Electric performance in 2017 powers tempered optimism for 2018.
The year 2017 surprised everyone. It was exceptional for the semiconductor industry—more than anyone expected. High-voltage revenue gains among the biggest semiconductor players led to record-breaking industrywide performance. How will semiconductor companies follow such remarkable performance in 2018? How can semiconductor executives flip the right switches to turn an unexpected spike into a prolonged surge of steady, upward growth?
For KPMG’s annual global semiconductor outlook, we surveyed executive-level insiders about their perspectives and expectations following this banner year. We asked them about what sectors, products, and geographies will drive demand; what forces will impact their strategies; and what parts of their internal businesses they will invest in or transform. We found that while most semiconductor executives recognize it will be nearly impossible to sustain such massive growth over the long-term, optimism exists about 2018.
The majority of semiconductor leaders said they expect their companies—and the industry as a whole—to increase revenue, largely driven by diversification into revolutionary new technology segments, such as artificial intelligence (AI), the internet of things (IoT), and autonomous vehicles. Most executives expect profitability to increase alongside revenue, as companies obtain revenue from new markets and rationalize costs in research and development (R&D). Companies also plan to increase investment in their workforce and equipment.
Sensors/MEMS, microprocessors in the spotlight
If you had $500 million to invest in the semiconductor industry, what sectors would you invest in? The clear leader among our respondents is microprocessors. These products remain critical pieces of common electronic, automotive, computing, consumer, and media devices and are only poised for further growth as the AI and the IoT markets move beyond the early stages of development. Indeed, current trends in venture capital show a significant amount of start-up funding going into chipsets to support AI, neural networks, IoT, and autonomous vehicles.12 Semiconductor companies are betting heavily on the AI revolution and the connected age, anticipating the role their industry will play in creating chips and producing enough memory and computing power to support both. Memory, which is driving so much revenue growth right now, actually ranks lowest. Executives may believe the memory segment has been bled dry, given the level of investment that has already gone into it.
Similarly, sensors/MEMS (like last year) are expected to provide the highest growth opportunity in 2018 for the industry, followed by microprocessors. But we also see more bunching of responses this year, indicating increasing opportunities across a breadth of other sectors, including memory, optoelectronics, and analog/RF/mixed signal.
Chips wanted for wider variety of applications
You can’t leave home without it: Anyone glued to their smartphone screen for hours on end will not be surprised that the most important application market driving semiconductor revenue is wireless communications, including smartphones and other mobile devices, as was the case last year. However, again, our findings show the end uses of semiconductor products becoming more diverse. There is a more even distribution in target application markets this year. Wireless communications, IoT, wireline communications, consumer electronics, industrial, automotive, cloud computing, robotics/drones, security, and AI and all ranked as “very important application markets” that will drive revenue over the next year. AI, it is worth noting, was barely even on the radar last year. IoT could produce results based on sheer volume. Also, cloud computing made a huge jump as consumers continue to demand more storage space for photos, e-mails, music, and other personal data. Clearly, there are no longer just a few end markets driving the industry; now there are ten or eleven that are really important. More flexible chips and systems are required to cater to a greater number of technology applications; so as emerging technology starts to go mainstream, semiconductor companies will need to become more efficient in R&D.
The United States and China, the traditional semiconductor powerhouses that dominated sales for the greater part of the decade, will maintain their position as the most important geographic areas for semiconductor revenue growth three years from now, according to our survey. But both countries are considered less important than they were one year ago. Predictions for declining sales in both countries may relate to new or anticipated trade restrictions between them13. High expectations for revenue growth in China may also continue to source from its intent on indigenizing its semiconductor industry and relying less on imports. In addition, other countries are starting to come on strong. As consumer technology use increases around the world and global technology business hubs spring up in emerging markets, respondents expect to sell more chips in Taiwan, Japan, Korea, India, and Brazil in the near future. With less dependency on two large markets, semiconductor companies will need to broaden their targeting and pursue opportunities in previously untapped regions more aggressively.
Range of issues keeps execs up at night
Despite the rosy outlook of this year’s survey respondents, there is a lot on their minds. A range of challenges are converging as top-of-mind issues for their businesses, including average selling price (ASP) erosion, keeping pace with diverse customer demands, the high cost of fabrication and back-end equipment, the continuation of Moore’s law and scaling, and production capacity restraints.
ASP erosion remains the biggest issue facing the industry, perhaps due to the view that prices for memory (the segment currently carrying the day) will eventually have to flatten out as more facilities are built to pump out memory, there is an influx of supply, and excess inventory builds up.
Keeping up with diverse customer demands is the second most common industry issue cited (forty-two percent) and made the biggest jump up the list since last year’s survey. This finding is consistent with the emphasis by semiconductor companies to diversify into new sectors, applications, and geographies to seize emerging opportunities outside of traditional sales channels.
Cross-border regulation was a new response option in this year’s question and it debuted strong with 23% of respondents naming it as one of the biggest issues facing the industry in the next three years. This is not surprising given the global nature of the supply chain and the evolving landscape of trade deals and tax reform.
The phenomenon of “increasing R&D costs” has dropped from the number one issue just two years ago to seventh in this year’s survey, as other challenges have become more important to respondents. It is also possible that the record sales growth in 2017 allayed this particular concern in this year’s survey, but this response dropped in the 2016 survey as well. Maybe the aggregate infusion of zero-based budgeting, D&A, Agile methodologies, and other techniques to make R&D more efficient have reached the point of sufficiently mitigating this issue in many respondent’s eyes.
The semiconductor industry appears to be in an expansion phase with significant runway in front of it. Revenue projections for 2018 are healthy. The majority of survey respondents say their company will increase R&D and capital investment next year. Very few respondents predict their workforce will contract.
The top strategic priorities (diversification, M&A, and talent management) remain consistent, although to a lesser degree than last year. Implementing disruptive technology and minimizing cyber security risk understandably climbed in the rankings this year. Conversely, the external-focused greater speed to market and the internal-focused articulating vision/ culture/purpose and diversity/inclusion categories surprisingly ranked much lower than last year.
A variety of new applications including IoT, automotive, AI, cloud, and robotics/drones are rising in importance and demanding increasingly complex semiconductor products. While this is good for growth, it is also challenging companies to become more disciplined in how they:
ASP erosion is still seen as the top industry issue for the next three years but by a slimmer margin than last year. Keeping pace with diverse customer demands jumped to number two this year, and we speculate it will remain highly ranked for the foreseeable future. Also of note is that cross-border regulation debuted on the issues list this year.
Leveraging findings from our survey data and insightful analysis from KPMG’s semiconductor practice leaders, this report sheds light on noteworthy industry trends, emerging issues to watch out for, and key areas of opportunity for global semiconductor.