Global Macro- Economics and Material Trends · KPMG 2017 Semiconductor Executive Survey Results ......

Global Macro-Economics and Material Trends

May 11, 2017

2© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

• Industry overview and trends• M&A Overview• KPMG 2017 Semiconductor Executive Survey Results

• Key Takeaways• Expectations for 2017 & 2018• What it means for suppliers and the materials industry

Topics


Industry structure

2016 Revenue: ~$50Bn

Equipment Manufacturers

2016 Revenue: ~$220Bn*

Integrated device manufacturer / Memory

End marketsIP Providers

2016 Revenue: ~$5Bn

Continued consolidation across the entire semiconductor value chain:• Dow-Dupont• Linde-Praxair• NXP-QualcommMoore’s Law is slowing creating more uncertainty on technology roadmapsRevenue growth in Semiconductors has slowed from high single digits to low single digits after the financial crisisAs fewer companies invest in leading edge manufacturing technology more large tech companies are developing their own silicon to meet internal demand for computing capabilities


Materials production

Silicon & Compound:


Foundry

2016 Revenue: ~$120Bn*

Fabless Semiconductor


Outsourced assembly and test

PC / Data centre:

Communications:

Consumer:

Auto / Industrial:

Aero / Defence:

SUPPLY CHAIN

Note (*): Sum of Integrated device manufacturer / memory and Fabless Semiconductor is roughly equal to the reported 2016 industry market size on the next slideSource: Semiconductor Industry Association, KPMG

Gases and Chemicals:


Historical semi conductor sector revenue and R&D trends

The semiconductor sector revenue was $340Bn in 2016, growing ~1.5% in 2015-2016R&D spending has recently begun to grow below it’s historical trend lineR&D spending peaked well above it’s historical trend line in 2007 and there did not appear to be a corresponding increase in revenue following that investment., perhaps due to the financial crisis.

Semi conductor market revenue Growth Rate

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

YoY Growth (%) 5 Yr Rolling Average

Gradual decrease in 5yr average growth rates

$-

$10

$20

$30

$40

$50

$60

$70

Semiconductor R&D Spend ($B)


Semiconductor M&A Activity in Perspective

$13

$103 $98

$-

$20

$40

$60

$80

$100

$120

5 yrs Avg '10-'14 2015 2016

Semiconductor M&A ($ Billions) Rank Deal - Year Value

1 Qualcomm-NXP (2016) $39.0B

2 Avago-Broadcom (2015) $37.0B

3 Softbank- ARM (2016) $32.0B

4 Western Digital- SanDisk (2015) $19.0B

5 PE- Freescale (2006) $17.6B

6 Intel- Altera (2015) $16.7B

7 ADI- Linear (2016) $14.8B

8 NXP-Freescale (2016) $11.8B

9 Texas Instruments –BurrBrown (2000) $7.6B

10 Avago- LSI Logic (2013) $6.6B


• Expectations for growth are more in line with reality and investment in R&D and Capital are coming down in line with those growth expectations

• Rising Cost to innovate and scale. Moore’s Law is slowing. • Companies are now focusing on supply chain efficiencies and obtaining greater scale for R&D

investments• Silicon is being seen as more of a commodity• Software and services are the differentiator… Intel buys Mobileye for $16B. • Majority of Semiconductor acquisitions are small software deals• China is still a major player in M&A although regulatory concerns are blocking a significant

amount of deals• Private equity and sovereign wealth funds are starting to come back to the table on Semis• Can big deals get done in Semi Cap Equipment? Lam/KLA and AMAT/TEL were killed by the

regulators based on customer feedback and concerns. Even Aixtron was blocked. • Trump administration- America first? What the implications?

Trends that are on our radar


Industry Life Cycles and M&A Drivers

Rapid Growth

Above Average Growth

GDP Like Growth Mature

Declining / Disrupted

Breakthrough Technology

Acquisitions based on IP and technology to increase speed to market

Acquisitions based on scale & supply chain efficiencies

Acquisitions based on access to broader markets to amortize high R&D investment over a business of greater scale

Acquisitions based on access to broader maximizing EBITDA through SG&A synergies in a flat to zero growth market

Deals and carve outs are also meant to unlock value in areas that are growing faster than the overall market

M&A is based on harvesting cash flows and restructuring businesses to support other investments in the portfolio

1. Semiconductors are transitioning from above average growth to being roughly inline with world GDP. The investment thesis for these deals has evolved overtime as the advantages of Fab-lite have now run their course.

2. The materials industry is in the GDP Like Growth to Mature state of it’s life cycle with deals largely being predicated on realizing synergies based off of SG&A consolidation & freeing up faster growing sectors of the company

1

2

2016/17 KPMG Semiconductor Executive Survey


Revenue expectations flattening, driving cautious investment outlook in both short and medium terms

The #1 strategic priority is “diversifying into a new business area”

#1 concern was on ASP pressure

Respondents expect M&A activity to continue to be higher than historic averages

There is significant opportunity to become more efficient with R&D spending

New competitors/disruptors seen as the biggest impact on future growth

USA resumes #1 position as most important area for revenue and headcount growth

Sensors/MEMS is the #1 sector expected to provide growth opportunity in 2017

Wireless Communications, IoT, and Automotive are the top 3 applications for driving growth

Headlines


Industry issues | ASP erosion

What do you see as the biggest issues facing the semiconductor industry during the next three years?

11%

29%

31%

41%

43%

50%

63%ASP erosion

Technology breakthroughs (continuing Moore’s law, 450 mm)

High cost for plant and equipment

Production capacity constraints

Increasing R&D costs

Keeping pace with customer demands

Availability of expansion capital

Multiple responses allowed

Source: KPMG Global Semiconductor Industry Survey 2016


Value of M&A deals | majority expect increase

What is your prediction for the rate of change in the aggregate valuation of semiconductor M&A deals in 2017 compared to 2016?

13%

32%

30%

12%

8%

7%Increase by more

than 20%

Increase by 11% to 20%



No change

Decrease


NOTE: This survey responses were gathered just before the ARM/Softbank and Qualcomm/NXP deals were announced.


R&D efficiency | widespread inefficiencies

51%35%

14%

Current customers/products


How efficiently is your R&D spending aligned with your current core customers and products and allocated to future growth opportunities?

59%29%

11%

40-49% indicate R&D is not efficiently aligned

Inefficient or very inefficient

Future growth opportunities

Somewhat inefficiently

Efficient or very efficiently


Technology roadmap | opinions split on Moore’s law

Moore’s law will continue; timing intervals extended 3+ yearsWhich of the

following best describes your perspective on the outlook for Moore’s law?


Moore’s law will continuefor the foreseeable future

Moore’s law will no longer apply at nodes less than 10 nanometers



Moore’s law has already ended 9%

12%

12%

19%

23%

25% 48%Moore’s law will

continue in some manner

52%Moore’s law has

ended or will end with current technologies


Technology roadmap | existing technologies still relevant

2.5D or 3D Integration (Interposer, TSV, Monolithic 3D, etc.)Thinking about

the future of production technology, which will have the greatest impact on the semiconductor industry in the next 5 years?


7%

10%

24%

29%

29%

New applications for 200mm wafers

Introduction of 450mm wafers

Production at sub-10nm technology node

Exotic Materials (SiGe, Nanotubes, III-V, etc.)


3-year revenue growth | slowing

What is your outlook, for your company’s semiconductor revenue growth, three years from today?


57%37%

6%

2016

71%

23%

6%

2015

81%

16%3%

2014

81%

13%6%

201554%37%

10%

2016

82%

10%7%

2014

IncreaseNo changeDecrease

3-year

1-year


3-year capital spending | majority now expect same/decrease


3-year

45%

44%

11%

2016 53%39%

8%

2015

83%

14%4%

2014

1-year

71%

25%

6%

39%

52%

10%

2016 2015

82%

12%5%

2014

What is your outlook for semiconductor-related capital spending by your company (both equipment and software) three years from today?

IncreaseNo changeDecrease


26%Europe 39%

Taiwan

40%Korea

41%Europe

45%India

43%Japan

27%Japan

17%Korea

3-year revenue outlook | U.S. leads again

Please rate the importance of the following geographic areas in terms of semiconductor revenue growth for your company three years from today.

2016

12%Taiwan

16%Japan

India

2015 2014

27%India

32%Europe

U.S.30%

29%India

54%China54%

China

58%U.S.

61%U.S.


32%Taiwan

32%Korea

56%China


Conclusion


Strongest growth since 2010 due to strength in the PC cycle and continuing growth in Industrial and Automotive.

M&A boom will continue but likely not at the same pace as 2015 and 2016 Many companies will carve out non-core pieces of their business Apple, Google, Amazon, Facebook and other “platform” companies will increase investment in

custom silicon Growth will slow in the back half of the year- currently on pace for ~10% YoY growth, we expect it

to come in at 6%-8% YoY growth for 2017 and a return to ~5% in 2018 Increased focus on 2.5D, 3D, CSC and “More than Moore” technologies China will continue to push the boundaries of M&A and test regulatory appetite for deals

Expectation for this year…


The Challenge: The same tricks are not producing the same results below 28nm. Scaling is failing…The Opportunity: Semiconductor companies are becoming more open minded to leveraging established technologies that were shunned previously.• 2.5D and 3D applications• Compound Semiconductors• New materialsNew value creation approaches are being considered. – Preventative maintenance, analytics, etc.Understanding how your product impacts Cost of Ownership for the tools and modules in the fab and test sites is critical to positioning your product with the buyer.

What does it mean to you?


Thank you!

Questions?

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