Change. For many, it’s a word that conjures up negative emotions: fear, anxiety, trepidation. And that’s understandable. Change is hard. It’s uncertain. It’s uncomfortable. But it’s also necessary at various points in the lifecycle of companies and industries to remain competitive—as the US semiconductor industry today is recognizing.
An industry under pressure
Traditional semiconductor players face many market pressures on their business. A big one—maybe the biggest—is political heat from the US government to bring more manufacturing back to the country. Undoubtedly playing a role in that push is the erosion of US chip production. CNBC.com reports that in the past 20 years, the US share of global semiconductor manufacturing capacity has been cut in half, to just 12%. While US semis might still have some US-based manufacturing, for the most part, they hang their hats on Chinese production…and the rug could be pulled from under their feet at any moment if trade tensions between the US and China escalate.
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US share of global semiconductor manufacturing in the past 20 years
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Semis also are challenged to really speed up their time to market—competition enters the market at a rather unforgiving pace. Making matters worse, software and platform competitors such as Amazon and Apple have demonstrated a relentless ability to leapfrog. And in this case, chip companies’ customers become very formidable competitors. Talk about a double whammy!
And then there is global demand which was cut by $56B in 2019 according to the Semiconductor Industry Association and will stay relatively flat in 2020 due to COVID. On the other hand, demand is growing for sophisticated and customized chips that can support new technologies such as 5G and the Internet of Things, or even those souped-up headsets with active noise cancellation capabilities. This means the days when devices were created around plug and play chips are rapidly fading. Technology evolution allows for chipsets to be tailored and customized in ways that give product designers “artistic freedom” in an affordable way—and semis need to respond accordingly.
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Caption: In 2019, global demand for chip manufacturing was cut by $56 billion (USD) and is estimated to stay flat in 2020.
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Transform or die
So, what does all this mean for traditional chip manufacturers? It means they’re ripe for transformation—not only across their business to fuel new chip R&D, design, and manufacturing, but also across their HR and IT organizations to ensure future-ready talent and supporting technologies. It sounds a little intimidating, especially during such turbulent times. It feels as disconcerting as fixing a boat’s rudder in the middle of a gale. But it’s exactly what US semis need to do to avoid running into the jagged rocks ashore.
The fact is, traditional US semis no longer operate in a world that allows fabless manufacturing and production of standard chips with a comfortable runway. They need to be more self-reliant to manufacture creative customized options—and do so at speed. But how do they fund this change? A company like Qualcomm could potentially rely on the strength of its highly profitable licensing revenue (from QTL, i.e., Qualcomm Technology Licensing), but others might not have that luxury. Intel is looking for grants and incentives for the US semiconductor industry to create a level playing field for these US companies. Another option for funding transformation is in-house optimization. For example, in Accenture’s experience, moving to “Living Systems” can help free up cash by increasing IT discretionary funds by up to 40% for a high-tech company. Creative thinking will be needed to unlock the cash to make this happen.
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Potential increase in IT discretionary funds for High Tech companies.
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The road to self-change
As daunting as all this seems, this push for reinvention in an industry isn’t new. The now well-worn tale of how Amazon has disrupted every industry is just one recent example. But think back even to the 1980s. Many of us remember how political and market pressures drove the US telco industry into intense divestitures, only to see the industry come roaring back full circle with “Baby Bell” acquisitions and mergers. It was a hugely significant reinvention process, but the ambitious telcos survived and thrived via new business models, government support, new markets, and an evolved focus on their customers. That’s because telco executives at the time saw the writing on the wall: They had to either board the train or step away completely. Leisurely walking by the tracks would only guarantee being run over. So, they transformed.
Today’s semis find themselves in the same situation and can learn from the telco industry’s experience. Although semis can still exert some influence over the market, that influence is waning and reinvention is likely the only path forward if they want to remain competitive and relevant. The good news is, history has shown that the kind of severe turbulence semis are feeling can force companies to drop their complacencies and spur them on to emerge stronger than they were before. As my favorite poet Rumi says, “Yesterday I was clever, so I wanted to change the world. Today I am wise, so I am changing myself.” Chip makers need to embrace the same kind of wisdom and, with grace, enthusiastically commit to that self-change.
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