Achieving High Performance in the Semiconductor Industry

8/3/2019 Achieving High Performance in the Semiconductor Industry

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Achieving HighPerformance in the

Semiconductor Industry



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Constant change is a fact of life in all areas of the high-tech industry, including semiconductors.In fact, one could argue that never before havesemiconductor companies been forced to confrontthe amount of change currently rippling throughthe sector. From the current economic downturn tothe rise of the multi-polar world to consolidations,alliances and business model shifts—all are havinga tremendous impact on semiconductor companies’operations, competitiveness and profitability.

To help shed light on actions semiconductorcompanies should take in response to today’schallenges, Accenture recently researched dozensof companies across the three semiconductorsegments—fabless, foundry and IDM. Our effortsrevealed three semiconductor companies thatmeet Accenture’s definition of a high-performancebusiness: two fabless companies and a foundry.By studying these leaders further, we identified

some of the characteristics and practices thatcan help any semiconductor company take stridestoward achieving high performance in an industryundergoing substantive and unpredictable change.



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The year 2009 will continue to be a

very challenging one for semiconductor

companies. According to various

analysts’ estimates, the market will

decline substantially this year—ranging

from a 5.5 percent drop predicted

by the Semiconductor Industry

Association to a 16.3 percent slide

expected by Gartner Dataquest.

Yet history also tells us thesemiconductor industry is highly cyclical,

as Figure 1 illustrates. And, in fact, most

observers are predicting the industry

to rebound in 2010, with the recovery

beginning to take hold in late 2009.

Growth is expected to be the most

robust between 2008 and 2012 in the

microcomponents and logic segments,

which are projected to post growth

rates of 3.6 percent and 3.4 percent,

respectively, during that time frame1.

Against this industry backdrop, fourmain trends are influencing the direction

of the semiconductor industry, each of

which results in distinct challenges for

semiconductor companies.

The continued dominance of Asia

Asia Pacific’s economic performance,

led by China and India, will continue to

outpace that of other regions—driven

in large part by increased foreign

investment to capitalize on the region’s

low manufacturing costs and strong

domestic demand. In fact, Asia Pacific’s

share of total worldwide semiconductor

revenue is expected to increase from 54percent in 2007 to 62 percent by 20122.

Indeed, 65 percent of the world’s top 20

semiconductor companies derived more

than 40 percent of their revenues from

the Asia Pacific region in 20083.

Beyond manufacturing, the region also

is attracting growing investment in

research and development. According

to a recent survey, China was named

by 60 percent of respondents as one

of the top-three most attractive

locations for R&D—outpacing theUnited States (40 percent), India (30

percent) and the United Kingdom

and Russia (15 percent each)4.

Greater shift to fablessoperations

Escalating manufacturing costs have led

to a sharp increase in the outsourcing

of manufacturing processes. In fact,

the industry’s larger players now are

focusing much more on product design

rather than on non-core manufacturing

processes. As a result, IP has become

more strategic than ever to maintainingtechnology leadership and market share.

1. iSuppli – Global Integrated Device Manufacturing

H2 2008 Market Tracker, 07 Jan 2009

2. Source: Gartner Dataquest 2008 [Forecast

Database: Semiconductors, Asia/Pacific, 2003-2012

(4Q08 Update)]

3. Source: iSuppli Nov 2008, Accenture Research

4. Source: PWC, July 08, UNCTAD 2005/2009

Four trends challenging the industry



4

Acceleration of the development

of alliancesAlong with manufacturing costs,

semiconductor companies’ R&D costs

have risen dramatically as well, spurring

companies to seek ways to maintain the

R&D investment at the level required

to keep pace with Moore’s Law. Indeed,

R&D spending for the semiconductor

industry is one of the highest in the

electronics/high-tech market. In

2007, for instance, 54 percent of the

semiconductor industry’s top players

spent up to 20 percent of sales on R&D,while 46 percent spent between 21

percent and 40 percent5.

In response, many companies have

begun forming strategic alliances and

partnerships to spread R&D costs

among a greater number of companies.

One prominent example of such

collaboration is the IBM Common

Platform Alliance, which includes 10

leading semiconductor companies

and accounts for $18 billion in capital

expenditure or roughly 34 percent of the

total semiconductor industry’s capitalexpenditure in 2007 ($54 billion). The

companies in the alliance also have

recorded R&D spending of $19 billion

in 2007, which represents 49 percent

of the total industry’s R&D spending of

$40.9 billion6.

Further consolidation of theindustry

Although forming alliances is still the

preferred strategy for reducing R&D

and manufacturing costs, mergers andacquisitions remain an alternative that

can enable a semiconductor company

to gain strategic assets to quickly

strengthen its product portfolio.

Such activity is not limited to one

segment of the industry. Fabless

players are targets for IDMs seeking to

acquire new technology and increase

their economies of scale, while fabless

companies are acquiring other fabless

businesses to reinforce their strategic

assets (especially, their IP). However,

while offering the opportunity toacquire key capabilities, mergers and

acquisitions can seriously disrupt

employee morale and organization

effectiveness if not managed

continuously and comprehensively.

5. Source: iSuppli - McLean Report 2007 & 2008Editions *note: based on Gartner Dataquest’s 2006

CAPEX reports.

6. Source: iSuppli - McLean Report 2007 & 2008

Editions *note: based on Gartner Dataquest’s 2006

CAPEX reports

0

50

100

150

200

250

300

-40

-30

-20

-10

0

10

20

30

40

2007200620052004200320022001200019991998199719961995199419931992

25% 8%-12% 3%-7%

Global Semiconductor cyclical Market growth 1992-2007

CAGR

$ Billion % Growth

274263

238

178

153

170

155

111

8679

222

156

222

139148

141

Figure 1. The semiconductor market is highly cyclical



5



6

As part of our ongoing research on the

characteristics of high-performancebusinesses, Accenture has answered

that important question by devising

an objective definition of high

performance—one that is based on

quantifiable metrics—and applying

that definition to companies across

36 industry segments, including the

semiconductor industry. In all, Accenture

studied more than 6,000 companies as

part of this effort.

Accenture defines a high-performance

business as one that:

• Effectivelybalancescurrentneedsand

future opportunities

• Consistentlyoutperformspeersin

revenue growth (three-year andseven-year compound annual growthrate), profitability (three-year andseven-year spread, that is, return oninvested capital), future value (seven-year change and seven-year level inrelative future value), and total returnto shareholders (over three, five, sevenand 10 years)

• Sustainsthissuperiorityacrosstime,business cycles, industry disruptionsand changes in leadership

We evaluated 42 semiconductor

companies (each with greater than$450 million in annual revenue)

across the three main segments of

the semiconductor industry—fabless,

foundry and IDM (Figure 2)—against

these criteria, and found only three

companies met Accenture’s criteria

for high-performance: two fabless

companies and one foundry. Tellingly,

no IDMs met Accenture’s criteria,

which clearly reflects the difficulty this

segment has balancing their unwieldy

cost structure with lower demand

and volume. Furthermore, reinforcing

the trend of increased influence and

importance of Asia Pacific, two of the

three high-performance businesses in

the semiconductor industry are based in

the Asia Pacific region.

Defining high performance

In such a challenging market, it’s paramount

for semiconductor companies to achieve high

performance if they want to thrive both todayand beyond. But what exactly do we mean by

high performance?



7

Figure 2. Our high-performance business research spanned the three main semiconductorindustry segments

Marketing/Sales B2B*

IDM Model

Design/IP systemsDesign/IP Systems Manufacturing

Fabless Model Foundry Model

* Business to business sales



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Variable to be Tested Hypothesis

Operating Model Companies implementing the fabless or “fab-lite” business model fortheir integrated circuit production are generally high performers.

Mergers and Acquisitions Companies with a higher propensity to consolidate with othercompanies are generally high performers

Product Portfolio Companies that focus on specializing instead of diverse product linesare high performers.

End-User Markets / Distribution Channel High performers serve a broader variety of end-user markets (forexample, PCs, consumer electronics, mobile phones and automobiles).

Product Life Cycle Management High performers have adopted product lifecycle management solutionsto improve the efficiency of product development and collaborationamong their engineering-centric processes.

After identifying the three high-performance

businesses, we sought to uncover some of the

reasons these companies excel. To help in thateffort, Accenture developed five hypotheses to test

several qualitative variables to understand what

drives high performance in the semiconductor

industry (Figure 3).

The drivers of performance in the semiconductor industry

Figure 3. Our hypotheses about high performance in the semiconductor industry



99

The first hypothesis relates to a

company’s operating model. We

hypothesized that companies

implementing the fabless or “fab-lite”

business model for their integrated

circuit production are generally high

performers. We found ample evidence

to support this assertion. For starters,

two of the three high-performance

businesses we identified are fabless

companies—and none is an IDM. We

further found that between 2004

and 2007, fabless semiconductors

companies outperformed IDMs in

three key areas: revenue growth (20.4

percent versus 8.9 percent), spread

(0.18 percent versus -3.1 percent) andtotal return to shareholders (2.4 percent

versus 2.2 percent). These findings

lend credence to the notion that the

absence of costly manufacturing

assets and processes is correlated

with better financial performance.

The preceding also helps explain why

most semiconductor companies in the

peer set we analyzed—63 percent—are

either going fabless or embracing

the fabless model to some extent

in response to the fact that risingmanufacturing costs are not being

offset by an increase in revenue. In fact,

manufacturing costs across the industry

have risen an estimated 10 percent to 15

percent year over year, compared with

revenue increases that have averaged 4

percent to 5 percent7.

The second hypothesis involved

merger and acquisition activity.

We posited that companies with a

higher propensity to consolidate with

other companies are generally high

performers. However, our research

revealed no definitive correlation

between acquisitive propensities and

high performance in the semiconductor

industry—but that doesn’t mean M&A

cannot generate positive results for

semiconductor companies. Indeed, as

previously mentioned, semiconductor

companies typically have embarked

on M&A activities to acquire strategic

assets, rather than to explicitly boost

short-term growth. Investors appearto have rewarded such selective and

value-accretive acquisitions. As shown

in Figure 4, acquisitive companies

are more likely to have generated

higher total return to shareholders

and three-year spread than their non-

acquisitive peers. However, to generate

the value from such combinations,

semiconductor companies not only must

be able to effectively integrate the

operations of the combining entities,

but also must blend the mergingcultures and address directly the loss

of control and transition necessary to

sustain the operation of the internal

and newly acquired resources.

Our third hypothesis related to product

portfolio. We hypothesized that high

performers are more likely to focus

on specialization instead of diverse

product lines. We did, in fact, find that

high-performance businesses in the

semiconductor industry are more likely

to specialize in one product segment.

In fact, of the top 25 semiconductor

companies, 17 derived more than 70

percent of their total revenues from

one IC product segment in fiscal

year 2007. Furthermore, one of the

high-performance businesses in the

semiconductor industry, a fabless

company, generated 100 percent of its

total revenue from one segment, whilethe foundry in our high-performance

business group generated 72 percent

of its sales from the same segment.

The current trend toward specialization

largely is being driven by the rising

costs of conducting research and

building fabs, as well as the advantages

of owning patents and having a

deep knowledge base about specific

products. As a result, high-performance

businesses tend to focus their research

in particular product areas, wherethey can potentially develop a design

advantage that, if it persists for a

business cycle or two, may force

competitors to shift their own focus and

abandon the product.

7. Gartner Dataquest Telebriefing: Financial

Challenges Facing the Semiconductor Industry,

January 2008



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Spread is equal to the Return on Invested Capital less the Capital Charge (ROIC-WACC)

Elpida

International Rectifier

Samsung

Toshiba

Sun

AMD

Micron

InfineonROHM

TI

Intel

STM

National Semiconductor

Fujitsu

Matsushita

Analog Devices

Maxim Integrated

Philips

-35%

-25%

-15%

-5%

5%

15%

25%

-20,00% -10,00% 0,00% 10,00% 20,00% 30,00%

3

y e a r s

T R S

3 years Spread

Industry Mean. 0.4%

Industry Mean. -2.0%

Acquisitive Cie

Non acquisitive Cie

Acq. Cie Mean. 1.3%

Acq. Cie Mean. 8.9%

Non Acq. Cie Mean. -4.9%

Non Acq. Cie Mean. -2.6%

11

Our fourth hypothesis focused on

distribution channels and end-usermarkets. We wanted to test the notion

that high-performance businesses are

more likely to serve a broader variety

of end-user markets (for example, PCs,

consumer electronics, mobile phones

and automobiles) as opposed to being

narrowly focused on one or a few

markets. Our research refuted this

hypothesis. Our three high-performance

businesses in the semiconductor

industry derive the bulk of their

revenues from one or two end-user

application categories (with one of the

companies generating 100 percent of

its revenue from a single market). This

finding makes sense when one considers

that market share in most mature

semiconductor industry sub-segments

is likely to be dominated by one or two

leading companies.

The fifth hypothesis related to

product life cycle management. Wehypothesized that a contributor to

high performance was a product

lifecycle management solution that

helps improve the efficiency of product

development and collaboration among

a company’s engineering-centric

processes. According to our research,

there does not seem to be any direct

correlation between the use of product

lifecycle management solutions and

high performance in the semiconductor

industry. In fact, the vast majority

of semiconductor companies we

studied have adopted product lifecycle

management to improve the efficiency

of product development and enhance

collaboration among their engineering-

centric processes—suggesting

product lifecycle management has

become a “table stakes” capability

that all companies need to compete

successfully. This is especially true inlight of the ongoing challenge that both

IDM and fabless companies have in

managing the ever-decreasing product

lifecycle and increasing R&D investment

required to remain competitive. In fact,

the emerging trend is companies moving

beyond product lifecycle management

toward IP maturity models and

ecosystems, which provide the full range

of innovative assets and capabilities

necessary for a semiconductor company

to most effectively leverage its IP for

differentiation in the marketplace.

Figure 4. Acquisitive companies are more likely to have generated higher total return toshareholders and three-year spread than their non-acquisitive peers.



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Market focus and position

High-performance businesses haveremarkable clarity when setting

strategic direction, and understand

intuitively where and how they can

have the greatest impact on the

value chain. They also are adept at

anticipating marketplace and industry

changes and quickly adjusting their

business models accordingly to

capitalize on the new opportunities

those changes make possible.

The foundry in our group of high-

performance businesses has been

extremely adept at teaming with fabless

and IDM companies to deliver the

largest portfolio of process-proven IP

and libraries, as well as the industry’s

most advanced design ecosystem. As

a result, the company dominates the

foundry business with a market share

of nearly 50 percent which, in turn,

provides the required scale to make

large plant investments profitable.

The fabless high-performance businesses

have an adaptive strategy that enables

them to focus on the most profitable

segments and product mix. As a result,

they can move quickly to capitalize on

new business opportunities and exitbusinesses that are past their prime.

Distinctive capabilitiesHigh-performance businesses are

experts in translating ideas into

results by effectively focusing their

efforts and capital only on the most

critical processes and capabilities,

and relentlessly pursuing continuous

improvements while being on the edge

of revolutionary change.

One of the fabless companies inthe group we identified as high-

performance businesses has been

extremely adept at developing the

capabilities that generate a high level

of productivity and efficiency. For

instance, the company has relationships

with a number of advanced silicon

foundries nearby, which helps reduce

supply chain costs and time to market.

Furthermore, the company uses

advanced manufacturing techniques

for wafers and back-end packagingto reduce its product costs and

establish material supply advantages.

The other fabless company recognizes its

lifeblood is innovation, and strategicallyinvests in capabilities and long-term

initiatives that can help it stay well

ahead of competitors. Specifically,

the company has created strong IP

portfolios and distinctive embedded

software that enable rapid adoption by

designers around the globe and create

the “design wins” necessary for fabless

companies to continue to grow. In

addition, with no fixed-asset concerns,

the company is better able to invest

in the growth of its IP ecosystem for

licensing, royalty and differentiation

in the market place. Given the

consolidation of the foundry, assembly

and test services segments, the trend

toward IP ecosystem growth likely will

continue at least until the mid-2010s.

In a segment where efficiency and

productivity are critical, the foundry

has developed a robust capability that

enables the company to collaborate

tightly with its customers from

A framework for high performance in thesemiconductor industry

The Accenture High Performance Business research

initiative has identified three building blocks of

high performance, which help to further illustrate

some of the practices and capabilities that have

enabled the three high-performance businesses

in the semiconductor industry to post superior

results: market focus and position, distinctive

capabilities and performance anatomy.

This document is produced by Accenture as general

guidance. It is not intended to provide specific

advice on your circumstances. If you require advice

or further details on any matters referred to, please

contact Accenture.



13

end to end to optimize design and

manufacturing efficiencies. Thiscapability is a suite of leading Web-

based applications that give the

designers at the company’s customers a

more active role in design, engineering

and logistics. For instance, designers

have access to critical information and

can create custom reports using the

online capability. By connecting with its

customers so completely, the foundry

gives customers total visibility into the

supply chain, which in turn, helps reduce

cycle time, inventory and inventory-

related costs.

Performance anatomyHigh-performance businesses possess

certain mindsets and associated

practices—driven by the organization’s

culture and leadership—that enable them

to quickly create and shape markets;

sustain superior levels of workforce

productivity; and persistently strive to

renew themselves.

For semiconductor companies, much of the performance anatomy driving high

performance centers on innovation,

which is critical to any semiconductor

company’s ability to compete. And

with the engineering workforce

largely determining the effectivenessof a company’s innovation efforts, a

performance anatomy that enhances

the effectiveness and productivity of

engineers is vital.

However, the changes buffeting the

semiconductor industry are having

a major impact on the engineering

workforce. Morale and productivity

among engineers is eroding rapidly as

they gradually lose control over key

aspects of their jobs, watch as valued

colleagues switch jobs in pursuitof greater stability and struggle to

understand the new performance

metrics with which they are measured

and managed.

The most successful semiconductor

companies make deliberate, targeted

investments in engineering professionals’

training and development to help ensure

they have the skills to be productive.

They also conduct periodic reviews of

engineers’ career paths and succession

plans to give engineers the insights theyneed to progress within the company.

In addition, by conducting regular

assessments of engineers’ mindsets

and perceptions—such as a quarterly

employee survey—high-performancebusinesses in the semiconductor

industry help executives keep tabs on

the overall mood of the workforce and

identify possible issues to deal with

before they become a drag on morale

and productivity.

13



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There’s no question that semiconductor

companies are facing a number of

strong challenges that are inherent to

the industry. Escalating costs, especially

in product design, combined with a

slowdown in demand and volume is

substantially increasing pressure on

semiconductor companies’ profitability.

Exacerbating the preceding are the ever-

present time-to-market pressures and

significant penalties for being late to a

market. And as companies continue to

pursue scale and strategic assets, they

are pressured to step up their pursuit of

M&A activities to preserve market share.

Furthermore, IP integration andverification is increasingly costly and

complex. As companies are forced

to continually acquire third-party IP

and implement across diverse product

platforms, they must address both

functional unit, sub-system and system

level verification which, in chipset and

CPU/GPU, is far from simple. In addition,

mixed-signal and analog devices have

a higher level of physical validation

required given the complex and critical

systems in which they may end up.

Finally, managing changes in partners’

business models also has become much

more difficult. In fact, the lines between

original equipment manufacturers,

device manufacturer and service

provider continues to blur. For example,

semiconductor companies now may

be working directly with distributors

to create reference designs for small

and medium businesses. Furthermore,

retailers are moving into private-

label brands, a shift that will requiresemiconductor companies to sell

directly to a company that formerly was

a business partner at the end of the

supply chain.

However, the good news is that in

those challenges are opportunities

for semiconductor companies that

can achieve the right market focus

and position, develop the distinctive

capabilities and build the performance

anatomy that can help them achieve

high performance.

For all segments of the semiconductor

industry, innovation and continuous

investment in R&D will be key to

withstanding the economic downturn

and preparing for next-generation

opportunities. Companies that are able

to strike effective alliances or join the

right consortia to reduce their R&D

cost burden, as well as acquire strategic

IP assets that can provide a strong

competitive differentiation, will be more

likely to thrive.For their part, foundries should

consider further alliances and mergers

or acquisitions with semiconductor

assembly and test services companies to

provide faster time-to-market solutions

for customers. Given the continued

escalation in the investment required

for next-generation process and design

Conclusion



15

technology, the service companies

that can leverage common platforms

and manufacturing alliances will be

better able to focus free cash flow

on investments in unique innovations

in manufacturing technology.

Furthermore, by 2012 we may even

see the reconstitution of foundry or

semiconductor assembly and test

services companies into complete IDMS

offering true design services directly to

original equipment manufacturers or IP

design houses.

To reduce their manufacturing cost

structure, IDMs should focus on a

more strategic offering by expandingtheir manufacturing outsourcing and

partnering approach to sustain future

growth. IDMs that can cost-effectively

offer manufacturing services should do

so. However, in Accenture’s experience,

few IDMs can provide service at the

same level of efficiency as embedded

competitors. Instead, IDMs must

make strategic investment in the

manufacturing roadmap and link it to

the product roadmap to maximize the

efficiency of their fixed assets.

Finally, semiconductor assembly and

test services companies themselves are

becoming the new enabler for Moore's

Law, offering a fast time to market,

short manufacturing cycles and flexible

integration processes. Semiconductor

companies pursuing high performance

should consider how they could leverage

such companies to further focus on their

core competency and shed unnecessary

operating costs.

The new world in which semiconductor companies

operate is, indeed, fraught with challenges, but it also

is rife with opportunities. Semiconductor companies

that can strike a compelling market position and

focus, develop key distinctive capabilities to penetrate

chosen markets, and foster a performance anatomy

that strongly supports innovation will be well on their

way toward high performance in this dynamic andunpredictable industry.



Copyright © 2009 Accenture

All rights reserved.

Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.

About Accenture Accenture is a global managementconsulting, technology servicesand outsourcing company.Combining unparalleled experience,comprehensive capabilities acrossall industries and business functions,and extensive research on the world’smost successful companies, Accenturecollaborates with clients to help thembecome high-performance businessesand governments. With approximately180,000 people serving clients in over120 countries, the company generatednet revenues of US$23.39 billion forthe fiscal year ended Aug. 31, 2008. Itshome page is www.accenture.com.

To learn more about how Accenturecan help your company achieve highperformance, please contact:

Scott GrantSemiconductor Segment Lead+1 602 337 4388

Accenture Research is Accenture’sglobal organization devoted toBusiness and Strategic analysis

Bouchra Carlier+33 153235039A&D research

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Achieving High Performance in the Semiconductor Industry

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