Only a few bricks left in the Semiconductor Industry.

Most semiconductor companies have outsourced all or some of their wafer manufacturing to foundry services. This has a positive impact on free cashflow with a possible negative impact on gross margins. Outsourcing manufacturing is not unique to the semiconductor industry but particularly attractive because of the massive investments needed to participate in the technology race. All outsourcing comes with a loss of control of your supply chain and only time can tell if it is a good strategic choice for a semiconductor company.

If you want to be a memory company, you need factories. As memories are highly competitive and either extremly profitable or running at a loss it require a highly specialised business model. When times are good you invest, when times are bad – you wait.

You can see more free charts here

 

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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The Future of Semiconductor Memory is a rabbit hunt.

The current memory boom we are experiencing is not new. What might be new is that one of the regulating factors that limit memory pricing is not working anymore. Most memory has been bought by consumers and increases in pricing has dampened the consumption. However, the current memory boom is driven by a new market that worries less about pricing than consumers do. This could mean a fundamentally different memory market in which the normal supply and demand equation is suspended. Right now the supply side of the equation is trying to hunt the demand rabbit – with little luck. Limited capital investments, too late have given the rabbit a head start and pricing is skyrocketing. This should normally curb demand which has not happened yet.

You can buy the complete memory report here

 

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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The stalemate has been broken between the Harddisk Giants

For a long time, hard disks have been the preferred storage for large amounts of data. Being relatively cheap and following the technological path of Moore’s law business has been good for the large hard disk companies. Eventually, the market ended up with 3 major players, Western Digital and Seagate with an equal market share in the low forties and Toshiba in the high teens. The two giants had followed an equal technological path and were in a stalemate situation. Until Western Digital decided to act on a market trend created by the cloud data centre. The cloud data centre is not only treating data as a cost but more importantly as a resource. When the focus shifts from storing data to investigating big data relationship, so do the need for storage. While the hard disk revenues declined during 2016, Flash revenue exploded. Western Digital could not have chosen a better time to acquire one of the top Flash players: SanDisk. Within a few quarters, flash grew to become half the revenue of Western Digital, while Seagate experienced negative growth.

 

With only a few flash companies left in the market, Seagate will have to hurry. Unfortunately, the only flash company up for sale is Toshiba. Being the third harddisk player, Seagate is not likely to receive regulatory approval of a deal due to anticompetitive legislation. The only option is to become part of a consortium bidding for Toshiba, which is what Seagate has chosen to do.

 

The Bain consortium including Apple, Hynix and Dell can possibly get an approval if they promise to protect Japanese jobs and manufacturing plants. This is likely the only chance for Seagate to get their fingers into the Flash pie and save the day. Should the consortium succeed, Seagate will use all options to increase its ownership share of the group to match the capabilities of Western Digital.

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Samsung has approved a 7B$ investment in a new NAND fab in China

The memory market is red hot and it is time to invest in the next upturn. If you are a semiconductor memory company, you need bricks and machines. It has not yet been successful to move memory production to foundry so there is a direct correlation between capital investments and future revenue. Samsung is already dominant in the NAND market and has decided to keep it that way by approving a 7B$ investment in a new NAND fab in China.

The scale of this investment should be seen in relations to the capital investments of the other players in the industry. The chart shows the capital investments for the entire company and not a specific investment into memory capacity. However, it is still pretty obvious who is investing in the future and who is sitting watching. Western Digital became the 2nd largest NAND company in Q2 overtaking a struggling Toshiba. Both companies are investing very carefully at the moment and combined it would take both their entire group capital investment for 5 years to pay for the Samsung fab. Both number 4 and 5, Hynix and Micron are signicanlty more aggressive but still some distance from Samsung. Their investment is however fully made into memory capacity.

 

 

 

 

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Semiconductor fab ownership ratio

Fab Ownership

The semiconductor industry is rapidly outsourcing manufacturing and with that losing control of a key element of the supply chain. The success of memory companies is still intimately associated with fab ownership but most other semiconductor companies have outsourced a proportion of manufacturing. It is possible to get insight into the extent of the outsourcing by investigating how much revenue is created by every dollar of Property, Plant and Equipment (PPE). Fully fab'ed companies typically generate less than 2$ of yearly revenue for every 1$ of PPE they own, for fabless companies, it is typically over 8$. The chart does not reveal what model is the best - this is fully dependent on the company its strategy and the market cycle.

Microchip Timeline

A timeline view of the Revenue/PPE data can reveal the strategic mode of a company. When Microchip acquired Atmel, they also inherited manufacturing capacity. In all likelihood, this is not part of the long term strategy of Microchip that is in the process of moving their revenue to foundry based manufacturing.

 

ST has Changed Investment Strategy

Establishing if a semiconductor company is in expansion mode or not can be difficult as some companies own their own manufacturing facilities and others use outsourced manufacturing. The first thing to understand is how dependent a semiconductor company is of its own factories. Memory companies typically have Property, Plant and Equipment (PPE) value of close to 100% of yearly revenue, where Intel has PPE/Revenue ratio of around 60%. In the opposite end of the spectrum, you have fabless companies that fully outsource their manufacturing. They have very low PPE/Revenue ratios of 7-15%. In the middle, from 15% to 60% are the fab light models.

With a PPE/Revenue of 33%, ST is in the heavy end of the fab light model. This means that their capital investments will reveal their strategic mode: Consolidation – Balance – Expansion.

Replacement Fixed Capital Investment (RFCI) is the investment level a company need to have to maintain the condition of the current revenue producing assets. The value of Fixed Capital Investments above RFCI contributes to an expansion of capacity and is called Incremental Fixed Capital Investments (IFCI).

IFCI is interesting to monitor as it directly tells you the strategic mode of the company. A negative IFCI implies consolidation and positive IFCI equals expansion. An IFCI of zero means the capital investments a just sufficient to maintain current level of activity and means the strategic mode is balanced.

Plotting the RFCI and the IFCI for ST shows that three quarters ago, ST changed their strategic mode from consolidation to expansion.

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Intel’s next acquisition?

The sudden increase in Intel’s cash position in Q2-17 is interesting and unexpected. There is no immediate cash need in the company so we might hear acquisition news from Intel soon.

It is not a secret that Intel is struggling to grow at market rates. 9% growth in Q2-17 (compared to Q2-16) is not stellar in a market that is growing 25% in the same period. Much of this is memory growth that only benefits Intel marginally. Excluding memory growth, the market grew 11% in the same period.

Intel has made an asymmetric bet on the future. The company want to win in Automotive, IoT and Data Center but organic growth will not get Intel meaningful revenue (compared to PC and server revenue) sufficiently fast. The acquisition of MobileEye was a move into the ADAS applications of automotive and the acquisition of Altera was aimed at the AI part of the Data Center. Even though Intel owns most of the processing in the enterprise and cloud Data Center, it has not had visible success in the fastest growing segment of the Data Center: Artificial Intelligence. From 0% two years ago, AI now accounts for more than 10% of the total processing volume in the Data Center and Intel has lost momentum to Nvidia in particular. The Altera acquisition has not changed this yet.

We don’t believe Intel is satisfied with the current momentum in the Data Center and could be looking to add other products attractive to in particular Cloud customers. With Nvidia out of financial reach, Intel could target smaller fish with success in the Data Center: AMD, Marvell and Microsemi could be on the shortlist.

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Another Flash Acquisition by Western Digital

In one of the best acquisitions ever, Western Digital managed to capture SanDisk and with that a ticket back to the future. Although still important, the HD business of Western Digital and their competitors has been declining and increasingly moving into commodity land. The acquisition has had an immediate and visible impact on the financial results of Western Digital and given the company appetite for more acquisitions. Latest Western Digital has entered an agreement to acquire Tegile, a company developing and manufacturing leading edge storage solutions to Data Centers. The Data Center is the single most important market for Western Digital’s flash products accounting for close to 1B$ worth of revenue per quarter.

Western Digital is successfully ascending from the abyss of disruption.

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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The Memory Market is not at Equilibrium yet.

WSTS has just released their semiconductor forecast for 2017 and 2018 suggesting that the memory market has peaked and will turn south from here. Our research on the demand and the supply side of the memory market points in a different direction.

The memory market has not yet reached an equilibrium and will continue to favour the producers of semiconductor memories. Although there has been invested significantly in increased supply, it will take time before the new capacity has a meaningful impact on the market. Hynix and Samsung started the investment cycle carefully followed by massive investments the last few quarters. Micron was out of the start block early but have now returned to a more conservative approach potentially expecting a turn in the market. Micron did add meaningful capacity by taking control of the Inotera, the manufacturing joint venture operated with Nanya but this does not add capacity to the market.

On the demand side, there have been two major surprises. Opposite to what should be expected of consumer products, the Smartphone and Tablet demand has remained solid irrespective of material price increases. The other has been the massive hunger of memory in the data Center, ignoring the price increases completely.

The move towards Big Data and Artificial Intelligence in the Cloud Data centre can be seen by Nvidia’s growing revenue. Nvidia cannot yet match Intel in the Data Center but seems to win most of the processor sockets for AI. Intel themselves believe 7% of the current processing capacity in the Data Center is associated with AI. Nvidia’s current share of processing revenue in the Data Center is slightly above that number. In other words, the current memory shortage could be a result of the 7% shift towards AI in the Data Center. It is safe to assume that this number will grow and have a significant impact on memory pricing.

The memory market could be entering uncharted territory.

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Semiconductor Memory Market shares Q2-2017

All memory companies had a great Q2. From a revenue perspective, both DRAM and NAND is continuing the significant growth rates as seen the last few quarters. NAND has recorded 4 quarter growth of 56.1% while DRAM has grown 79.4%. Quarter over quarter growth was 12.3% for NAND and 15.9% for DRAM. From a market share perspective a year ago, Micron managed to grab additional 3% DRAM marketshare while Hynix was flat and Samsung slightly down. In NAND, Samsung managed to win 5% marketshare while Toshiba lost close to 6%. Micron was flat while Hynix captured 2% and Intel lost 1.5%. Western Digital entered the market through the acquisition of SanDisk.

Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a factbook on each of the top 30 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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The most important semiconductor in the Data Center

The data center is not a new invention, it originates from the mainframe older than the PC itself. Where the PC is dominated by consumer and B2B buying decisions the data center is a corporate support function designed to aid the value creation process of the company. As with all other support functions, the corporation will always try and optimise the cost in order to deliver a higher profit. In other words, data storage and computational capacity should be minimised to the level sufficient to support the business. This business perspective does not change by moving the enterprise data to the cloud, this is merely an outsourcing decision.

What has changed is the way that the new cloud companies treat data. For Amazon and Google and the likes, data is not “cost” – it is the new oil. The new internet giants store everything they can irrespective if they can use the data immediately. They will then mine this dark data for insights they can use to optimise their own business or sell to other companies. For these companies, data storage is not a support function but part of the value creation process itself. You will not see Amazon run out of cloud storage.

The increasing dominance of the cloud companies has also changed the supply and demand equilibrium in the memory market. A limited supply made pricing increase and dampened demand and ample supply did the opposite. Not only do the cloud companies need more storage to support their dark data, they also treat memory supply as a long term strategic need that will not be stopped by increased memory pricing. This is the main driver behind the current memory boom and it does not show signs of slowing yet.

The most important part in the Datacenter is now a DRAM.

Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a factbook on each of the top 30 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Mobile Share of NAND Revenue declining.

While the Mobile share of DRAM revenue has been declining for some quarters as a result of increasing memory pricing, the NAND share has continued to increase. There are two likely factors behind this discrepancy. The first one is that the pricing of DRAM has increased more than NAND pricing encouraging smartphone manufacturers to change the memory mix of their phones towards flash. The other factor is that the high-end phones (like iPhones)  have a higher content of NAND and with better margins, the phone manufacturers will accept higher pricing. The Q4 drop in the Mobile share of the NAND market shows that mobile consumption has reached an inflexion point. Most likely the Smartphone market is now in the early stages of significant decline.

Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a factbook on each of the top 30 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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