Semiconductors: Beyond the Compute & Smartphone Era Date:   Monday , November 24, 2014 Wipro Limited (BSE: 507685) (NSE: WIPRO) (NYSE: WIT) is an IT Consulting and System Integration services company based out of Bangalore. The company has a current market cap of Rs.140,529.54 crore. The semiconductor industry is widely recognized as a key driver for economic growth in its role as a multiple lever and technology enabler for the whole electronics value chain. However, a detailed view of industry annual figures for 2013 revenues reveal a sorry state, in contrast to analysts� projections of $400 billion by 2015/16.This is largely due to the fact that the industry has been witnessing an emergent plateau effect in key areas that once successfully supported the demand for semiconductor products. Thenewer avenues for growth are diverse and spread acrossverticals, but with potential to generate only moderaterevenue streams, unlike the demand created by smartphones and tablets over the last decade. Customer Life cycle in the Semiconductor Industry The various stages in the life cycle for a semiconductor provider�s customer play out slightly differently for the commoditized solutions segment.The customer life cycle for a leading LTE Integrated Radio product targeted at smartphones and tablets would be different from commodity products such as analog to digital converters and other discrete component devices. Semiconductor products are categorized into ASICs & ASSPs based on how they are used by end customers. ASICs are usually built for few high-volume customers with lock-in contracts. ASSPs(application specific standard parts)essay standard functionsare sold primarily using a traditional make-then-sell process. So far, key factors that set the industry leaders apart from the rest were:- 1. Continuous innovation & technology development to stay strong in the commodity segments Capture demand created across functions, as smartphones/tablets became commonplace, via time to market, technology patents, OEMs/ODM partnerships 2. Unmatched/niche technology But the market pressure to seek out growth has increased competition. So the main challenges will be to: 1. Retain sufficient market share in near-commodity segments 2. Discover and enable new solutions and use cases to drive demand and growth 3. Differentiate beyond just price-performance ratios Therefore,going forward, firms will have to tread the extra mile to define, shape demand and to create sustainable leadership. Activities like customer segmentation, value positioning, sales, promotions and after-sales support will become as important as the product development. Market estimates show that logic, memory & micro components are projected to earn an additional $47 billion over the next 5 years,at aCAGR of 3 percent, 5.4 percent and 4 percent respectively. To achieve aggregate revenue growth >6-7 percent, firms will resort to means like:- 1. Widening of product portfolios 2. New offerings for entry into new segments/sub segments 3. Inorganic initiatives like M&As, product acquisitions. They would also have to work towards bringing down R&D Costs and seek ways to improve contribution margins, reduce S&GA (Sales and General Administration) expenses (industry average ~13.5 percent) in order to achieve reasonable break-even volumes. Share of Wallet & Multiple-vendor strategy as a growth driver Semiconductors make up ~65 percent of a typical smartphone BOM (Bill of materials). Some device manufacturers use different vendors for some components to manage geo-specific feature bundling and supply chain. Suppliers with broad portfolios can apply a share-of-wallet strategy to gain an edge over competition by using aggressive selling, and enhanced products that create a compelling localization value proposition. A share of wallet strategy was evident in a recent smartphone launch where a single semiconductor provider had 7 socket wins. Go-to-market imperatives for segment creation/expansion Semiconductor firms with narrow product portfolios depend on a few leading customers to bring in large volumes. Conversely, those with broad portfolios depend on a large and fragmented customer base.The lack of growth in high-volume segments is slowly forcing firms to widen their portfolios to diversify and create new revenue streams as well as grow in the process. As semiconductor companies reinvent themselves, they will have to adopt a strategic approach to market selection and value creation in order to address new demand generation themes. Semiconductor customers will have to take on the role of an ecosystem creator/facilitator, so that their large and diverse pool of existing and prospective customers will be able to leverage all ecosystem technology and process assets to realize their products. This will reduce the barrier to entry for prospective customers like startups, product incubators & product companies and creates a clear advantage for the firm\'s offerings. References:- 1. Finding the next $100 billion in semiconductor revenues, McKinsey & Company, 2012 2. Various IDC, SeekingAlpha, Gartner & Deloitte articles 3. Annual reports & Corporate/Analyst Presentations