Industry analyst firm iSuppli has run the numbers on companies in the semiconductor business and found they are turning in levels of operating profitability not seen since the glory days of the Internet boom.
Overall operating profitability rose to 21.4 per cent according to iSuppli in the fourth quarter of 2009, the highest level since the last quarter of 2000. Those working around the industry then will remember those heady days, which were quickly followed by a sudden post-Christmas hangover when purchasing managers staggered into their warehouses and wondered: “Cripes. Did we really order all this stuff?”
For those thinking that the world was only just beginning to move out of recession late last year, a lot of the recovery in profitability in chipmaking has come from very aggressive supply management, also known as not spending anything on stuff to make chips with. Major customers are now in the unusual position of not being able to name their price and it’s not going to get any easier for them any time soon even though the big chipmakers are now opening up their wallets to expand production capacity.
Even during the disastrous first quarter of 2009, prices did not fall as far as they used to — because the chipmakers did not allow inventory to build up in the way it did in 1995 or 2000. In fact, prices went up for a while before falling slightly as the recovery got under. This is very different to what happened in 2001 when prices went down and kept going down. The revenue per wafer (red line) and wafer output (grey area) chart here from SICAS and SIA numbers shows what happened.
President and CEO of iSuppli Derek Lidow also cited the increasing focus of chipmakers: “The semiconductor industry has almost completely eschewed the broad-line model that once was the hallmark of the largest players in the business. Instead, chipmakers now are concentrating on specific market segments, allowing them to focus on areas where they have pricing power and a competitive advantage. This has allowed them to improve profit margins and to cut overhead.”
That position echoes former Infineon president Wolfgang Ziebart at Electronica in 2006: “Before, size was very important. This is over.”
At the same panel session, Professor Hermann Simon of Simon-Kucher and Partners went a bit further by chiding the chip industry for being “stupid” by chasing market share, and constantly dumping price to get it.
Infineon’s board thanked Ziebart for his insight by firing him and then wound up shutting down Qimonda just months ahead of a pricing recovery that might have helped the German memory maker find a buyer as a going concern rather than a source of cheap production tools for Texas Instruments.
The numbers for the second half of the last decade don’t really bear out Lidow’s assertion. Profitability fell to a lower sustained level from 2006 onward and really only took off after fab managers decided the best way to cope with the worldwide financial crisis of late 2008 was to turn a lot of machinery off. However, looking into the future, vanishing sockets and increasing focus should demonstrate what Lidow describes in the medium to long term.