2013: Look for continued consolidation

By Ron Leckie, President, Infrastructure Advisors

2012 brought a slowdown in consumer spending which has negatively impacted chip unit demand.  In fact, chip units have been essentially flat for much of the last two years.  However, the good news is that unlike in prior slow periods, average selling prices have maintained a steady level.  As a result, the industry sits today with slightly elevated inventories and also with factory utilization levels that are generally about 15 percentage points below normal healthy levels.  I look to enter 2013 with continued seasonal slowness, but anticipate that unit volumes and utilization levels will start picking up by the second quarter and throughout the year.

As a result, with utilization rates at the low end of the range, we will not be seeing any significant capacity additions until later in the year.  Capital purchases will be primarily for new technology capabilities until unit volumes pick up and in turn drive capacity needs.  The Test and Assembly equipment sectors should feel a recovery slightly ahead of their Wafer Fab counterparts since they tend to be more units-driven.

The semiconductor industry and its entire supply chain are certainly maturing and are becoming more dependent than ever on the overall economy.  Consumer influence is a big factor affecting semiconductor and electronics growth.  Individual companies either need to have new innovative products to gain market share and drive organic growth, or they need to acquire companies that will take them into new adjacent markets.

In recent years, we have seen consolidation by some of the larger companies in the industry.  However, when walking around trade shows such as Semicon West, it is evident just how many small and medium sized companies still exist.  For these companies to thrive in a mature market, they need critical mass and now is the time to be looking at strategic alternatives.  Such smaller companies with complementary product lines and customers should be looking for merger opportunities.  The semiconductor industry is truly global and for example, there are big synergies to be found when bringing together global sales and service operations.  Customers prefer working with strong suppliers who will be around to support them for years to come.

For the equipment and materials suppliers, their customer base is consolidating. Some of this is through M&A (Merger and Acquisition) activities and some is through the transition to heavily outsourced business models.  Instead of selling to many IDMs, they now find themselves dealing with customers who are mostly a few large IDMs, large Wafer Foundries and OSATs.

Increasingly, we find ourselves becoming more involved with clients who are seeking strategic alternatives to “business as normal.”  In 2013, it is anticipated that M&A transaction activities will increase and result in further consolidation of the semiconductor supply chain.  It’s true what they say – size does matter.

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