Most of the technological development over the last couple of decades has been driven by an industry driven by a very simple equation. Moores law states that the density of transistors in semiconductor chips doubles every two years. This means semiconductor companies deliver cheaper, faster and lower power consumption chips every year enabling other industries to grow.
The semiconductor industry itself is not growing significantly anymore even though the number of transistors it manufactures doubles every two years. It has reached a commodity equilibrium hard to break.
Just to stand still semiconductor companies need to invest massively in new technology and in acquiring competitors to get to a higher scale of economy that allows massive investments.
This is not an even race as can be seen in the chart. Three companies dominate the roulette table:
A few companies dominate the race followed by a long string of companies that are struggling to handle the investments needed to participate in Moore's race. Although the technology is available through subcontractors, using it comes with a loss in the value chain that has an impact on costs and gross margins.
Moore's law is available only to a few companies
If you want to be in the semiconductor game you need to go big or go home. The R&D cost relative to sales is an average of 17.2% for the major semiconductor companies. This is significantly over what other industries normally invest in R&D and way above technologically (still) respected Apple Inc, that only invest 5.5% of sales into R&D.
Investing too much into R&D makes you a target for acquisition. To buy a company you have to pay more than it is worth (many different measurements available). For an acquisition to make sense it has to either deliver revenue synergy, cost synergy or both. In the semiconductor industry, cost synergies dominate. This means a high R&D ratio gives an acquirer the opportunity to cut R&D spend with little immediate impact. Longer term there might be ramifications.
The industry is entering a new phase of uncertainty where M&A might not be the path to survival it has been for the last few years. What the Obama administration started the new Trump administration will continue, blocking foreign acquisitions of semiconductor companies. In return China and Europe are likely to block any intra-US mergers. Soon the industry will have to learn how to grow organically again.
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