For 50 years, technological advancement has been led by Moore's law the observation that, over the history of computing hardware, the number of transistors in a dense integrated circuit doubles approximately every two years. But the semiconductor industry is undergoing dramatic changes as the overall growth rates slow down and it reaches maturity. The slowing growth and high investment levels needed to stay on the leading edge of the technology curve, along with the sustained availability of low-interest debt, has led to an accelerated pace of consolidation in the industry. One additional dimension which has contributed to the acquisition frenzy has been the announcement by the Chinese Government to invest over $170 B to increase domestic semiconductor content in the electronics industry from the current < ten percent levels. Based on the valuation of the recent deals which have occurred, 2015 has proved to be the busiest year for M&A, with $125 B of transactions YTD.

Some additional challenges facing the semiconductor industry have led to a view that scale is the only reasonable way to contend with the upcoming challenges. These include a) Consolidation in the customer base b) Consolidation in the supplier base and c) Cost of development at advanced technology nodes and increased integration of analog/mixed-signal functionality in the digital domain.

a)Consolidation of the customer base has been a challenge. A few examples: In mobile devices today, there are five major customers (Apple, Samsung, Huawei, LG and Xiaomi). In wireless equipment, there are now 4 major suppliers (Ericsson, Huawei, Nokia and ZTE). This trend extends to other areas such as cloud services, where there are 4 major providers (Amazon, Google, Microsoft and Baidu). The consolidated customer base poses two risks to semiconductor suppliers:

1) An inability to support a broad portfolio of customer needs without scale; and

2) The potential disruption that missed product cycles at one of these customers can cause to a small or mid-size company

b) Consolidation in the supplier base has reduced the purchasing leverage for mid-size semiconductor companies. This is evident across the supplier base, from the design tool flows where there are three major companies (Synopsys, Cadence, and Mentor), to pure play wafer foundries, where there are three leading-edge companies (TSMC, Global Foundries, SMIC), and in the OSAT area where there are four large companies (ASE, Amkor, SPIL and JCET).

c)The cost of new product development at advanced technology nodes is prohibitive for all but the largest companies, with product development at the 14 nm node costing upwards of $150 M. Simultaneously, the integration of analog/mixed-signal (AMS) functions into the digital domain means pure-play AMS companies which have traditionally enjoyed good financial performance are increasingly on the radar screen for acquisitions by larger companies needing a broader portfolio of intellectual property.

In light of this consolidation one may view the semiconductor outlook with a pessimistic lens, but a little additional color around the M&A activity in 2015 and around the overall technological landscape is helpful.

1) If the four deals with the highest valuations (mega-deals) are discounted, the overall M&A activity is very much in line with the consolidation trends in earlier years.

2) The industry, while mature, still is over $350 B in terms of size, and while the overall growth rates are slowing, the electronics content in everything from automotive, to industrial, to medical devices continues to increase. The need for ubiquitous wireless connectivity is now extending its reach to the wireless power arena, where companies such as Integrated Device Technology (IDT) and Texas Instruments (TI) are playing a pioneering role.

3) The change in the computing infrastructure from a more traditional von Neumann type to a disaggregated environment is leading to a fundamental re-thinking of systems and the interconnect landscape. There is also a new-class of memories, called persistent memories, emerging that bridges the gap between traditional DRAM and Flash (3DX Point from Micron/Intel is one variant).

4)The need for continually connected devices in the home and outside is driving the Internet of Things "IoT" trend, and ubiquitous sensing will drive the next wave of pervasive computing.

5) The increase in video traffic over the worldwide web is pushing innovations in the way networks handle traffic and driving new opportunities for creativity in the semiconductor space. In addition, mobile-edge computing is pushing significant computing power closer to the edge of the network.

6) The move to "5G" networks and higher frequency (60 GHz and greater) communications is driving innovation in the RF area.

7)Finally, as environmental consciousness increases, efficient delivery of power across multiple power domains assumes increased importance and is leading to new innovations involving the use of new materials, such as GaN on Si and GaN on SiC.

So what does all this mean for the semiconductor industry?

The pace of innovation in the semiconductor industry continues in the midst of consolidation, and it is unlikely that one of the most innovative sectors in the economy will reduce its efforts in this area. The result of this ongoing innovation is the emergence of new technologies, innovative packaging and module-based solutions to address new market needs.

Although it may seem counter intuitive, the growth in the IoT trend is being led by multiple customers who are driving smaller volume, resulting in fragmented end markets. An example is the wearable market, where a host of companies all have modest share. Large companies that have significant scale need to address markets of sufficient size and scale to sustain growth and profitability. As such, they will have a challenge addressing the needs of the fragmented market landscape, which has different needs for different applications.

The semiconductor industry while maturing and, some may argue, at a crossroads still has a long and interesting journey ahead. It will offer opportunities, regardless of scale, to companies that continue to innovate and take advantage of disruptions in the marketplace.