The Internet of Things –
opportunities and challenges
for semiconductor companies May 2015
January 2015
1
This final report is the result of a collaboration between
McKinsey and the Global Semiconductor Alliance (GSA)
SOURCE: Gartner; IDC; ABI Research; GSA and McKinsey & Company “IoT collaboration”
A key growth opportunity
▪ The number of connected IoT devices is
expected to reach 20 – 30 bn by 2020
▪ A semiconductor growth opportunity exists for
servers/network equipment (“Internet”) and
components for deployed “things”
A new strategic challenge
▪ The highly vertical character of the IoT (many
small niches) requires a new approach on how
to address the market
▪ The IoT is starting to happen but is still early
in its development (e.g., unclear standards, no
“killer application” yet)
▪ IoT devices often have specific technical
requirements regarding low power
consumption, integration, cost points,
connectivity, and sensors
Unpaid collaboration between GSA and
McKinsey & Company to develop a
perspective on the implications of IoT for the
semiconductor industry
11 GSA member executives overseeing the
effort as the Steering Committee
Interviews with 30 C-level executives from
semiconductor companies and the broader IoT
ecosystem (including semiconductor
customers)
Survey of 229 semiconductor executives
from GSA member companies
Final report summarizing findings (ex-
clusively available for GSA members)
Supporting rigorous (quantitative) analyses
GSA/McKinsey collaborationFor semiconductors, the IoT is
2
The joint GSA/McKinsey report on IoT is available in 3 different formatsThis report
SOURCE: GSA and McKinsey & Company “IoT collaboration”
Presentation – executive
summary Presentation – fact pack Written report
70-page presentation
▪ Detailed presentation and
documentation of findings
20-page presentation
▪ Short executive summary for
an overview on the report’s
key findings
Reports exclusively available for GSA members at
http://www.gsaglobal.org/gsa-resources/publications
20-page written report
▪ Complementary perspective
with special focus on
interview findings
3
Editorial
SOURCE: GSA and McKinsey & Company “IoT collaboration”
Churchill Tower
12400 Coit Road, Suite 650
Dallas, Texas 75251
United States
http://www.gsaglobal.org
Sandro Grigolli
EMEA Executive Director
Sophienstraße 26
80333 Munich
Germany
Dr. Harald Bauer, Director, Frankfurt
Mark Patel, Principal, San Francisco
Jan Veira, Associate Principal, Munich
David Baillie, Fogale Sensation, CEO
Dr. Jalal Bagherli, Dialog Semiconductor Plc, CEO
Stan Boland, Neul Ltd., CEO
Svein-Egil Nielsen, Nordic Semiconductor ASA, CTO
Dr. Steven Gray, CSR Plc, CTO
Dr. Harald Hamster, Infineon Technologies AG, Head of Strategy
Dr. Yannick Levy, Parrot SA, VP Corporate Business Development
Dr. Maria Marced, TSMC Ltd., President TSMC Europe (Chair of Steering Committee)
Thomas Riener, ams AG, EVP and Head of Marketing & Strategy
Dr. Hans Rijns, NXP Semiconductors NV, CTO
Remy de Tonnac, INSIDE Secure SA, CEO
GSA Steering Committee for this report
This report was developed as a part of an unpaid collaboration between the Global Semiconductor
Alliance and McKinsey & Company between Aug. 2014 and Apr. 2015
4
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
5
Internet of Things can be defined in a wider or more focused way
SOURCE: Expert interviews; McKinsey and GSA IoT survey (n=229; VP-level+ executives from semiconductor companies); GSA and McKinsey
& Company “IoT collaboration”
ILLUSTRATIVE
Classic
Internet devices
Cloud
Big
data
PCs Tablets
Smart-
phones
Data centers
Enterprise intranet
The IoT is the network of all
physical objects accessed
through the Internet
Wide definition
“Smart things”
Wearables
Autonomous systems
Industrial automation
Medical devices
Connected cars
The IoT is the network of all
smart things communicating
over the Internet with
something else without
human interaction and that
have some sort of sensing
mechanism
Focused definition
Focus of this report1
1 Key findings in this report are; however; also valid with the wider definition
6
IoT is an ecosystem, and “things” are only a small part of thisIoT technology stack – example energy/smart grid SELECTED ELEMENTS OF STACK“Things”
SOURCE: Press clippings; expert interviews; GSA and McKinsey & Company “IoT collaboration”
Exemplary players
Energy T&D
infrastructureCustomersWiresSubstation
“Things” Meters StorageTransformersSwitches
Communica-
tion networkWAM, WiMAX, cellular LAN, RF mesh, PLC
Home-area network
(HAN), ZigBee
Use
cases
Smart meter
(e.g., advanced
meter
infrastructure)
Grid apps
(e.g., substation
automation)
Customer
applications
(e.g., demand-
side
management)
Integration
(e.g., supply/
demand
balancing, load
forecasting)
Semi-
conductorMemoryDSPProcessor Analog MEMS
System
integrationPower grid management systems and system integration
Software
Distribution
management
system (DMS)
Outage
information
system (OIS)
Asset
manage-
ment (AM)
Customer
information
system (CIS)
Meter data
management
system
(MDMS)
7
Many new IoT applications have already been established – even more are
gaining traction and are on the horizon
SOURCE: IHS; expert interviews; press clippings; GSA and McKinsey & Company “IoT collaboration”
Proliferation status of IoT applications
Wearables
Industrial
automationSmart home
Medical
electronics Connected cars Smart cities
Smart meter Vehicle tracking
Fitness accessories Logistics trackingHome automation Telematics Traffic monitoring
Vital function monitoring Remote servicingConnected appliances
Surveillance
Productivity
improvementConnected lighting In-vehicle infotainment Public surveillanceSmart watch Digital patient record
Emerging over the
next 3-5 years
Estab-
lished
Gaining
traction
Existing
today
Predictive maintenanceIntelligent lighting Smart pill
Smart thermostat
Smart door lockHospital management
Automatic system
upgradeSmart glasses Traffic control
Predictive process
monitoring
Predictive maintenanceSmart implantsLocation-based
information
GardeningSmart clothes and shoes Patient localization
Vehicle to vehicle /
vehicle to Internet
communication
Smart gridsIntelligent
production lots
On the horizon Distributed
environmental
monitoring
Autonomous
maintenance
Embedded wearables Assisted living Autonomous driving Predictive maintenanceSensor swarms
Agile/individual
manufacturing
8
Initial applications show that the IoT is already happening
SOURCE: IHS Technology 2013; press search; Navigant Research; SBD; CCS Insight; University of Michigan; The Edison Foundation Institute
for Electric Innovation (IEI); GSA and McKinsey & Company “IoT collaboration”
1 Prediction by Morgan Stanley
Wearables – Smart watches Connected car – Insurance Smart metering
▪ In 2014 > 22 mn wearable devices
sold with a volume of ~ USD 12bn
▪ Launch of Apple watch expected
in Q2 2015 with volume up to 30
mn units in first 12 months1
▪ An American car insurance
company monitors customer
driving habits via the mobile
network with a customized device
installed in the car
▪ > 50 mn smart meters (AMI,
advanced meter infrastructure) are
installed in the USA which cover
43% of all US homes
Road pricing system IoT technology in automotive Smart service in industrial machine
▪ Smart system diagnostics have
improved the first-time fix rate by
5% for an exemplary equipment
vendor in the flexible materials
industries
▪ An electrical vehicle manufacturer
fixed battery charging on ~30,000
cars without a “physical recall”
with a remote system update via
the mobile network
▪ In Singapore, > 93 gantries have
Electronic Road Pricing System to
manage road tolls which are
charged based on location, time
slots, and day (e.g., weekday vs.
weekend)
9
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however
some ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
10
IoT is considered to be a key growth driver for semiconductors
in the coming years
ILLUSTRATIVE
2000 - 2007
2007 - 2014
2014 - 2020
3% p.a. 4% p.a.
Average
industry
revenue
growth
3 - 5% p.a.
SOURCE: McKinsey and GSA IoT survey (n=229; VP-level+ executives from semiconductor companies); iSuppli; Gartner; IDC; expert interviews;
McKinsey Global Institute; GSA and McKinsey & Company “IoT collaboration”
Key
growth
drivers
Personal com-
puting/internet
Wireless com-
munications Internet of Things
▪ PCs
▪ Laptops
▪ Servers
▪ Smartphones
▪ Network
infrastructure
▪ Smart home
▪ Wearables
▪ Healthcare
▪ Industrial
▪ Connected car
▪ Cloud/big data
Current
trends
… and IoT is likely to
pick upII
▪ Considered most important
growth driver by many executives
▪ IoT installed base to grow by 15-
20% p.a. to 26-30bn devices in
2020
▪ Economic impact > USD 2 tr
in 2025
Wireless as key growth
driver will slow down…I
▪ 16% growth p.a. 2009 - 13
▪ Market maturity expected
to slow growth down to 3%
p.a. 2014 - 18
How do you rate IoT
as a growth driver?
%
I expect limited
incremental
growth from the
IoT
Just 1 of many
growth factors
for the industry
One of the top 3
incremental
growth drivers
of the industry
The number 1
incremental
growth driver for
the industry
2
33
48
17
Survey of semiconductor
industry experts shows IoT
as key growth driver
11SOURCE: iSuppli (Q3 2014); McKinsey; GSA and McKinsey & Company “IoT collaboration”
Semiconductor industry revenue by application, 2000 - 20E, USD bn
Note: Figures may not sum due to rounding
5331
95
57
38
24
22
47
52
58
35
41
28
20
30
21
16
25Data
processing
+4% p.a.
+4% p.a.
+3% p.a.
Wireless
Industrial
Consumer
electronic
Automotive
Wired
2020E
439
154
109
19E
422
18E
409
17E
396
16E
385
15E
374
14E
352
112
100
13
323
12
304
11
313
10
309
09
231
08
260
07
274
102
06
264
05
239
04
229
03
186
02
161
01
157
2000
221
12
Semiconductor industry growth has primarily been driven by growth
in the wireless market over the last 5 years
CAGR
2014-20
CAGR
2007-14
11%
4%
6%
6%
CAGR
2000-07
8%
-6%
0% 1%1%
7% 7%1%
-2% -2%8%
5% 6%8%
I
12SOURCE: Gartner; IDC; ABI Research; expert interviews; McKinsey; GSA and McKinsey & Company “IoT collaboration”
The IoT installed base is expected to grow rapidly in the long-term, but
executives have different expectations on timing and growth segments
IoT installed base1
Connected devices, billions
Analysts are optimistic about the rapid rise
of the IoT market
“If you aggregate all IoT verticals, the
opportunity is huge. Obviously, it will
grow, but verticals will behave differently
and take-off at different rates”
– IDM VP
“I believe the IoT will happen and reach
significant scale but it’s not yet fully clear
at what point the critical scale for market
inflection will be”
– Fabless player executive
26
7
28
9
30
10
+15-20% p.a.
2013 2020
ABIIDCGartner
“I think IoT is the next natural evolution of
the semiconductor market, but I don’t see
it providing any revolutionary growth”
– Foundry executive
While executive expectations are
positive but more tempered
1 “Wide” IoT definition used by reports (i.e. including "classic" internet devices; such as PCs; servers).
II
13
Network and cloud infrastructure growthIoT device growth
2018E
+3% p.a.
10.9
+4% p.a.
17E
10.5
16E
10.1
15E
9.7
14E
9.3
13
9.0
12
8.7
11
8.6
2010
8.3
IoT is also a significant growth opportunity for semiconductors
due to the increasing demand for network and cloud infrastructure
SOURCE: IDC; press clippings; analyst reports; expert interviews; GSA and McKinsey & Company “IoT collaboration”
Increased demand for network infrastructure and hubs
expected due to
▪ Increased number of hubs required to deliver
connectivity coverage
▪ Lower computational efficiency of small hubs vs. servers, (i.e.,
higher demand for silicon for same computation needs)
▪ No virtualization of hubs
▪ Number of connected IoT devices
expected to grow to 26 - 30 bn by
2020
▪ Trend exists to shift as much
computing power from the “thing” to
hubs or into the cloud in order to
minimize power consumption and form
factor of “things”
Network infrastructure – IoT drives demand
Server market – slow but steady growth
Server shipments, millions
II
14
The readiness of IoT for reaching the growth
inflection point varies by vertical
SOURCE: McKinsey and GSA IoT survey (n=229; VP-level+ executives from semiconductor companies); IHS; expert interviews;
GSA and McKinsey & Company “IoT collaboration”
II
14
10
53
21
1
> 5 years from
now
I don't expect
a disruption,
but steady
growth
3 - 5 years
from now
1 - 2 years
from now
Now
Partially availableWidely available
Inflection
enablers
Industry
Automation Smart citiesSmart home
Medical
electronics
Connected
carsWearables
Ecoystem/
infrastruc-
ture (e.g.,
products
available,
network
coverage)
Capabilities for
IoT missing in
hospitals
Technology
(e.g., ad-
vancement,
affordability)
Current price
level only
feasible for
premium/enthus
iast customers
Further devel-
opment of che-
mical sensors,
miniaturized
implants
ongoing
Affordability for
complex IoT
(e.g., autono-
mous driving) to
be created
Market
(e.g., frag-
mentation,
standards,
security)
Interoperability
and security
currently only
within (small)
proprietary
ecosystems,
industry wide
standards
missing
Strong business
models needed
that do not
require big
investments;
higher integra-
tion of different
applications
needed
Overarching
integration of
applications
needed;
missing
standards
impeding
growth
High
certification
requirements
in medical
applications;
initial growth
expected from
lifestyle/fitness/
assisted living
Highest safety
and reliability
need to be
guaranteed;
legal aspects to
be clarified
(potential
regulation)
Profitable
use cases
searched
When do you expect that
the IoT inflection point will
be reached?
Percent
Note: Figures may not sum due to rounding
ILLUSTRATIVE
Most surveyed semi-
conductor industry experts
expect growth inflection
point in 1-5 years
15
Consumer electronics case studies reveal that inflection of growth
pockets occurred when the relevant growth enablers was in place
SOURCE: McKinsey; GSA and McKinsey & Company “IoT collaboration”
II
▪ 5 growth
enablers
identified
(2 technology
driven, 3
ecosystem
driven)
▪ Inflection of
growth hap-
pened when
the last
relevant
enabler of
growth was in
place
Inflection
enablers
Year of
inflection
Smart-
phones
Consumer electronics technology case studies
Mobile
phone
(India)
Net-
books
MP3
player
Flat-
screen
TV
2005 2009 2007 2003 2003 2008
Blu-ray Tablet
2010 2006
Social network
PC Mobile
2009
Technology
driven
Usability <2000 2009 <2000 2001 2003 2006 2010 <2000 2009
Affordability 20072009 2002 2003 20062005 2010 <2000 2009
Ecosystem
driven
Content
availability
n/a <2000 <2000 2003 <2000 2007 <2000 2006 2006
Standards <2000 <2000 <2000<2000<2000 2008 <2000 <2000 <2000
Infrastructure
availability
2005 2005 2005 n/a <2000 n/a 2005 2004 2004
16
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
17
Key enablers from semiconductors and beyond for IoT growth are already
in place today
SOURCE: GSA and McKinsey & Company “IoT collaboration”
Supplier
push
Required
infrastructure
Technological
enhancement
Customer
demand
A Key players have positioned themselves along the value
chain and have launched flagship products
B Alliance building and M&A activity are extensively used
to strengthen companies’ positions
G Connectivity infrastructure is widely available
(e.g., LTE, WiFi)
H Cloud computing is readily available at rapidly
declining prices
E Increased device lifetime has been enabled by reduced
power consumption due to semiconductor technology progress
F Cost position of critical components (e.g., sensors) is
reaching levels that allow for higher market penetration
C Consumer pull is gaining momentum in certain segments,
(e.g., for wearables)
D There is increasing interest in IoT solutions
(e.g., Industry 4.0)
18
IoT players across the value chain are preparing for
broad IoT adaption
EXEMPLARY PLAYERS
SOURCE: Press clippings; analyst reports; GSA and McKinsey & Company “IoT collaboration”
Key movements of selected IoT players
A
Solution provider End retailers
Leading IoT trend based on deep understanding
of customer needs and innovative ideas
▪ Develop and launch
low-power solution
for IoT (e.g., ARM
Cortex-M,
Bluetooth LE)
▪ Codevelop extreme
low-power core
architecture with
chip manufacturer
(e.g., MIPS-Ineda)
▪ EMS develop IoT
products for non-
traditional electronics
companies (e.g.,
Google Glass by
Foxconn, Nike
FuelBand by
Flextronics)
▪ Develop and launch
IoT-optimized chip
by integrating
multiple
components into 1
chip (e.g., Intel
Quark)
▪ Partnership among
semiconductor
players for IoT chip
(e.g., Atmel-Bosch
collaboration)
▪ Announce OS and
standard platform
for IoT (e.g., Apple
HomeKit, Google
Nest)
▪ Various start-ups
emerged for IoT
devices
▪ Diverse non-
traditional
electronics
companies launch
and adopt IoT devices
(e.g., connected light,
insurances)
IP provider Chip manufacturerSystem integrator
(EMS)
19
Key players extensively use alliances and M&As
to strengthen their IoT market position M&As and
alliances
ChipDevice
SOURCE: Expert interviews; company web pages; press clippings; team analysis; GSA and McKinsey & Company “IoT collaboration”
Recent IoT-related M&As, alliances and commercial activity
Qualcomm
launched Gimbal
beacon
Apple announced
HomeKit and
HealthKit for iOS 8
Intel announced
smart shirts
product
Samsung
announced Simband
open platform
Nest launched the
Nest Protect smart
smoke detector
Aug Oct Dec Jan Feb Mar Apr May Jun Aug Oct
2013
Apple
announced
Apple Watch
Samsung and LG
launched
connected lighting
Intel launched
Quark SoC
and IoT
business group
Intel
launched
Edison IoT
platform
ARM
acquired
Sensinode
acquired
Nest
Qualcomm
acquired
CSR
Verizon, GE,
and Intel
announced
IoT alliance
Microchip
acquired
ISSC
Toshiba
launched appli-
cation processor
for wearables
2014
NOT EXHAUSTIVEB
20SOURCE: Navigant Research; SBD; CCS Insights; University of Michigan; GSA and McKinsey & Company “IoT collaboration”
IoT verticals are expected to grow due to increasing customer pull
135
100
6942
2210
1331241151079992
41
3224
171311
17E 2018E16E15E14E2013
“In a telephone poll of 1,011 Americans, young
consumers aged 18 - 34 are the most excited
about wearable technology. 57% said they
would purchase or wear smart glasses, and
53% said they are interested in
a smart watch’
–Opinion Research
“Despite concerns, about ¾ of respondents
believe that connected vehicles will reduce the
number and severity of crashes, improve
emergency response times and result in better
fuel economy. In addition, more than 60%
expect less traffic congestion, shorter travel
times, and lower vehicle emissions”
–University of Michigan poll
Customer pull (examples)
Smart
meters
Wearables
IoT verticals growth
Number of shipments, mn
Connected
vehicles
“Consumers are asking for competitive, low- or
no-carbon, highly efficient power. We’re finding
that clean power generation through smart grid
is the most competitive”
–Galvin Electricity Initiative
C
21
IoT is currently gaining broad interest – Industry 4.0 example
SOURCE: Expert interviews; Press research; GSA and McKinsey & Company “IoT collaboration”
D
Advantages of Industry 4.0
Of production
processes
Simpler coordination
of fragmented,
worldwide value
chains
Digitization
In a
cyberphysical
system (CPS)
with auto-
nomous
exchanges of
information and
automated
action
triggering
Flexible, autonomous
transport systems
and efficient
warehouse logistics
Intelligent products
that manage their
own production
process
Networks/
connectivity
For example,
3D printing,
advanced
robotics
technology,
sensorics
Flexibility of the
production lines down
to a lot size of 1
Advanced
technologies
▪ German SMEs – the "Mittelstand"
– could increase their revenue
even more and create 670,000
new jobs if they would make
more use of the latest IT
▪ Industry 4.0 is today largely a
matter for big companies
▪ Manufacturing in the DACH
region (Germany, Austria, and
Switzerland) has to catch up on
the road to Industry 4.0 (IoT in
manufacturing)
▪ Opportunities with analytics are
far from exhausted
EnablesBased on
22
Industry 4.0 example – condition-based maintenance allows increased
utilization due to fewer breakdowns
12 3624 48 Time Months
Failure ratePer 1,000
Failure
rate
to repair
Early lifetime
standard failure
rate suggests
replacement at
48 months
Remote sensor already
signals replacement
need at 24 months
1 Aggregated average figures from expert interviews – not for a specific company
SOURCE: Expert interviews; ARC Advisory Group; VibroSyst; WiHART System; Schaeffler; Department of Defense; GE; GSA and McKinsey &
Company “IoT collaboration”
Estimated need for
repair at 48 months
Detecting early signs of
problems for timely
correc-tion at minimal
costs
Prioritizing and
optimizing mainte-
nance resources using
real-time data
Increasing unit
availability due to
shorter
downtimes
D
-50%Machinery
breakdowns
-20%Spare part
inventory
-50%Total machine
downtime
-20%Overtime
expenses
+20 - 40%Machine life
Overall
productivity
+20 - 30%
Typical impact of CBM1Condition-based maintenance (CBM)
23
NOT EXHAUSITIVESemiconductor technology has made good progress
on enabling lower power consumption of ICs
1 Technologies are (partly) not “additive” but complementary 2 Volume production time for 28nm FDSOI 3 For mobile DRAM
SOURCE: Press research; Company websites; GSA and McKinsey & Company “IoT collaboration”
DescriptionTechnology1
▪ System on chip (SoC) combines multiple dies in 1 package through interpose to save on
power, cost, and footprint of the package
▪ Compared to nonintegrated design, SoC reduces power consumption by ~ 35%, package
size by ~ 40%, and overall cost by 25%
SoC
packaging
2007 and
earlier..
▪ High-K Metal Gate (HKMG) lowers power consumption of ICs compared to SiO2 gate
oxide
▪ Leakage current of HKMG is ~ 90% lower than SiO2 gate
HKMG2007
▪ New heterogeneous multicore architecture couples low-power processor cores with high-
performance, high-power cores
▪ Comparing to Cortex-A15, Cortex-A15∙Cortex-A7 saves 75% of the CPU energy
ARM big-
LITTLE
architecture
2011
▪ FinFET is a 3D transistor with stronger gate control from a trigate design and depleted
channel
▪ Compared to planar MOSFET, FinFET is 30 - 40% faster, and the leakage current is
reduced up to 90%
FinFET2011-2012
2014
▪ 3D through silicon via (TSV) is a new packaging technology for multiple types of ICs so
that they can be stacked horizontally and vertically in a single package
▪ For example, 3D TSV for DRAM is expected to match performance plus 20 - 30% lower
power consumption compared to standard DRAM
3D TSV3
2013
▪ Fully depleted silicon on insulator (FD-SOI) with a depleted channel and and additional
ultrathin insulator layer (buried oxide) provides strong gate control and low leakage current
▪ FD-SOI is 20 - 30% faster and has 25 - 50% lower power consumption than bulk CMOS
FD-SOI2
E
24SOURCE: Bernstein Research; Yole; press clippings; GSA and McKinsey & Company “IoT collaboration”
TSV technology is key for 2.5/3.0D IC integrationE
Mold
PCB
Substrate
Die 1
Die 2
Die 3
PCB
Substrate
Die 1
Interposer
Die 2
▪ 2.5DIC technology connects the die to
the substrate through a TSV interposer
– an extra passive layer with no
transistor
▪ Interposer lowers the risk of TSV
induced degradation but adds 1
extra layer
▪ 3.0DIC technology connects multiple dies vertically,
directly through TSV within each die
▪ True 3D technology eliminates extra processing
of interposer
▪ Advanced packaging process control required
to avoid damage during handling
VS.
2.5DIC
Mass pro-
duction
start
Examples
FPGA GPUCPUApplications
2010 -
remains nice
application for
high-end
servers
2013 - 14
with 28 nm
process
2015 - 16
expected
with 16/20
nm process
3.0DIC
Image
sensors MEMS
3D stacked
DRAM
2012 stacked
BSI CIS
2012 - 13 launch
of multi-ASIC
MEMS sensor ICs
2015 launch
expected using
HBM and HMC
technology
Hynix/MicronBoschSonyNVIDIA/
AMD
XilinxIBM/
Oracle
BACKUP
25
MEMS are replacing most conventional sensors needed
in IoT devices at a lower cost and better performance
SOURCE: Yole; iSuppli; IHS; expert interviews; GSA and McKinsey & Company “IoT collaboration”
1 Inertial measurement unit; consisting of up to 10 different accelerometers; gyroscopes; magnetometers; and pressure sensors
2 Bulk acoustic wave filters
Details on
next slideF
▪ Cost and size of
MEMS are
decreasing
while
performance is
increasing
▪ Integration of
MEMS into 1
building block is
on-going (e.g.,
IMU1 combos)
▪ Integration of
MEMS with
logic expected
in next 5 years
Wear-
ables
Smart
home
Connec-
ted cars
Medical
electro-
nics
Indus-
trial auto-
mation
Smart
cities
Accelerometer
Gyroscope
Flow sensor
Lab-on-chip
Magnetometer
Temperature
Microphone
BAW filter2
Pressure sensors
MEMS can be used across all IoT verticalsKey trends in
MEMSMEMS suitable
26
The recent price and volume developments of key MEMS components
can be seen as indicators that IoT growth is picking up
SOURCE: Analyst reports; expert interviews; GSA and McKinsey & Company “IoT collaboration”
F
10.00
0.10
1.00
0.01
161211 132009 171510 14 2018
1.00
1.25
0.63
2.00
1.58
0.79
0.50
13 1710 161514 201812112009
Oscillators
RF MEMSGyroscopes
Microphones Inertial combos
-5
-13
-14
-8
-9
CAGR
2009 - 18, %
6
35
17
80
57
CAGR
2009 - 18, %
Average selling price (ASP)
Volume
Price and volume development of key MEMS devices (normalized to 2013)
Past examples demand/cost correlation
Smartphones
Led bulbs
01
23
4
0
1,000
500
122003 04 06 09 1007 1105 08 2013
Units, mnUSD
Annual number of smartphones sold
ASP1 WLAN IC
ASP1 touch controller
0
10
20
30
40 80
0
40
60
20
18
USD bnUSD
2020171411 122007 15 1613100908
Market size (LED
lamp, LED luminaire)
LED price/klm
27
Wireless infrastructure is prepared for the rising demand in wireless
communications
1 Wireless penetration is measured as subscribers/population
SOURCE: Ovum, Verizon; GSA and McKinsey & Company “IoT collaboration”
G
Example 2: global wireless coverageExample 1: 4G LTE coverage in the US
Region
Total penetration1
Sep 2014
US/Canada 111%
Mexico / South America 115%
Western Europe 122%
Eastern Europe 146%
Middle East 113%
Africa 76%
Asia-Pacific 90%
World average 96%
The world is nearing 100%
wireless connectivity
Currently: 98% of the US
population is covered by LTE
28
Case example: Google is passing on economies of scale to
end customers by dropping prices for cloud storage and big data
SOURCE: “The Cloud Service Provider Market”; TechCrunch; press clippings; GSA and McKinsey & Company “IoT collaboration”
Google announces massive price drops
for its cloud computing services and
storage, introduces sustained-use
discounts
0.3
0.8
-68% p.a.
5.0
35.0
Before
April 1,
2014
After
-86% p.a.
Cloud
storage
USD/
month/
GByte
Big data
analysis
(Big-
Query)
USD/
TByte
H ILLUSTRATIVE
29
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
30
Challenges remain for unlocking full potential of the IoT for semiconductor
industry – survey results
Semiconductor technology challenges
(low power, integration,...)
Value extraction challenges (margins too low, costs too high, value captured by others, ...)
12.1
14.8
Addressable market challenges (too
fragmented, unknown/new customers, ...)15.5
Lack of common standards 16.3
Low customer demand
(no killer apps)16.4
Security/privacy issues 19.3
SOURCE: McKinsey and GSA IoT survey (n=229; VP-level+ executives from semiconductor companies); GSA and McKinsey & Company “IoT
collaboration”
1 Participants had a total of 100 points to distribute to challenges based on severity/importance of challenge (more points = more important)
Key challenges for success in IoT1
1
2
3
5
6
4
Average score from all participants (out of a total of 100 points)1
Security and
privacy are seen
as key
challenges to
IoT growth
The industry is
optimistic about
semiconductor
technology
challenges
31
The ease to resolve critical gaps varies by vertical INDICATIVE
SOURCE: Expert interviews; GSA and McKinsey & Company “IoT collaboration”
Higher inter-
operability required
to increase benefit
from home
automation
a
High certification
requirements and
varying regional
regulations slow
down market
development;
scattered market
with many small
players
b
Highest reliability
and safety required
for application in
cars (especially
autonomous driving)
c
Devices still require
significant techno-
logical advance-
ment (e.g., power
consumption and
form factor)
d
Critical gaps
Fragmented
markets4
Standards 3
Customer
demand2
Technological
advancement6
Smart home
a
Connected
cars
c
Medical
electronics
b
Industrial
automation
Smart citiesWearables
d
Value
extraction5
Security
and privacy1
Ease to resolve critical gaps
Easy to solve/no challenge Medium effort required
Difficult to solve/major challenge
32
Ease of resolution of critical gaps strongly
differ by vertical (1/2)
SOURCE: Expert interviews; GSA and McKinsey & Company “IoT collaboration”
INDICATIVE
BACKUP
Security
and
privacy
▪ Data is often not critical
▪ Security and privacy
have comparably low
relevance
▪ Privacy, especially for
private medical data,
needs to be guaranteed
▪ Life supporting
functions have highest
security requirements
Medical electronics
▪ Security is essential to
prohibit accidents
▪ Regulatory
requirements raise the
security requirements
Connected carsIndustrial automation
▪ Security is crucial
for mission-critical
operations (e.g.,
automated
manufacturing)
▪ For functions like data
tracking or optimization
security not as critical
▪ Security is critical for
smart grid and traffic
control
▪ Security is less critical
for functions like energy
efficiencies or lighting
Wearables Smart cities
▪ Security is important to
prevent unauthorized
entry into home and 2nd
level attacks on home
automation
Smart home
Standards
▪ Wearables can use
existing connectivity
standards from
consumer electronics
like mobile phones
▪ Large consumer
electronics players can
leverage existing
ecosystems
▪ Government regulations
and system standards
needed for seamless
device integration
▪ Medical devices can
leverage standards
from established
consumer ecosystems
and established IT
infrastructure
▪ System and behavioral
standards still required
for autonomous driving
▪ Limited number of
automotive OEMs make
standard alignment
easier
▪ Standards are
advantageous for ease
of integration
▪ Proprietary systems are
feasible in industrial
environment but limit
speed of adoption
▪ Standards are required
to ensure
communication
between different
devices but that is only
critical within same
city/region (e.g., traffic
monitoring, traffic light
controls and weather
stations)
▪ Very scattered
landscape of competing
standards
▪ Large pool of
players from different
industries
▪ Interoperability of
devices would be very
important
3
▪ Customer demand
is increasing with key
players pushing (e.g.,
Apple, Samsung, Intel)
▪ Expect to take off in
2015/16
▪ IoT demand for specific
applications already
exists
▪ Adoption will be driven
by efficiency
improvements,
economic and
convenience benefits
for customers
▪ Reliability and
technology capability
are critical gaps for
broader demand
▪ Early prototypes
available but no large-
scale rollout yet
▪ Adoption will be driven
by economic benefit
▪ Customer demand is
currently very
application specific,
resulting in a scattered
market
▪ Some customer
segments are
traditionally
conservative/
slow with innovations
▪ Smart meters and grids
are building up in
America and Europe
▪ However, public
institutions are risk
averse, budget
restricted, and not
economically
incentivized to adopt
new IoT applications
▪ Industry players have
been focusing on
specific products, like
thermostats and fire
beacons
▪ All-in-one products
required to further
increase customer
excitement
Customer
demand2
1
Selection
of verticals
Ease to resolve critical gaps
Easy to solve/no challenge Medium effort required
Difficult to solve/major challenge
33
Ease of resolution of critical gaps strongly
differ by vertical (2/2)
INDICATIVE
SOURCE: Expert interviews; GSA and McKinsey & Company “IoT collaboration”
Frag-
mented
markets
▪ Market of industrial
automation is
fragmented and slow
moving, which takes a
long time to create
(long tail)
▪ Only limited amount of
players for connected
cars, and most have
clear market direction
(big OEMs, few new
entrants)
▪ Regulatory
requirements can
potentially slow down
market development
▪ Scattered market with
many players and
different types of
products
▪ Specific sub-segments
are developed (smart
meters) and relatively
standardized
▪ Many end markets
highly fragmented
▪ Market has already
been created by mobile
device players
▪ Potentially dominated
by a few large
consumer electronics
players
Techno-
logical
advance-
ment
▪ Even though many
devices are connected
to the power network,
technological changes
for low-power design
can extend use cases
and lower cost
▪ Lower cost is an
enabler to reach large
volumes faster
▪ Cost is less critical as
IoT is only a small
portion of total
equipment and
machinery cost
▪ Technology changes
for low-power designs
are not needed as cars
have their own power
generation
▪ Potentially, very
specific technical
requirements
▪ Chemical sensors,
miniaturization, and
lower power
consumption still
required to enable
some use cases
▪ Technology available
today
▪ Low-power designs for
many use cases not
crucial, as devices are
connected to the power
network
▪ Long-term autonomous
applications exist that
need better energy
efficiency
▪ Single devices already
have high level of
maturity; technology
advancement will
further improve usability
▪ Embedded systems still
need technological
advancement in terms
of power consumption
and size for certain
use-cases
6
Value
extraction
▪ Large markup on
hardware; system and
solutions cover a large
part of the added value
▪ Possibly, new business
models necessary
▪ Systems and solutions
cover a large part of the
added value
▪ Possibly, new business
models necessary for
component suppliers
▪ OEMs still have to
define business model
how to extract value
from connectivity/data
▪ Suppliers extract fair
share of value with
automotive grade
products
▪ Suppliers can possibly
extract fair share of
value with medical-
grade products (healthy
margins)
▪ Suppliers possibly can
extract fair share of
value for highly
specialized products
(with right business
model)
▪ Business model in
wearables is well-
defined from supplier to
OEM
▪ Suppliers extract fair
share of value with
components
5
4
Medical electronics Connected carsIndustrial automationWearables Smart citiesSmart home
Selection
of verticals
▪ Today, market is
developing, although
fragmented with many
players for different
smart home products
▪ In the future potentially
few consumer
electronics players
dominating
Ease to resolve critical gaps
Easy to solve/no challenge Medium effort required
Difficult to solve/major challenge BACKUP
34
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
35
The Internet of Things faces new security and
privacy challenges
SOURCE: Expert interviews; GSA and McKinsey & Company “IoT collaboration”
NOT EXHAUSTIVE1
Security is critical for all elements of the IoT stack
Cloud
LAN
Security on device level is
challenging due to low
performance/memory
Hub
IoT partly covering mission-
critical functionality (e.g., con-
nected car, electricity grid)
Sensitive private or
commercial data (e.g., health
data)
Exemplary security risks
▪ Snooping/blocking of commands/data transmission
▪ Injection/alteration of data or commands
▪ Delay of legitimate commands
▪ Use of hacked devices for other attacks
New security concepts and
solutions needed
▪ End-to-end security
across the entire stack
▪ Safe encryption requiring
minimal computing
resources
▪ Agile adaption to new
emerging threats without
user interaction
▪ Tampering/hacking
detection
▪ Compliance with
regulatory requirements
(e.g., on privacy)
36
Case example – spam botnets are starting to include smart IoT
devices, such as TVs and refrigerators
SOURCE: Proofpoint; GSA and McKinsey & Company “IoT collaboration”
1
▪ Large attack between
Dec 23, 2013
and Jan 6, 2014
▪ Besides “things,” also
conventional devices,
such as desktop
computers, laptops,
and mobile device
used
▪ Attack using simple
exploits, such as
default passwords and
misconfigurations
25% of attached devices were
misused during the attack
Few e-mails per
device
3 waves of spam
per day
Connected
multi-media
centers
TV sets
At least 1
refrigerator
Total of > 100,000 devices
in botnet
< 10 emails
per device
> 750,000 spam
e-mails
Home-
networking
routers
Increased out-of-the-box security needed for IoT devices
Cyber attack using IoT
devices
37
Ensuring privacy – IoT-driven increase of data collection requires
end-to-end security and potentially regulation
SOURCE: Österreichische Bundesarbeitskammer; GSA and McKinsey & Company “IoT collaboration”
1
IoT as a “threat” for privacy
Usage of private
information by
companies in a
legal way but to
consumer’s
disadvantage
Illegal data
exploitation
B
A
Description Example
Multiple scenarios
Espionage for private information
(e.g., by criminals, hostile
organizations)
Illegal exploitation through
backdoors or vulnerabilities
Loss of control
Data given to corporations cannot
be easily deleted
Data is resold or is inherently
connected to operational data without
consumer knowledge
Imbalance
Companies have detailed
customer information without
consent
Detection and use of very private
information (e.g., pregnancy by
retailers)
Wrong data
forecasts
Analyses have inherent faults
possibly causing discrimination
against individual users
Refusal of credit due to duplicate
names
Discrimination/
exclusion
Companies have the know-ledge
to discriminate against individual
customer groups
Loss of health insurance (e.g., due to
detection of high cancer risk)
Each cause needs specific solutions
▪ Strong end-to-end security is a must for all IoT devices
▪ Transparent regulations needed to ensure appropriate
data usage and to provide legal clarity for companies
A
B
38
Security requirements for IoT vary by segment
1 For example; Germany requires smart meter data to be hardware encrypted
1
SOURCE: Expert interviews; GSA and McKinsey & Company “IoT collaboration”
Trans-
mission
encryption
Data storage
encryption
Device operating
system encryption
Hardware encryption
Non digital,
physical security elements
Software
Hardware
Physical
Light
Strong
▪ Certificate management
Indus-
trial
Smart
home
Wear-
ables
Additional regulatory
requirements exist in
some regions1
Con-
nected
car
▪ Public key cryptography,
e.g., SSL
▪ VPN
▪ IPsec
▪ Secure memory
▪ Software obfuscation
▪ Secure bootstrap
▪ Hardware-implemented
de/encoding algorithms
▪ Hardware random number
generators
▪ Physically unclonable
functions
▪ Quantum transmissions
Typical requirements by segmentLevel of security Security concepts/examples
NOT EXHAUSTIVE
39
loT security is an opportunity for a vertically integrated play
from semiconductor companies through growth or collaboration
1
“Organic" opportunity Partnership opportunity
SOURCE: GSA and McKinsey & Company “IoT collaboration”
End-to-end security
needed for IoT stack
Applica-
tion/
cloud
Trans-
port/
hub
“Thing”
A) Move upwards B) Expand from the middle C) Move downwards
Organic development of capabilities may not be in a short time
▪ Collaborations, partnerships, or M&A are viable strategic options
Semiconductor
manufacturer
core competency
Knowledge
of low-level
(hardware)
security
provides
advantage in
designing
higher-level
(software)
security
Network equipment
manufacturer core
competency
Many key
competencies in
transport layer
security design
are applicable
to the application
layer
Hardware design
capabilities are
needed for
offering an
integrated
solution
Application
designer key
competency
Control of
application
interfaces
and/or
customer
access can
provide an
advantage in
defining low-
level
designs/arch-
itectures
End-to-end
security offer
40
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
41
A lack of market demand is a growth inhibitor for IoT – semiconductor
players can help customers to create demand
SOURCE: Navigant; IHS; SBD; GSA and McKinsey & Company “IoT collaboration”
2
1 FAE:Field application engineer
Lack of profitable use cases
▪ Verticals have IoT products, but lack a profitable use cases
Missing customer capabilities
▪ Use cases with economic added value exist, but customers have yet to buy in for
IoT’s added value
▪ Many B2B customers do not know how to leverage the connectivity of “things”
and how to create economic value
Necessary approach to
help stimulate demand
▪ Provide open platforms
and an ecosystem to
facilitate use case
development
▪ Educate customers and
build customer
capabilities (e.g., with
dedicated sales force,
FAEs1)
▪ Complement
semiconductors with
software to enable
customers to use products
more easily
▪ Develop different levels
of development support
depth depending on
customer needs
Inflection
enablers
Ecosystem
Market
Smart
home
Smart
cities
Con-
nected
cars
Medical
electro-
nics
Industry
auto-
mation
Wear-
ables
Technology
Status inflection enablers today by IoT vertical
42
Major semiconductor players are building software eco-systems
around their products
SOURCE: Company websites; press search; GSA and McKinsey & Company “IoT collaboration”
2
2009 2010 2011 2012 2013 2014
Acquired Mashery’s
API management
software in May
2013
Updated BeeKit
wireless
connectivity toolkit
in Jan 2013
Partnered with
Thingsquare wireless
connectivity platform
in Mar 2013
Acquired McAfee
security software
in Feb 2011
Acquired Aepona’s API
exposure and
monetization software
platforms in May 2013
Released Onebox IoT
gateway
Sep 2013
Joined ARM mbed
project in
Dec 2013
Released iNEMO
filtering and predictive
software tool in Mar
2011
Acquired Wind
River embedded
software in
Jul 2009
Relaunched Intel
Services Division in
Jul 2014
Updated Code-
Warrior software in
Apr 2014
Released 2net
Mobile software
platform in
Sep 2013
Launched AllJoyn
IoT software
framework in Feb
2011
Released Internet of
Everything Devel-
opment Platform in
Jan 2013
Acquired 2,400
software and mobile
OS patents from HP in
Jan 2014
Released CSRmesh
BT protocol in Feb
2014
Merged with SiRF in
Jun 2009, inte-
grating its GPS
software tools
Released Harmony
software framework
in Sep 2010
Released VibeHub
networked audio
platform in Jan 2014
Updated µEnergy
BT platform in
Jun 2013
Partnering strategy
with players across
IoT value chain
IoT strategy
(outside-in perspective)
M&A strategy targe-
ting verticalization of
IoT by building
software/service
capabilities in house
Development of
connectivity soft-
ware to complement
processor/MCUs
Development of
connectivity soft-
ware to complement
processor/MCU
products, selected
acquisitions to
strengthen
technology portfolio
Announced new
open development
platform in Nov
2014
43
Open-source hardware can be an enabler for start-ups and hobbyists
to enter into IoT device development
SOURCE: Press clippings; GSA and McKinsey & Company “IoT collaboration”
2
Openness levelsOpen-source
hardware
players
openPicus,
Electric Imp,
Spark Labs
Arduino,
Adafruit,
SparkFun,
OLIMEX
Applications
for product
IoT devices
built by start-
ups, larger
device
manufacturers
or individuals
DIY/Maker/ho
memade
IoT devices
Business
model/concept
Basic enabling of
IoT devices (e.g.,
providing connec-
tivity backbone for
IoT devices made
of hardware,
software, and/or
cloud service)
Supply for maker
community (i.e.,
components, frame-
works, and instruct-
tions for home-
made electronics,
many of which are
IoT “things”)
Implications for
semiconductor
players
Can stimulate
demand from
smaller cus-
tomers such as
start-ups due to
reduced devel-
opment costs and
generally reduced
time to market
Low unit counts
not worth their own
development, can
be a (small)
market for
existing ICs
Circuit
layout
Elect.
circuit
Firm-
ware
IC
design
Mech.
design
Rele-
vance
for IoT
44SOURCE: GSA and McKinsey & Company “IoT collaboration”
IoT customers have a broad range of demands with a need
for tailored platform offerings and targeted customer support
1 Operating systems
High customer involvement No customer involvement
2 PRELIMINARY
Types of IoT end customer
Company example
Key customer
needsRequirements for product offering
Start-ups
Large
consumer
electronics
Large
industrial
electronics
August
Nontraditional
companies
Tra
dit
ion
al e
lec
tro
nic
s
Full turnkey
solution from
chip design to
manufacturing
Full customer
support to enable
maximum
customization/
performance
Highly flexible
solution offering
using off-the-shelf
components
Product con-cept design
Solution development
Level of customer involvement
Frequent use of standard OSs1, e.g. iOS, Android
Industrial-specific OS1
(e.g. RTOG)
Mostly outsourced
Device manufacturing
Lack of experience in device/solution development (opportunity for partnerships with third parties)
▪ Low cost
▪ Fast time-to-
market
▪ High variability
▪ Ease of
development
▪ Performance
▪ Reliability and
security
▪ Compatible with
legacy system
▪ Low total cost
of ownership
▪ Help with
product design
▪ Integrated
solution project
convenience
45
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
46
1 Gbps
100 Mbps
100 Bps
10 Mbps
1 Mbps
100 Kbps
10 Kbps
10 Bps
100 km10 km1 km100 m10 m
Data rate, Log scale
Range, Log scale
IoT standards are not yet mature –
connectivity example
SOURCE: Expert interviews; company websites; press research; GSA and McKinsey & Company “IoT collaboration”
Current wireless connectivity standard landscape
NOT EXHAUSTIVE
1
2
1 Preliminary specs
LTE Cat. 01
Widely adopted
Established, adoption ongoingNew standard
Power consumption, indicative
802.11ah
4G
High
Low
3
1 Many competing standards
for low and medium-low
data rate hinder growth for
many IoT applications
▪ Interoperability missing
▪ Consortia wars might
be emerging
▪ Additional incompatibilities
in higher communication
layers (e.g., 6LoWPAN vs.
Zigbee)
2 Standard whitespace for
low-data rate, low-power,
high-range applications
such as smart grid
▪ WiFi/LTE power
consumption is too high
▪ Alternatives with low
power and a wide range
(e.g., LTECat. 0,
802.11ah, SIGFOX, On-
Ramp) are in very early
stages
47
Different approaches exist for developing
standards for the Internet of Things
ILLUSTRATIVE –
SELECTED EXAMPLES ONLY
Interest group Open standard initiative
1 Apple is using a Bluetooth specification that requires special connectivity chips
IoT standardization effortsIndustry player
SOURCE: Press clippings; company websites; GSA and McKinsey & Company “IoT collaboration”
3
API/
Ser-
vices
Conne-
ctivity
Appli-
cation
All-
Joyn
Intel Gateway
Solutions
/Nest
Apple1
HomeKit/
HealthKit
Qivi-
con
Industrial Internet Consortium (IIC)
Wi-Fi, cellular IoT, LTE-MTC, Bluetooth, ZigBee, Z-Wave, SIGFOX, RFID
Open Inter-
connect
Consortium
(OIC)
Smart
home
Smart citiesConnected
cars
Medical
electronics
Industrial
automation
Wearables
48
Semiconductor players need to pursue well-thought out
strategies in IoT landscape of immature and missing standards
SOURCE: GSA and McKinsey & Company “IoT collaboration”
Deep-dive3
▪ All players should
– Pursue a hedging strategy with a
focus on standards that meet the
criteria for high likelihood of success
– Actively support industry
associations in promoting standards
– Use collaborations with other
industry players to drive
standardization
▪ Large players can act more
independently due to sufficiently large
volumes and can potential be driving
forces in establishing standards
Depending on company type, different
approaches are required
▪ Multiple
competing
standards are
available in some
domains
▪ Standardization
is still missing in
many areas in
verticals and layers
of the stack
Development
of standards is
still in progress
▪ Holistic roll-out
with many
participants/
devices
▪ Strong
ecosystem
available
▪ Clear value
proposition for
key stakeholders
Good standards
must fulfill key
requirements
49
Successful standards exhibit common key characteristics NOT EXHAUSITIVE
SOURCE: Expert interviews; GSA and McKinsey & Company “IoT collaboration”
3BACKUP
▪ Success of 5 different connectivity
standards in the US was investigated
▪ LTE, Bluetooth, WiFi, and 3G CDMA
came out as winners while WiMax did
not succeed
▪ Winners shared key characteristics in
their strategies
Analysis of connectivity standards Common factors for successful standards
Successful rollout
Rapid and scaled deployment
Ease of implementation
Push & commitment from lead players
Strong partnerships
Strong ecosystem
Highly available products and services
Large accessible market
Open/accessible standard
Common value across key stakeholders
Clear value to stakeholders
Low cost/investment to adopt
Strong interest group or association to
align players
50
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
51
IoT device specifications vary significantly within a
multidimensional solution space, depending on application
SOURCE: Press research; GSA and McKinsey & Company “IoT collaboration”
EXEMPLARY IoT VERTICALS4
Smart
meter
Power consumption
Recharge cycle
Connectivity
Transmission speed
Connectivity
Transmission distance
Data processing
Computation speed
Data processing
Memory capacity
Communication security
Form factor
Price of IoT chipset
Every
year
Every
few days
Permanent
<Kbits >Mbit/sKbits/s - Mbit/s
1m >1km100m
Low High
< MB GBMB
None StrongLight
Irrelevant mmcm
USD 0.01 > USD 100USD 1
Smart
watch
Industrial
automation
52
ILLUSTRATIVE
CALCULATION
▪ IoT device specifi-
cations vary along
multiple dimensions
– Power
requirements,
lifetime
– Connectivity
– Form factor
– Performance
– …
▪ Traditional R&D and
marketing approach
would include the
design of an
application-specific
product
▪ Minimum volume is
required to breakeven
with each product –
minimum volume
depends on product
complexity
74
SOURCE: McKinsey Numetrics; GSA and McKinsey & Company “IoT collaboration”
1 Assumptions: R&D cost USD 12 mn for low-complexity IC design and USD 45 mn for high-complexity design; 5-year product lifetime; market with 10
competitors; ASP USD 3.00 in year 1; thereafter 10% price decline per year; gross margin of 55%
20
High-
complexity
design
Low-
complexity
design
Wearables:
~22M units –
Smart grid:
~100M units
Most IoT
verticals: very
small volumes
per specific
application with
a few thousand
to a few million
units per year
Annual shipments, mn
4 Many small IoT market segments cannot be profitably addressed
with a traditional business model for integrated devices
▪ Allows to cover many
IoT markets with small
annual volume
▪ Requires
identification of IoT
device archetypes,
even over different
verticals
▪ Needs definition of a
common-ground
platform for each of
these archetypes
Breakeven volume in different market environments1 A platform strategy
is necessary
53SOURCE: Interviews; press clippings; company websites; GSA and McKinsey & Company “IoT collaboration”
Platform strategy if it is possible to identify device archetypes
that cover several different IoT verticals
EXEMPLARY4
IoT requirements by vertical/application
Industrial
auto-
mation
Medical
elec-
tronics
Con-
nected
cars
Smart
home
Smart
cities
Accessories w/o screen
Home surveillance
Lighting system
Home automation
Smart metering
Field monitoring
Entertainment system
Clothing/ shoes
Accessories with screen
Hospital patient/asset
management
Personal health
monitoring
Preventive maintenance
Supply chain monitoring
Traffic control
Public surveillance
> 1Mb < 1Mb
eMemory
Enhanced Basic
Security
Med.
Processing power
< 100 Mhz
Mobile broadband
Connectivity range
Long Short
BLE, Zighee, WiFi
LowHigh
> 700 MHz
Wear-
ables
Low
Power
Low-end
commodity
▪ Low processing
▪ Short-range RF
▪ < 1Mb memory
High performing
▪ Very high (AP-
like) processing
▪ Long/short-
range RF
▪ > 1Mb memory
▪ Enhanced
security
Medium-end
▪ Med processing
▪ Short/long-
range RF
▪ < 1Mb memory
▪ Enhanced
security
High-level
IoT device
archetypes
Simplified and illustrative view – semiconductor players will need to analyze which
applications can be served by 1 archetype platform on a more granular level
54
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
55
Semiconductor companies need to identify new ways how to extract
“fair share” of overall value generated by IoT for themselves
5
SOURCE: McKinsey Global Institute; Cisco; expert interviews; GSA and McKinsey & Company “IoT collaboration”
Opportunities for value extraction
▪ Complement components with software
to provide a more comprehensive solution
▪ Use security to span all elements of the
technology stack and extract value from
offering end-to-end solution
▪ Offer system integration services for IoT
devices
▪ Investigate opportunities for new business
models in IoT that go beyond selling
hardware
▪ IoT is expected to create an overall
value of > USD 5 trillion by 2025
▪ End-users and consumers will
benefit from this value creation
through IoT applications
▪ Companies within the IoT
technology stack will also be able to
capture a share of the created value
▪ How to extract a fair share of the
overall created value for
semiconductor companies is an
unresolved question
▪ High value extraction by IoT service
providers and cloud players might
diminish available value for
semiconductor companies
56
1 Outside-in analysis
The semiconductor industry has started to integrate
along value chain and is building up software capabilitites
SOURCE: Company websites; press search; GSA and McKinsey & Company “IoT collaboration”
Inhouse
M&A
Collaboration
5
▪ Primary focus
is on
connectivity
and inter-
operability
▪ Most
companies
complement
in-house
software
development
with M&A
and/or
collaborations
▪ High share of overall
created value by IoT is
created in Internet/
cloud part of IoT stack
(expert estimates: up
to 80 - 90%)
▪ Small share of value
created in things is a
risk for semiconductor
players failing to
capture fair share of
overall created value
▪ Adding
complementary
software to sold
semiconductor devices
is an opportunity to
increase captured
value for
semiconductor players
via a more holistic IoT
solution
Applica.
specific
Interop-
erability
Connec-
tivity OSSecuritySensor
Software/API functionality – selected players1
57SOURCE: Press research; Business Model Generation by Osterwalder/Pigneur; GSA and McKinsey & Company “IoT collaboration”
With proliferation of IoT, there are opportunities for completely new
business models – potentially also for semiconductor players
NOT EXHAUSTIVE
5
Hardware
centered1
Generate revenue from the sale of
devices that are sometimes bundled with
a free service
▪ Google/Nest offers a home automation hardware
product (smart thermostat) that can be controlled
remotely from any device
Freemium7
Provide a free basic service and attempt
to upgrade customers to a paid, premium
service
▪ Fitbit provides free software with the sale of its
hardware
▪ Additionally, users can upgrade to the premium app
that offers additional features
Closed
ecosystem6
Tightly integrate hardware, software,
and services to incentivize customers
to stay in a company’s closed ecosystem
of products
▪ Apple controls the entire user experience by selling
a set of hardware products with a layer of free
software and paid services on top
Professional
services5
Provide data analytics, IT consulting,
business intelligence, and cyber security
to B2B customers
▪ Microsoft’s cloud offering Azure, has specialized IoT
service offerings that enable enterprises to perform
real-time analytics, machine learning, etc.
Data driven3
Leverage customer/system data to offer
better services/pricing, improve product
design, and optimze performance
▪ GE uses operational data from sensors on its
industrial machinery and aircraft engines to provide
services such as efficiency optimization
Adjacent rev-
enue streams8
Utilize information gained to open,
adjacent revenue streams (e.g., location-
based advertising, data selling)
▪ Google’s wearable product Glass will enable
companies to target customers based on location
IP centered2
Generate revenue from licensing out IP
building blocks; additional revenue by
supporting development of IP
▪ ARM offers licenses for computer processor
architecture built around its own proprietary RISC
technology
Description Example of business model
Platform4
Provide a software-based infrastructure
for enterprises to deploy IoT solutions
▪ PTC’s Axeda machine cloud offers its enterprise
customers a complete M2M and IoT data intergration
and application development platform
58
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards
low-power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
59
10,000
100
1
0.01
2015102000
1
100
10,000
0.01
0.0001
20151020001992
Technological advancement in Iow power, device performance and
device size is necessary to unleash full potential of IoT
SOURCE: Deloitte; drpeering.net; cmu.edu; postscapes.com; Texas Instruments; GSA and McKinsey & Company “IoT collaboration”
10,000
100
1
0.01
20151020001992
c Details on next page
222 0.01
10,000 0.03
1,200 0.63
Storage
USD per GB
Computation
USD per
1 mn
transistors
Connection
USD per
Mbps
Cost advancement of semiconductors has gone a long way
But still more development
needed
▪ Today, many IoT applications
technically solvable but have
long development times,
high product cost, or still
immature features (e.g.,
form factor, run time)
▪ Technological
advancement is required to
unleash te full potential of IoT
– Lower power
consumption, increased
run time
– Integration, smaller
form factor
a
b
5
60
Evolution of battery technologies
Emerging battery technologies may help enable low-power IoT
applications, but they are not sufficient alone to enable the IoT
SOURCE: International Energy Agency; expert interviews; company websites; whitepapers GSA and McKinsey & Company “IoT collaboration”
Emerging technology
Wirelessly chargeable
batteries that can be powered
over the air (e.g. using a RF
signal)
Fuel cells convert chemical
energy from fuels (e.g.,
hydrogen) into electricity
Energy harvesting is the
process of capturing minute
amounts of energy from natural
sources (e.g., solar, thermal,
wind) and could enable battery-
free devices
Pioneers (examples)
Thin-film batteries are printable
batteries for applications that
require a thin form factor and
flexibility
0
100
400
50
2,000
Energy density, Wh/kg
1860 1910 1960 2010 2020 2030
Lead acid
25 - 45
Nickel iron
30 - 40
Nickel cadmium
35 - 60
Nickel-metal
hydride 50 - 75
Lithium ion with
Si nanowire 400
Li-air
~2,000
Lithium ion
110 - 140
6a
61
2 technology options are available for ultralow power in leading
edge chips: FinFET and FDSOI
SOURCE: Expert interviews; manufacturer websites; press clippings; whitepapers; GSA and McKinsey & Company “IoT collaboration”
1 Fully depleted silicon on insulator – smaller FD-SOI nodes are currently in development
6a
16/14 nm FinFET 28 nm FD-SOI1
Description
Thin silicon film
New technologies have an up to 70% reduced
power consumption and at the same time up to 60%
improved performance compared to 28nm bulk
Conventional planar transistor design
but with an additional ultra-thin
insulator layer (buried oxide)
Source DrainGate
Insulator
3D transistor design that is more
space- and power-efficient than
conventional planar designs
ManufacturingNew processes (e.g. double patter-
ning) and tools required to create 3D
shapes at 20nm node size
Current planar production lines can be
used with small modifications
Vendors
Intel, TSMC, Samsung, and
GlobalFoundries
STMicroelectronics, Samsung, and
GlobalFoundries plan to start
production
62
SoC and SiP solutions have significant advantages but are often only
viable for large-scale solutions
SOURCE: Product data sheets; ITRS; expert interviews; GSA and McKinsey & Company “IoT collaboration”
Technology comparison SoC (system on chip)SiP (system in package)
Better
WorseSiP SoCNon-
inte-
grated
Better
WorseSiP SoCNon-
inte-
grated
6b
Package
size
▪ Highest integration – smallest
footprint
▪ Vertically stacked chips can
reduce footprint
Power
con-
sumption
▪ Highest integration – lowest
power consumption
▪ Fewer and shorter interconnects
– lower power consumption
Flexibility
▪ Change of components requires
redesign of whole chip
▪ Individual components can be
replaced
Time to
market
(TTM)
▪ Longest TTM as silicon respin is
required for each die change
▪ Longer TTM means additional
complexity
Product
cost
▪ Highest economies of scale
▪ Simple packaging – lower
assembly costs
▪ Yields are typically lower –
~ 90%
▪ Higher economies of scale
▪ Complex packaging – higher
assembly costs
▪ Yields are typically lowest –
~ 80%
Develop-
ment cost
▪ Up to 3x R&D effort
▪ Highest design costs
▪ Up to 1.5x R&D effort
▪ High design costs
63
Integration of components into SiP or SoC requires access to several
technologies – close collaboration of several suppliers is necessary
SOURCE: Expert interview; GSA and McKinsey & Company “IoT collaboration”
6b
Traditional electronics value chain
IP pro-
viders
OEM
Connec-
tivity
Sensors
Memory
AP/MCU
Key trend for IoT
IP provider
collaborate with
chip manu-
facturer to build
an extreme low
power core
architecture for
IoT solution
1
Different chip
component
suppliers will
collaborate to
develop single chip
for IoT
2
Turnkey service
from chip to device
will be needed for
nonelectronic IoT
customers
3
2
Buy
SoC
3
1
IPChip
supplier
Devices/
solutionIP Chip supplier
Devices/
solution
PCB
assembly
▪ pushes
integration of
own MCU
technology
(e.g. with Bosch
Sensortec)
▪ Is developing
SigFox
transceiver/
MCU SoCs
IoT chip scenario
“Collaboration with leading sensor manufacturers will enable Atmel to provide customers
with the most appropriate sensor solutions, hereby reducing overall time to market,”
– Senior Product Marketing Manager, Atmel Corporation
EXEMPLARY\
COMPANIES
Semiconductor chip
manufacturers
64
Contents
Key
strategic
challenges
Implications for semiconductor
players
▪ Semiconductor players have to pick their role in an evolving market
and embrace challenges as opportunities
IoT as a growth driver for the
semiconductor industry
▪ IoT is expected to be a key growth driver for semiconductors; however some
ambiguity exists about the timing and the magnitude of growth
Introduction▪ IoT spans a broad field of applications and is starting to happen now
Good progress towards the
realization of IoT
▪ Progress for IoT has been made by increasing supplier push and customer
demand, technological and cost advancement, and improved infrastructure
Customer
demand2
▪ Which opportunities exist for stimulating market demand?
Standards 3▪ What is the best way to navigate an environment
of immature standards?
Technological
advancement6
▪ What can be done to continue the technological improvements towards low-
power and low-cost IoT devices?
▪ Challenges need to be overcome to unleash the full potential of IoT
Security and
privacy1
▪ How can security be ensured across the IoT stack?
▪ How can privacy requirements be met for IoT?
Platform
strategy4
▪ How can customers in fragmented markets be reached successfully?
Value
extraction5
▪ How can a suitable business model be chosen?
▪ How can a semiconductor company capture value?
SOURCE: GSA and McKinsey & Company “IoT collaboration”
65
IoT is an opportunity for the semiconductor sector, but it calls for new
business and operating models
SOURCE: GSA and McKinsey & Company “IoT collaboration”
I Identify application- and vertical-specific growth pockets
▪ Perform an in-depth assessment of market opportunity and
requirement for each IoT vertical/application
▪ Identify growth pockets that fit well with specific products/
capabilities of each respective semiconductor company
▪ Make bold moves if required to enter a specific
application/vertical
II Seek value beyond silicon
▪ Understand application- and vertical-specific value drivers for
the end-user (how does the consumer or enterprise derive
value)
▪ Identify opportunities beyond silicon (e.g., system integration,
software) to generate value for customers
▪ Test alternative business models to capture more of the
generated value (e.g., usage based)
III Revisit the operating model to cultivate and support IoT
innovation across more fragmented products and markets
(e.g., setup of organization, R&D investment approach)
▪ IoT presents an
opportunity for new
growth beyond
mobile
▪ IoT creates potential
opportunities for
value capture
beyond silicon
Strategic needs for individual semiconductor players
66
Identify application- and vertical-specific growth pockets –
diverse opportunities exist for IoT plays
I
SOURCE: GSA and McKinsey & Company “IoT collaboration”
Verticals
Products
(Embedded)
sensors
Processing
chips
Devices
Software/alg-
orithms
Servers/
infrastructure
Connectivity
chips
End-user
applications
Cloud services
Wear-
ables
Medical
electron-
ics
Con-
nected
cars
Industrial
auto-
mation
Smart
home
Smart
cities
Silicon
System
inte-
gration
Appli-
cations
Many opportunities
for players to find
profitable niches,
(depending on a
company’s specific
capacity profile), for
instance:
▪ Player A
Expert in consumer
products with full
system integration
capability
▪ Player B
Expert in leading
edge IC with high
performance for pro-
sumer applications
▪ Player C
Expert in industrial
high reliability and
security ICs
▪ Player D
Connectivity enabler
▪ Player E
Processing provider
with vertical-specific
connectivity solution
Player A
Player C
Player B
Player DPlayer E
ILLUSTRATIVE
67
Seek value beyond silicon – Opportunities further
up the value chain need to be investigated
II
SOURCE: GSA and McKinsey & Company “IoT collaboration”
Semiconductor players’ approaches to the IoT business model
Partnerships/alliances
Integration/M&A
Value chain
Classic hardware-oriented
semiconductor business
IoT as an opportunity to
sell more silicon
IoT as a new business model
across the entire stack
Software today consid-
ered prerequisite to sell
silicon – rarely useable
to capture more value
Differentiation by
applications focused on
end user – currently key
strategy of many players
Full integration to capture
all value – targeted by
some players but market
still too nascent to judge
(Embedded)
sensors
Processing
chips
Devices
Software/
algorithms
Servers/
infrastructure
Connectivity
chips
End-user
applications
Cloud services
Silicon
System
inte-
gration
Appli-
cations
Core semiconductor
business
Core semiconductor
business
Core semiconductor
business
ILLUSTRATIVE
68
Revisiting the operating model – enablers for growth in IoT
SOURCE: GSA and McKinsey & Company “IoT collaboration”
III
1 It is still contested in the industry if integration in unfamiliar territories (e.g., applications/product design, cloud services ) is an advantage or loss of focus
Organization
Business model
Approach to
portfolio /
technology
development
Capabilities
Investment
approach
▪ Limited number of large BUs
▪ Direct sales and FAE
▪ Application-specific R&D
programs
▪ Multi-market approach to diverse end
markets
▪ Leverage distribution sales channel
▪ Platform approach to R&D
▪ Largely HW based pricing
▪ Differentiation on features and
functionality in HW
▪ Explore business models based on usage
and value (e.g., usage based)
▪ Differentiation in SW and services (e.g.,
secure access)
▪ Application-focused roadmaps
(e.g., Automotive)
▪ BU driven R&D investments and
IP
▪ Platform approach to address multiple IoT
use cases across verticals
▪ Leverage third-party IP to build platform
(e.g., connectivity, image processing)
▪ Core IP development in design
▪ Application development with
medium to large customers
▪ IP integration for IoT platform designs
▪ Platform development: tools design kits,
developer communities
▪ System (board) level design capability
▪ Limited number of large portfolio
bets decided by BU lead
▪ Typically, biased investment in
core products vs. application
development
▪ Significant platform investments (tools,
user community, platform-level ICs)
▪ Small bets in many application markets
▪ Integration (M&A, alliances, partnerships)
distant from core as a key capability1
ToFrom
69
IoT will have particular implications on industry sub-segments and players
IoT requires bold
moves from IDM
and fabless players
Players need to choose strategy for IC design
▪ Platform approach – offer multiple chip platforms to serve across
verticals; derive value from scale
▪ Specialist approach – go deep into very selected verticals:
derive value from specialist ‘high performance’ applications
IoT drives a new
model for
competition of AP
and MCU players
Processor and MCU players migrate to compete for IoT SoC
▪ Processor players “move down” and offer more power and
cost-efficient mid/low-end solutions with existing integrated
functionality for connectivity/RF and sensor I/O
▪ MCU players need to “move up” to add connectivity/RF and
increased functionality for sensor integration
IoT recasts a
foundry opportunity
beyond leading
edge
Foundry players have potential to both drive IoT innovation
and benefit from increased demand at nodes beyond n-1
▪ Foundry innovation is required on lagging nodes: RF integration,
NVM integration, and new structures, ultra low power
architectures
▪ New volume for fabs at 40nm and above
Selected themes for specific segments and players based on value chain role
SOURCE: Executive interviews; GSA and McKinsey & Company “IoT collaboration”