The road to growth in semiconductors

28 Pages·2017·3.25 MB·English

The road to growth
in semiconductors
Diversification, M&A, and
portfolio management as
strategic priorities
KPMG Global Semiconductor Outlook
kpmg.com

The road to
growth in
semiconductors
Contents
2 Foreword
3 Highlights
4 Semiconductor industry outlook
8 KPMG Semiconductor
Industry Confidence Index
9 Strategic priorities
14 Portfolio management
16 Geographic impact
18 Product expectations
21 Technology road map
23 Conclusion and next steps
24 How KPMG can help
25 About the research
25 About the authors
© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG KPMG Global Semiconductor Outlook | 1
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.
Foreword
What semiconductors can learn from the farm girl
In one of Aesop’s fables, a farm girl was carrying all of the day’s egg production to market in a single
basket. She literally had all of her eggs in one basket. On the road, she began daydreaming and
looking forward to what she would do with the money she was about to make. Distracted, she let go
of the basket, the eggs shattered, and she had nothing to sell.
Restated in modern terms, the girl went down the road with only one product, stopped paying
attention to her environment, and was unprepared when disruption occurred. If her product portfolio
was diversified, she would have had a better chance to succeed.
Are we overstating things to make a point? Perhaps. Does the simple, centuries old business moral
of Aesop’s fable still apply, even to an industry as cutting edge as semiconductors? Absolutely. And
semiconductor executives know it.
The top strategic priority of executives over the next three years is “diversifying into a new business
area.” The second is “acquisition, merger or joint venture.” We believe that M&A (mergers &
acquisitions) activity will continue in the industry, but with a fresh focus on acquiring adjacent
technologies to spur revenue growth.
Another path to diversification lies in honing the organic R&D (research & development) process so
it is properly aligned with the future marketplace. Unfortunately, we see widespread inefficiencies
in R&D funding allocation. The good news is that a road out of this wilderness can be built with an
integrated portfolio management process.
The sentiment to diversify is explained by the expectation of moderate revenue growth more in line
with global GDP growth. This is indicative of a mature industry whose products are integrated into a
wider variety of goods utilized worldwide. The imperative for semiconductor leaders now becomes
developing new ways to grow the business and take advantage of the new spheres of demand such
as automotive, data management and security, and all things IoT.
So the question is posed. As semiconductor companies travel the road to tomorrow’s market, will
they keep all their eggs in one basket? Or will they heed the lesson of the farm girl and diversify their
offerings to increase their chances of success?
Tim Zanni Lincoln Clark
Global and U.S. Chair, Partner in charge,
Technology, Media and Global Semiconductor
Telecommunications, practice, KPMG LLP
KPMG LLP
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International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.
Highlights
Industry outlook Geographic impact “This is an exciting time for
Projections call for The United States re-
the semiconductor industry.
moderate revenue assumed the position
growth in 2017, and this as the most important There are signs the industry is
is having a downstream geographic market for
maturing, and that brings a new
impact of restrained semiconductor revenue
expectations for operating profitability growth in both the one-year and three- set of challenges to overcome.
and investment. Three-year outlooks year outlooks. This is driven by increased
But we are a unique, creative
are similar, indicating that the industry expectations for the IoT (Internet of Things)
is maturing. The KPMG Semiconductor and autonomous cars. The United States group that has always attacked
Industry Confidence Index score for this also moved back into the number-one challenges rather than shying
year reflects these sentiments. position for head count growth in the next
12 months. away from them. We embrace
Strategic priorities opportunities to evolve, master
Diversification is the top Product expectations new business models, and
strategic priority in the
Sensors/MEMS
increase the value we provide
industry and is closely
(microelectro-
linked to M&A, which mechanical systems) to an increasingly connected,
is tied for second with
jumped to the top as technologically integrated
talent development/
the sector expected to
management. Most executives believe world.
provide the strongest growth opportunity
that total M&A valuations in 2017 will
in 2017 at the expense of the memory
be bigger than 2016. ASP erosion was As president of the GSA, I thank
and other logic categories. Wireless
identified as the top issue facing the
communications continued to be the most KPMG for their continual insight
industry over the next three years, fueling
important application driving revenue over
the need to diversify. and thought leadership and for
the next three years. IoT and automotive
are expected to benefit from 5G wireless this annual report on what our
Portfolio management network rollouts.
global semiconductor leaders
As revenue growth
slows and R&D are thinking across a multitude
budgets become Technology road map
of topics. I look forward to
more constrained, Semiconductor leaders
it is imperative that are evenly split on seeing how we will innovate,
companies embrace effective product Moore’s law. Roughly push the boundaries of what’s
portfolio management. Half of the half believe Moore’s law
respondents said their R&D spending will continue unabated or possible, and lead the way into
is not efficiently aligned with current continue with extended intervals while the the next Industrial Age.”
customers and a significant portion other half feels that it has already ended
admitted their R&D spending is not or will end with the current technologies
— J odi Shelton, President,
efficiently aligned with future growth under development. To hedge against
GSA (Global Semiconductor Alliance)
opportunities. this, many companies aim to improve and
repurpose existing technologies.
© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG KPMG Global Semiconductor Outlook | 3
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.
Semiconductor industry outlook
Revenue growth moderating What is your outlook for your company’s semiconductor revenue growth
Slowing expectations describe the revenue in the next fiscal year?
outlook for 2017, and through 2020. While
more than half of the respondents (57%)
to this year’s survey do predict positive Increase 9% 2014
by more 9%
revenue growth in 2017, most of these than 10% 20%
fall in the 1-5% range. These projections
2015
are in line with estimates by WSTS (World
Increase 18%
Semiconductor Trade Statistics), which, as by 6% 25%
of February 2017, was projecting revenue to 10% 27% 2016
growth of ~3% in 2017 and ~2% in 2018.
Increase 30%
The most glaring trend is the continued
by 1% 37%
sentiment toward flat results for the to 5% 34%
next fiscal year, as 37% of this year’s
respondents expect no change in YOY 37%
(year-over-year) revenue growth. This was No change 23%
up significantly from 23% last year and 16%
16% the year before. The concern over
stagnating revenue growth is being fueled 6%
Decrease 6%
by ASP erosion and is a catalyst for the
3% 2016 2015 2014
massive M&A activity over the last two
years and the stated need to diversify into 0Source: KPMG5 Global Semic1o0nductor Surv1ey5 2016 20 25 30 35 40
new business areas to grow.
What is your estimate for the change in the annual operating profitability
Revenue projections that are closer to
of the global semiconductor industry over the next year?
global GDP growth rates indicate a maturing
industry and have a downstream impact on Increase 2% 2014
by more 3%
profitability and investment projections. than 20% 8%
Increase 2% 2015
Profitability estimates flattening by 11% 9%
Similar to the revenue growth responses, to 20% 15%
a substantial 34% of respondents believe 2016
Increase 13%
that operating profitability will increase by by 6% 18%
1-5% next year. However, an even greater to 10% 26%
percentage (37%) see flat operating profit-
Increase 34%
ability over the next year. This again is a driver by 1% 33%
to diversify into new products and value- to 5% 35%
added services with higher profit margins.
37%
No change 27%
11%
Maintaining investment spending
Looking at projections for different 12%
investment categories, the impact of Decrease 12%
5% 2016 2015 2014
moderate revenue growth is clear. The
outlook for R&D spending, workforce 0Source: KPMG5 Global Semic1o0nductor Surve1y5 2016 20 25 30 35 40
growth, and capital spending all reflect
the same paradigm shift seen for revenue high level of M&A activity and resulting target, negotiate and close the deal, and
growth and operating profitability. That postmerger integration taking place. If integrate R&D organizations. Organic
is, the single largest response for each M&A is becoming an increasingly popular R&D should still be funded in order to
category is “no change” YOY. tool of choice to redesign R&D functions, capitalize on future growth opportunities
then this thinking would reflect a decrease and complete designs at the 10 and 7
However, these responses perhaps
in organic R&D spend. The danger lies in nanometer level. But in the environment of
warrant an extra level of analysis. While
lowering the investment level too much. shrinking R&D budgets, efficient portfolio
the impact of low revenue growth cannot
An entire technology cycle can be missed management is paramount. There is great
be ignored, one should also consider the
in the time it takes to identify an acquisition
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International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.
Semiconductor industry outlook
What is your outlook for semiconductor-related capital spending During the next fiscal year, do you expect your company’s
by your company for the next fiscal year compared with your global semiconductor workforce to increase or decrease?
company’s current-year spending?
Increase 5% Increase 3% 2014 2014
by more 9% by more 8%
than 10% 22% than 10% 17%
2015 2015
Increase 11% Increase 9%
by 6% 18% by 6% 13%
to 10% 26% to 10% 2016 21% 2016
Increase 29% Increase 25%
by 1% 25% by 1% 28%
to 5% 35% to 5% 32%
44% 49%
No change 39% No change 45%
14% 21%
11% 14%
Decrease 8% Decrease 5%
4% 2016 2015 2014 9% 2016 2015 2014
0Source: KPMG Global 1S0emiconductor Survey 220016 30 40 50 0Source: KPMG Global 1S0emiconductor Survey 220016 30 40 50
What is your expectation for the change in semiconductor R&D
spending by your company for the next fiscal year over the current year?
Increase 8% 2014
by more 12%
than 10% 19%
2015
Increase 9%
by 6% 17%
to 10% 28% 2016
Increase 24%
by 1% 33%
to 5% 36%
50%
No change 33%
14%
9%
Decrease 6%
4% 2016 2015 2014
0Source: KPMG Global 1S0emiconductor Survey 220016 30 40 50
opportunity in this area, and it is discussed report to 14% this year. This represents the However, similar to other investments,
further on page 14. largest uptick in the “decrease” response an increasing amount expect capital
across all survey questions and is a result spending to be the same. Considering the
On the topic of workforce, it is noteworthy
of both the lower revenue projections and unprecedented levels of M&A activity in
that while the percentage of respondents
the need to realize postmerger synergies. the last couple of years, and the increasing
expecting “no change” went up compared
cost of debt, it is understandable that many
to last year, the percentage expecting a Forty-five percent of industry leaders still
respondents are thinking about working
decrease in their company’s head count project some degree of increase in capital
capital restrictions.
went up significantly from 5% in last year’s spending next year, which is encouraging.
© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG KPMG Global Semiconductor Outlook | 5
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.
Decrease Decrease
No change No change
Increase Increase
Decrease Decrease
No change No change
Increase Increase

Semiconductor industry outlook
(continued) Decrease Decrease
No change No change
Increase Increase
Three-year industry outlook What is your outlook for your company’s semiconductor revenue growth
Traditionally, in our Global Semiconductor in the next one and three years? (Values in percent)
Industry Survey, the three-year outlooks
for revenue growth, operating profitability, 1-year 3-year
6
R&D spending, and capital spending 10
are optimistic even when the one-year
6 6
outlooks are less so. Previously, when
3 13
there was a downturn in the short-term 7
23 16 10
outlook, it was always countered by a
Decrease Decrease
more optimistic midterm outlook. 37 ’14 ’15 ’16 37 ’14 ’15 ’16
In this year’s survey, the three-year No change No change
81 82
outlooks have shifted to almost match the 54
71 57 Incr8e1ase Increase
one-year outlooks. This further conveys the
realization by the surveyed executives that Decrease Decrease
the industry is maturing and transitioning
No change No change
into the late expansion or contraction
Source: KPMG Global Semiconductor Survey 2016
stage, which is discussed later. Increase Increase
Increase No change Decrease
The key findings from this year’s three-year
outlook questions are as follows. Previous
years are also shown for comparison: Decrease Decrease
No change No change
– 5 4% of respondents expect their
Increase Increase
company to have positive revenue
What is your estimate for the change in the annual operating profitability of the
growth in three years, where 57%
global semiconductor industry over the next one and three years? (Values in percent)
expect positive revenue growth
next year.
1-year 3-year
– 5 2% of respondents expect the 12 11
global semiconductor industry to have
increased operating profitability in three 12 11
years, compared to 51% that expect this 5 8
11 12 6
next year.
27 36
– 4 5% of respondents expect their 37 ’14 ’15 ’16 ’14 ’15 ’16
company to increase R&D spending in
84 85
three years. 41% expect an increase 63 52
next year. 51 76
– 3 9% of respondents expect their
company to increase capital spending
in three years, compared to 45% that
Source: KPMG Global Semiconductor Survey 2016
expect an increase next year.
Increase No change Decrease
Importantly, even though midterm
growth and profitability confidence are
decreasing, companies need to be careful
not to pull back too much on new product
development capabilities. This is the
engine of future growth and should not be
jeopardized in favor of short-term financial
gains. If anything, these muted three-year
outlooks reinforce the need to become
more efficient with R&D spending through
disciplined portfolio management.
6 | KPMG Global Semiconductor Outlook © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.
Decrease Decrease
No change No change
Increase Increase
Decrease Decrease
No change No change
Increase Increase

Semiconductor industry outlook
(continued) Decrease Decrease
No change No change
Increase Increase
What is your expectation for the change in semiconductor R&D spending “Aside from the downstream
by your company, one and three years from today? (Values in percent)
impact of single-digit revenue
1-year 3-year growth, many companies will
9 7
also be focused on integrating
6 7
their newly acquired R&D and
4 7
14 20 design capabilities, as well as
15
33 ’14 ’15 ’16 48 Dec’1re4ase’15 ’16 assimilatinDgec rtehaseeir combined
50
No change workforcesN oo chvanegre the next year
83 79
62 41 Inc7re5ase 45 rather thanIn corenase increasing
Decrease Decrease investment levels.”
No change No change
— T im Zanni, Global and U.S
Source: KPMG Global Semiconductor Survey 2016 Increase Increase Chair, Technology, Media and
Increase No change Decrease Telecommunications, KPMG LLP
Decrease Decrease
No change No change
Increase Increase
What is your outlook for semiconductor-related capital spending by your company
(both equipment and software) one and three years from today? (Values in percent)
1-year 3-year
11 10
8 6
4 5
14 25 12
39
’14 ’15 ’16 ’14 ’15 ’16
44 52
83 82
52 71
45 39
Source: KPMG Global Semiconductor Survey 2016
Increase No change Decrease
© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG KPMG Global Semiconductor Outlook | 7
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.
KPMG Semiconductor
Industry Confidence Index
41
KPMG calculates the Semiconductor Industry
Confidence Index based on respondent answers to
the one-year outlook questions on revenue growth,
operating profitability, R&D spending, workforce
growth, and capital spending. An index score above
50 represents an optimistic outlook and a score below “We do not feel that the industry outlook is
50 signals a pessimistic outlook.
as much of a negative scenario for 2017 as
The index score for the next year is 41. This is a little surprising a 41 index score would intuitively suggest.
and can be partially explained by the timing of the survey, which
It shows, from an executive sentiment and
was in September 2016— before the industry started its fourth
perception perspective, that expectations for
quarter rally.
the upcoming year are perhaps more realistic
The score of 41 is driven mainly by the shift to “no change”
than they were a year ago and reflect the
responses across all of the above referenced questions.
Confidence is understandably muted when industry insiders single-digit revenue growth expectations of
predict low single-digit revenue growth, slowing operating a maturing industry.”
profitability, and lower investment levels.
— L incoln Clark, Partner in charge, Global Semiconductor practice,
The bright side is that as the industry matures and evolves, it KPMG LLP
also has a path to recapture growth through a combination of
diversification and efficient portfolio management.
8 | KPMG Global Semiconductor Outlook © 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG
International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm
vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. NDPPS 642398.