Semiconductor Outlook: Building on Traditional Strengths
The Semiconductor Industry serves as a driver, enabler and indicator of technological progress. Developments in the industry determine the way we work, transport ourselves, communicate, entertain ourselves and respond to our environment. The PCs we work on, the cars we drive, the phones we communicate with, the electronic gadgets on which we watch movies, listen to music and play games on, and the planes and weapons used to transport or protect us use semiconductor devices.
As environmental issues have become more of a concern today, semiconductor devices are being made to reduce power consumption, reduce heat dissipation, capture solar energy, create more efficient lighting solutions and so forth.
In this part of the outlook, we are discussing how the evolving nature of markets using semiconductors is shaping their growth. Thus, we have broadly categorized these markets into three buckets.
The IoT Bucket
The Internet of Things (IoT) opportunity is considerable for semiconductor players. While growth expectations have moderated over the past year or so due to adoption rates trailing expectations, it’s still expected to yield several hundred billion dollars for industry players over the next five years. The opportunity is split between the IoT devices connecting to the Internet and the cloud facilitating their existence.
In order to tap the growth potential in IoT devices, industry players have to enable much greater chip integration (a typical IoT device requires microcontrollers, sensors, connectivity and storage chips, but in an extremely small package). Adoption will increase only with very low-cost chips that will not require high compute power in many cases. So the challenge here is cost, which can be overcome only with very high volumes.
IDC estimates that the IoT market will grow at a 7.9% CAGR from 2013 to 2020. Industry experts estimate that the “things” part of IoT will account for roughly 10% of IoT device value. This probably means that semiconductor companies will attempt to make more of these “things” to partake in more of the growth, which would explain innovations like Intel’s MICA bracelet. Prime enablers of IoT growth are likely to be companies like Intel Corp. (NASDAQ:INTC) and ARM Holdings (LONDON:ARM), although many other players will play a role.
The opportunity in the cloud is far broader because the demand for more powerful chips (with more processing power) is now being supplemented with a growing demand for lower-cost chips that can handle simple operations in high volume. The data captured by sensors in IoT and other devices is useful only when it is stored, sorted and analyzed in a protected environment, which is when it becomes valuable for industry players like retailers, healthcare professionals and marketers. Semiconductors enable this process at every stage, but the limited standardization in the systems created by tech companies are bottlenecks in the smooth flow of data.
That’s why big companies like Intel, IBM (NYSE:IBM), Cisco Systems (NASDAQ:CSCO), GE (NYSE:GE) and AT&T (NYSE:T) formed the Industrial Internet Consortium to develop common standards. The process could take time but once available, the standards could generate higher-margin revenue for semiconductor players.
The Computing/Consumer/Communications Bucket
These markets remain the primary consumers of semiconductors today. But there’s plenty going on under this broad head other than the miniaturization that led to IoT devices.
As mobile devices with varying capabilities enter the market, demand has become greatly linked to geography. In most developed markets, tablets are a second or third computing device a person would buy and this market is largely saturated. Innovation is also reaching its limits making it harder to sell new versions. Larger phones or phablets are also taking over.
In developing markets, on the other hand, smartphones and now increasingly tablets, are the primary computing device and projected growth rates are strong. With Google (NASDAQ:GOOGL) announcing Android One in several markets and Microsoft (NASDAQ:MSFT) announcing several cheaper devices, a whole new market has opened up, which is positive for semiconductor players. So semiconductor players with greater geographical diversity have stronger chances of tapping this opportunity.
At least some of the mobile market enthusiasm is shifting to enterprises as employers increasingly recognize the benefits of having constant contact and collaboration with field personnel. And legacy workloads are correspondingly moving to the cloud so more devices have access to them. Mobile adoption at enterprises adds to chip sales because it drives demand for devices on the one hand and cloud capacity on the other, both of which require fresh investment in technology and chips.
Enterprise workloads usually require greater computing resources so there is tremendous scope for semiconductor companies in this segment. But they also require denser, energy efficient and secure data centers and networks, and more intelligent network control. Here, too, semiconductor companies like Intel can play a role.
Tablets, phones and other mobile devices primarily run on ARM designs that are licensed by companies like Broadcom (NASDAQ:BRCM) , Advanced Micro Devices (NASDAQ:AMD), Apple (NASDAQ:AAPL) and Samsung (KS:005930) to make semiconductor devices. Adoption of Intel chips increased last year supported by the subsidies it is offering.
Smartphone revenue (the single largest driver of CE sales) will grow 5% while tablets will see a 1% decline, which doesn’t sound that exciting and doesn’t explain Intel’s interest in tablets. Intel architecture traditionally powered all desktops and laptops while ARM technology dominated mobile phones. With mobile devices encroaching on the desktop and ARM technology finding niches in the cloud, every place that ARM wins is Intel’s loss. Without a solid mobile strategy, Intel will rapidly lose out on its high-margin enterprise business, especially as BYOD comes of age.
Consumer also includes many other items, such as 3D printers, health and fitness devices, smart watches, Ultra HD television displays and smart thermostats that will see the strongest growth this year (108%), albeit off a small base (CEA estimates). A host of analog and mixed-signal chipmakers will ride on this growth.
Wireless infrastructure builds (3G, 4G LTE) have been necessitated by increasing data volumes and connectivity issues (network congestion, power reliability, privacy and security) in wireless networks. These builds will require increased investment in semiconductors, thus driving sales.
The Industrial Bucket
We are including in this bucket not just industrial applications, but also automotive, aerospace, medical as well as other niche markets. Databeans estimates that the semiconductor TAM for this market will reach $38.4 billion this year. The previous cycle had many players diversifying into these relatively stable markets. This resulted in a large number of slower-growing players within the industry that continue to generate decent cash flows.
Of these, auto has the greatest promise. In fact, electronic content of cars (for navigation, safety, infotainment, etc.) has been rising over the last few years and may be expected to continue on the growth path. IHS estimates that the chip market for autos grew 10% in 2014 and will grow another 7.5% this year.
Primary areas of strength are hybrid electric vehicles, telematics and connectivity, and advanced driver assistance systems (ADAS), where the estimated 5-year CAGRs for chip demand are 20%, 19% and 18%, respectively. Leaders in this segment include Infineon (OTC:IFNNY), Freescale (NYSE:FSL), Texas Instruments (NASDAQ:TXN), ON Semiconductor (NASDAQ:ON) and Micron Technology (NASDAQ:MU). Analog Devices (NASDAQ:ADI), with its ADAS technology, is also a beneficiary.
Component Forecast
IC Insights expects DRAM revenue growth to moderate this year to 14% as the removal of capacity constraints contain price appreciation. As far as microprocessors are concerned, there will be a 10% increase in cellphones, a 3% increase in tablets and a 3% increase in PCs, servers, etc, all of which are lower than in 2014. However, logic chips for computing, communications and automotive markets will see strong growth. The microcontroller category is seeing very strong growth and this segment is expected to benefit particularly from IoT growth.
Gartner says that memory will be the strongest driver through 2018 will be SSD adoption at the data center and favorable DRAM pricing for now. Logic (driven by smartphone and ultramobile demand, and FinFET transition over the next few years) will be the second largest driver.
According to World Semiconductor Trade Statistics (WSTS), semiconductor sales grew 10% in 2014 (compared to the previous forecast of 6%), with strength across geographies. Memory, discretes, analog chips were up 18.2%, 10.8% and 10.5%, respectively. Growth is currently expected to be 4.9% in 2015 and 3.1% in 2016 assuming a moderate macro recovery and some maturing product categories. Auto and communications are expected to be the strongest markets and consumer/computing flattish.
Stay Tuned...
In part two, we will touch on the manufacturing trends, the factors in play on the cost side of the equation and the major players in this segment.