“Just as electricity had merged into the walls of our homes, invisible yet always present, so will computers and its semiconductors one day become as thin and inexpensive as paper – so cheap, in fact, that you could crumple it and toss it in the bin.”
That’s roughly what Michio Kaku, a world-renowned theoretical physicist, said about how fast computers are improving today. Seemingly filled with indefinite opportunities, the semiconductor industry is a treasure cove for anyone with the technical know-how and resources. However, it can also be a mine field that would chew you up and spit you out. Intense competition characterizes the industry, with hundreds of billions of dollars being pumped into R&D alone to make chips smaller, faster and more affordable.
To meet demand, semiconductor companies outsource a portion of their manufacturing needs to external companies. Since the 1960’s, semiconductor manufacturers in Malaysia play a significant role in the production of high-quality semiconductor chips and supply some of the world’s largest MNCs from around the world (Germany, US, etc.), including Infineon Technologies, X-Fab and ON Semiconductor.
In 2004, the gross output of the semiconductor industry totalled RM183.1 billion, with the total export value of finished electrical and electronic products at RM241.5 billion. In 2015, exports grew to RM5.35 billion, largely driven by an increase in demand for photosensitive semiconductors for solar-powered products (MITI Report 2015, http://www.miti.gov.my/miti/resources/MITI_Report_2015-5.pdf).
So if you’re a start-up or investor looking to get into the semiconductor industry, here are a few things you’ll need to know:
Types of Semiconductors and Their Place in the Market Today.
Microprocessors, or Central Processing Unit (CPU), are the core logic centres that let computers process instructions. Robust marketing and understanding of economies of scale provided Intel the funds it needed to develop its R&D and manufacturing capabilities. Today, Intel’s X86 processors dominate the microprocessor market, with virtually every home computer housing an X86.
2. System on a Chip (SOC).
“System on a Chip”, or SOC, are integrated circuits that combine the functionality of different systems into one product, typically the microprocessor (CPU), graphic processing unit (GPU) and Wi-Fi module. Low power consumption means that mobile devices such as smartphones benefit the most from SOCs, with demand for these products to further include more features at lower prices driving the market. Regarded as the only semiconductor-related industry with a lower market saturation, the SOC sector is a hotspot for new players, like SOHO start-ups, looking to take a short at the semiconductor industry.
Fast and reliable, memory chips store and transmit information back and forth the central processor, serving as “short-term memory” as opposed to the “long-term memory” provided by hard disks and flash storage. However, brutal competition means that only super-entities like Samsung, Toshiba and Kingston are able to compete on a level playing field, leaving little room for newcomers looking for a slice of the pie.
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Subject to Cyclical Economy.
The semiconductor market is characterized by a highly cyclical. Simply put, the health of cyclical industry is proportional to how well the overall economy is doing, which follows a pattern of strong economy, which eventually gives way to depression only to recover again.
The cyclical economy comprises of non-essential products or luxury items, including smartphones, computers and electronic equipment – and demand for these products rise and fall depending on the health of the economy and consumer spending power. Therefore, cyclical products are the first thing that consumers cut from their shopping lists when times are bad, and vice-versa when times are good.
Can You Predict How the Performance of Industry?
Despite understanding how cyclical economies work, trying to predict when the semiconductor industry will peak and when it will fall is not an easy task. Like the thousands of moving parts in a complex machine, the semiconductor industry is made up of multiple segments that are highly interdependent on one another, with each segment peaking and constricting at different points of time. And because it takes years to design chips, build the fabricators and earn back enough in sales simply cover the costs of development, pinpointing the reasons that made or broke the market is complicated.
However, careful planning and understanding of consumers is what will give a semiconductor company the best run for their money. For example, few people could’ve predicted how the technically inferior X86 microprocessor would so completely outpace the RISC today.
The ace card? Unlike RISC, the X86 architecture was cheap, which led to higher X86 sales over the superior but more expensive RISC. Now with the money and resources, the next step in their strategy was to invest heavily into R&D to develop better products, eventually overtaking the competition both qualitatively and quantitatively. It is this combination of high-quality products and brand presence that resulted in Intel’s domination of the CPU market today.
How long will Intel be able to dominate the microprocessor market is anyone’s guess, but software backward compatibility means that switching over to a completely new system would leave your favourite software unusable, and therefore a change in the status quo is going to happen soon.
Market Potential and Entry for Start-Ups.
Overall, the semiconductor industry is and will continue to be dominated by a small group but highly established big players. With billions of dollars required to set up fabrication plant and compete in R&D, breaking into the market will only be possible with significant backing and resources. Chip designers and manufacturers take big risks all the time. It takes years to design a chip, longer before they hit the fab plants, and even longer before the outcome of sales becomes apparent.
The risks that large chip and semiconductor makers face, including severe price competition, technological development setbacks and logistical problems, are not issues that smaller companies will be able to absorb.
An exception is the SoC (System on a Chip) market. Driven by the demand for higher bandwidths and speeds, this segment of the industry needs engineering talents to come up with creative solutions who will be able to contribute without the resources of a multi-billion dollar organization.
The appearance and success of “fabless” chip makers also points to another point of entry for newcomers. Leveraging on the manufacturing capabilities of existing fab plants, “fabless” chip makers focus solely on chip design and sales while outsourcing/licensing their designs to established fabrication plants.
Outsourcing to Semiconductor Manufacturers in Malaysia.
To cut costs and stay competitive, large chip designers and even fabricators outsource their production predominantly to Asia to take advantage of lower labour costs, land and taxes, before being sent back home for final inspection.
This includes semiconductor manufacturers in Malaysia and Singapore, and represents are great opportunity for start-ups and investors to form partnerships and gain a foothold in the industry. More recently, chip and semiconductor manufacturers have also started to outsource testing to semiconductor test equipment companies in Malaysia.
Despite strong growth in the semiconductor manufacturing in Malaysia, the Trump administrations decision to close its foreign trade policies could see less production being outsourced from the US to semiconductor manufacturers in Malaysia.
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