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Chip Industry Faces Financial Distress

29 January 2014

More than half of world's publicly listed chip companies are facing possible financial distress in 2014, according to business consultancy Alix Partners LLP (Detroit, Michigan).

As a result the firm is discounting predictions of chip market growth in 2014 and reckons that more than half of the semiconductor industry's 191 publicly-listed companies face possible financial distress and that 2014 will be characterized by mergers, acquisitions and break ups.

Alix Partners argue that – like global warming – the business climate that produced deals in 2013 involving Avago acquiring LSI Corp., Micron Technology buying Elpida Memory and the announced merger of Applied Materials and Tokyo Electron, is set to get more extreme. And what is driving the business climate is the exponentially increasing cost of participation in the chip industry that is squeezing many middle tier companies.

Alix Partners note that in the year to 3Q13 the five largest pure-play semiconductor companies – Intel, Qualcomm, TSMC, Texas Instruments and SK Hynix – produced almost one third of industry revenues, but 52 percent of industry earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA margins at the these five companies, at 41 percent, were more than 2.5 times higher than for the other 186 public companies, which average a margin of 16 pecent. A 10 percent margin is often the harbinger of cash-generation problems, Alix Partners said.

As a result not only are 53 percent of the 191 companies at risk but 32 percent are at "high risk" the firm said.

"Though the popularity of end-products such as smartphones, tablets and pads is a rising tide lifting many boats in the semiconductor industry today, the industry as a whole faces persistent structural problems," said Karl Roberts, managing director at AlixPartners, in a statement. "In many corners of the industry revenues and profits have been flat or declining for some time now, just as the demands for more spending on research and development have been escalating more than ever."

In terms of how the predicted stress and consolidation is set to play out Alix said that 100 percent of solar companies face potential distress, as do 92 percent of package and test companies, 52 percent of materials suppliers and 34 percent of IDMs and 32 percent of more general electronic component suppliers. The sectors weathering the storm best are semiconductor manufacturing equipment at 11 percent, fabless chip companies at 13 percent and foundry suppliers at 25 percent.

Alix Partners also noted that pressure is also bearing down on the the industry leaders. For the identified top five companies overheads and going up and returns on capital are going down. With the industry on the brink of an era where Moore's Law no longer holds sway consolidation could be rapid and extreme.

Alix Partners has also announced that it has teamed up with nanoelectronics research institute IMEC (Leuven, Belgium) to look at economic models of the global industry as it attempts to introduce significant changes such as the 10nm and 7nm chip manufacturing 3D packaging and 3D NAND memory.

Under a research program IMEC and Alix Partners will model the cost of lithography from a system perspective and share information with equipment makers and materials suppliers to support the development of extreme ultraviolet (EUV) and multipattern 193nm lithography.

Related links and articles:

News articles:

Jobs Cuts Pile Up as Chip Firms Adjust

Avago to Acquire LSI Via Debt-backed Deal

Micron-Elpida Merger Will Transform DRAM Industry

Semi Equipment Makers Applied Materials, TEL to Merge

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