2016: What’s Next For the Semiconductor Industry?


2015 will go down as the year of the mega merger in the semiconductor industry. After several years of normal consolidation, the M&A trend exploded in this segment in 2015, driven by a general lack of growth in the industry, combined with top-heavy business models. From 2005 to 2014, there were a total of 583 acquisitions and/or mergers, for a total estimated value of about $134B. In 2015, there have been a total of 23 deals valued at roughly $131B, and, as we look into 2016, there seems to be ongoing news reports about multiple other possible mergers. The industry landscape is changing to be sure.

As we look ahead into 2016 and beyond, the critical question to be asked is what comes next for the industry? We believe there are 6 key trends to watch for:

1. Pricing power: Over the past few years, with the rapid growth in consumer electronics combined with competition from Asia, and the continued integration of functionality, many semiconductor companies have suffered from a lack of pricing power. However, the consolidation trend will likely return pricing power back to some (not all) companies. For example, Avago/Broadcom will now be in a better negotiating position with their customers than either company was separately in areas such as enterprise storage, wireless connectivity, and wired infrastructure, where both companies have a significant presence and large breadth of IP. The net result could be higher margins for the combined company.

Semiconductors remain the backbone of the electronics industry and will remain so for the foreseeable future.

2. Smaller companies will become niche players: Although most of the previous deals (pre-2015) were focused on small/medium sized semiconductor companies, the vast majority of the deals done in 2015 were those of larger players. This is a significant new development, as the “rich get richer” so to speak. As such, the most likely outcome is the smaller companies will remain “niche” players, focused on point products.

3. Head count reductions: The single biggest issue cited as a driving force behind the recent mergers is the ability to achieve large synergies. This is a polite way of saying the combined companies plan to cut expenses and eliminate redundancies in their operations. This includes not only duplicate functions such as HR, finance and legal, but also R&D. According to the SIA, the semiconductor industry currently employs about 250,000 employees worldwide. Many of the recent mergers will result in headcount reductions between 15-25%, which is a significant hit to the industry.


4. Risk to innovation: Once the initial integration plans have occurred, the combined companies will likely start to integrate their technologies and roll out next generation integrated devices targeting IoT, Cloud Computing, Automotive, and Wearables, among others. Areas such as FPGA and CPU integration (Altera/Intel) will enable a new generation of programmable processing units, for example. However, given the industry’s focus on achieving expense reductions and “synergies”, there is a real risk to a slowdown in innovation, as new projects are sacrificed to achieve greater cost efficiencies for the company.

5. Spin off of product lines: Once the integration phase has passed, the natural next step for management is to review the strategic direction of the “new” company. Many of the recently announced mergers include companies that have non-strategic assets in their portfolios. The next phase of the semiconductor industry will include the spin off, sale or divestment of non-strategic assets. Mergers such as those of Freescale/NXP, Intel/Altera, and Avago/Broadcom will likely result in non-strategic product lines being sold or divested.

6. Emergence of private semiconductor companies: Finally, the longer-term impact to the industry could be an emergence of semiconductor start-ups. We will likely see groups of engineers from Intel, Altera, NXP, Avago, Broadcom, and other prominent companies leave to start their own ventures. In fact, we are already seeing several interesting private companies in areas such as low power computing, Gallium Nitride-on-silicon base wafers, and ultra broadband communications, among others.

Semiconductors remain the backbone of the electronics industry and will remain so for the foreseeable future. As such, investors and electronics industry participants need to pay attention to this segment. Although in the near term the current M&A trend will lead to a shrinking chip industry, longer term, we need to see more investment dollars put to work in semiconductor R&D in order to continue to innovate exciting new products for emerging end markets such as IoT, Cloud Computing, Wearables, and Automotive, among others.


BitNavi is a blog conceived by Karl Motey in the heart of Silicon Valley, dedicated to emerging technologies and strategic business issues challenging the industry.

Follow them on Twitter: @bitnaviblog


Leave a Reply

Your email address will not be published. Required fields are marked *