may refrain from attempting a major deal given mounting global trade friction and efforts by the United States to protect its domestic technology.
"The current rankings may see significant change this year with the expectation than memory market conditions will weaken," Norwood said in a statement. "Memory has already entered a downturn [and] there is the looming trade war between the United States and China, and mounting uncertainty about the global economy." He added: "2019 will be a very different market from the previous two years."