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The shape and dynamics of the semiconductor market have changed dramatically, driven by the exploding demand for smart, connected devices such as smartphones, tablets and PCs. Now, semiconductor manufacturers must cater to the demands of these consumer device makers, providing new products faster, with more features and functions, while managing increasing complexity and cost. These factors are challenging existing operating models and call for new ways of doing business.
To meet these challenges and tap into new opportunities that come with the surging demand for consumer devices, semiconductor vendors need to drive improvements across their business operations and supply chains.
The key to quickly capturing more value up and down the supply chain lies in enhancing four segments of the operating model:
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In the semiconductor market, most of the vendors have legacy value chains built in the era when demand for semiconductors was dominated by computer and industrial equipment manufacturers with a steadily consistent growth rate. In contrast, the hyper-growth in consumer demand for smart devices is expected to outpace the industrial segment significantly—intensifying the challenge for semiconductor providers to respond to the changes in their customer base.
With ever shorter product cycles of smart devices where multiple variants of new products are introduced in a single year, most semiconductor providers are rendered ill-equipped to handle the surge in demand. With slow semiconductor supply chains, the development cycle timeframe of a new semiconductor chip risks becoming a critical-path constraint for a device whose entire delivery cycle is shorter. Hence, materially shorter lead time is what chip companies ought to strive for to harness a bigger share of demand from consumer device manufacturers.
Key findings and research suggest shipments of smart devices will increase from nearly 1.2 billion in 2012 to almost 2 billion in 2016. With an expected 11 percent compound annual growth rate (CAGR) for smart devices between 2010 and 2015 (which significantly outpaces the 7.5 percent expected CAGR of industrial products in the same period), smart device consumers will account for nearly 37 percent of the market by revenue and 22 percent of device units.
With this hyper-growth, volume of consumer device units produced in the future will clearly surpass the industrial segment, intensifying the challenge for semiconductor vendors to cater to the rising demand from smart device manufacturers.
Furthermore in the semiconductor market, acceleration in the new product introduction life cycle of smart devices is another challenge. The short development cycle has contributed to a rapid proliferation in products—by 2015, more than 300 tablets and 1,000 smartphone variants are expected to be released.
With each product striving to differentiate itself through its features and functions, relying in turn on the semiconductor chips embedded in the device, speed to launch new chips is also critical to the success of semiconductor manufacturing companies.
Alongside the time pressures, there are challenges around cost and complexity. For differentiation, extra features increase the design cost. And unlike the demand in the industrial segment where integrated circuits could be priced ahead of anticipated volume, future demand for smart consumer devices is far less predictable—making pricing more risky and return on investment uncertain.
All these factors challenge existing semiconductor business models and call for a new operating model.
To tap into the opportunities offered by consumer devices, semiconductor vendors need to drive improvements across various areas of their business and supply chain. In our view, the key to accelerating the value chain lies in four segments of the operating model:
Market devices and services: Strengthen the integration with original equipment manufacturers (OEMs) of consumer devices to adapt more flexibly to change, reduce costs and achieve faster time-to-market.
Innovate solutions and manage research and development: Integrate the dynamic of functional and vertical integration. Software is becoming critical, adding capability of software and system design alongside chip design and development is crucial.
Manufacture devices and develop solutions: Resolve supply-side constraints to improve product development and lead time. Provide OEMs customers visibility into supply chains and enhance business' agility via collaboration.
Fulfill demand: Enhance production capacity to satisfy customer demand. Shorter fulfillment timelines will continue to play a critical role considering the high volumes and increased frequency of orders.
January 23, 2013
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