Consolidation Heats Up In Chip Industry

11 February 2015

As growth slows in the consumer wireless market, the industrial and automotive sectors are heating up, prompting many chip companies to shift their product and marketing strategies. The trend was the driving force behind a multi-billion-dollar wave of semiconductor merger and acquisition activity last fall.

“Wireless, which has been the key growth driver, has actually fallen significantly,” said Dale Ford, vice president and chief analyst at IHS. The compound annual growth rate forecast for semiconductor revenue in wireless communications is just 2.5 percent over the five-year period of 2013-2018, according to IHS’s latest forecast. The only segment growing more slowly is consumer electronics, where revenue is projected to actually shrink 1 percent.

High volumes and strong competition in the primary market for wireless communications chips--smartphones and tablets--have depressed average selling prices for most wireless semiconductor suppliers and therefore eroded revenue growth, said Tom Hackenberg, principal analyst of MCUs and DSPs at IHS. Many players have left the market as they saw their profit margins shrink. Among them are Ericsson, Texas Instruments, Freescale, Broadcom and Infineon, he said.

Meanwhile, the industrial and automotive sectors are projected to grow by 9.7 percent and 7.5 percent, respectively. Consequently, over the last eight months there have been several major acquisitions, and one merger, among chip companies. The trend started small, with ON Semiconductor acquiring Aptina Imaging, a maker of CMOS image sensors for automotive and industrial markets, for $400 million in June. Then came the mega deals:

The activity at the chip level is to some extent a reflection of consolidation in the broader automotive industry. Among all automotive component suppliers (not just semiconductors), M&A deal volume rose to $10.1 billion in the first half of 2014, the fourth consecutive increase, while the number of deals rose 17 percent, according to a study by PricewaterhouseCoopers. And that was before the chip industry mega-deals, which alone amount to $9.5 billion in the second half of 2014.

With manufacturing volumes rising, car makers are adopting standardized, global platforms so the same car can be manufactured anywhere in the world. That means they need larger suppliers capable of supplying a high volume of parts in any region, says Richard Hanna, global automotive leader at PricewaterhouseCoopers. Indeed, Infineon said that a major reason for its acquisition of International Rectifier was to create a larger regional footprint. The acquisition “will help to improve Infineon’s position in Asia,” it noted in a press release. “The increase in exposure to the distribution channel will allow Infineon to meet the needs of a broader range of customers.”

Also, automotive manufacturers are demanding more integrated electronics subsystems, said Hanna. That was a major reason driving the $12.4-billion acquisition of TRW Automotive by German company ZF Friedrichshafen AG last fall. “Automated functions are at the top of the industry's agenda,” Tolga Oal, a vice president at TRW Global Electronics, was quoted as saying at the Consumer Electronics Show in January. “This requires an increase in the level of integration between sensors, controllers and actuators.” The deal created the world’s second largest automotive supplier, after Bosch.

The chip-level M&A activity seems aimed at taking advantage of particularly hot sectors within the automotive market, specifically infotainment/connectivity, advanced driver assistance systems (ADAS) and power trains. Growth in those three areas is forecast at more than 15 percent, said Ahad Ahmed Buksh, an IHS analyst specializing in automotive and industrial semiconductors. In addition, some consumer wireless chip suppliers are have tweaked their designs in order to sell them into the automotive market, said Luca De Ambroggi, IHS principal analyst in automotive semiconductors. Although these companies have to make their chips more reliable and able to withstand higher temperatures for the automotive market, there are fewer changes required for infotainment/connectivity than ADAS and power trains, he notes. After all a failure to receive a phone call is not as critical as a failure of a safety system.

Nvidia is an example of how consumer chip companies are turning to the automotive market, said De Ambroggi. The company’s graphics chips have been dominant in the PC and mobile phone markets, but today Nvidia’s Tegra 3 chip is at the heart of Audi’s sophisticated display and infotainment systems. In fact, last year Nvidia’s automotive revenue grew more than 80 percent, said Buksh. Nvidia is now trying to enter the ADAS market as well, with its new processor, the Tegra X1, introduced at the Consumer Electronics Show in January.

The Qualcomm/CSR deal is also an infotainment and connectivity play. Although Qualcomm has always been strong in cellular, its acquisition of CSR brings it increased market share in the automotive industry and strengthens its product portfolio in Bluetooth connectivity, said De Ambroggi.

The Cypress-Spansion merger involves both power trains and infotainment/connectivity. It combines the two companies’ microcontroller and memory technologies (Cypress has SRAM and Spansion is strong in NOR flash memory) to strengthen their position in automotive and industrial embedded systems. Spansion was particularly interested in Cypress’s capacitive sensing technology, which can be used in touch screens for infotainment and connectivity systems, notes De Ambroggi.

ON’s acquisition of Aptina, which has a large market share in CMOS image sensors, was all about ADAS, said Buksh. “The CMOS camera is a component that is growing dramatically within ADAS applications,” adds De Ambroggi. “It is considered the eyes of ADAS.”

Infineon’s acquisition of International Rectifier combines two companies with strong positions in power management technology, applicable to embedded industrial and automotive ADAS and power train applications. By acquiring IR, Infineon strengthens its portfolio in low power IGBTs and power MOSFETs, key components in the hybrid and electric vehicle engines, says Buksh. These engines have 10 times more electronic content than traditional combustion engines, he noted.

Analysts say more mergers and partnerships are likely this year, as wireless chip companies continue to try to hitch their wagons to the highest growth markets. Wireless is still hot, but now “wireless is coming in different packages - such as large packages with four wheels,” said Hackenberg.

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Related links:

IHS Semiconductors & Components

IHS Automotive & Transportation

News articles:

Infineon to Buy International Rectifier for $3 Billion

Qualcomm Grabs CSR For $2.5 Billion

Cypress, Spansion Agree to $4 Billion Merger

ON Semi to Buy Aptina for $400 Million

Lattice Semi Snaps Up Silicon Image

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