It is expensive to participate in the Semiconductor industry. Billion dollar fabs are needed, full of equipment their weight worth in gold. Chasing the leading edge technology while being chased by obsolescence. Moore’s law has not created a linear market but an industry full of exponential increases. The cost of developing new technologies and new products are dramatically increasing as are the costs of manufacturing facilities and equipment. The only element of the semiconductor business model that is slowing down is revenue growth.
This development is changing the business models of semiconductor companies. Not all companies are participating in the technology race anymore. Some have become predators and live of acquiring other companies. Others have outsourced most of their manufacturing and other elements of their business hoping that the loss of value chain does not impact overall value creation. There are also companies that are consolidating their operation trying to make careful strategic bets hoping to create golden eggs – products that can withstand the technology race and deliver revenue for many years.
What used to be one business model has morphed into many different business models. For most stakeholders in the industry, it is important to understand the business model as it can predict the behavior of semiconductor companies in certain situations. If you work for, sell to or buy from a semicoductor company, you want to know.
One of the key financial metrics you want to follow is the R&D spend. If a company is not investing in the future there is a high likelyhood they are focusing on extracting value from their current relationships. You don’t want to work with semiconductor companies that want more of the cake, you want to work with companies baking bigger cakes. The largest spenders are not necessarily the best companies to work with, but there is a correlation.
The semiconductor industry outspends most other industries, even the pharma and biotek industry that do a good job of telling everybody how much they invest. The R&D spend is increasing although the Q4 spend was down compared to the same quarter last year. We believe this increase will continue givent the challenges the industry is facing from a product development perspective and technological perspective.
What looks like an impressive spend in another industry can be unambitious in semiconductors. You need to compare the spend to other semiconductor companies to get any insights. The large spread of R&D spending in the semiconductor industry combined with other information can uncover different business models. There are investor and extractor companies in the semiconductor industry.
We believe this matters to all stakeholders in the industry. We are currently working on a report that dissects the Q4 results and the business models of the top semiconductor companies. Sign up for a notification here.
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