2015: A turning point for the semiconductor industry?

Case Abstract
In the middle of 20th century, two important inventions gave birth to a new industry the semiconductor
industry. The prevalence of electronics in almost all the parts of modern life is a manifestation of the
tremendous success of the semiconductor industry in a very short span of time. The microelectronics
industry, a more common name for the semiconductor industry, pertains to design and manufacturing of
all kinds of electronic chips found in various devices and appliances. The primary manufacturing material
of a typical electronic chip is silicon, which is a type of a semiconductor, hence the name. The case will
discuss the background behind the inception of this industry followed by an important phenomenon
called Moores Law that has been observed throughout the evolution of the industry. The case will also
explain briefly the manufacturing process of an integrated circuit, a technical name for a microelectronic
chip.
After laying the groundwork for readers not very familiar with the industry, the case will delve into basic
industry facts, such as market size and segmentation, used by industry analysts. The case can help readers
analyze the stage of the industrys life cycle and overall competitive arena including strategic positioning
of major industry players. The external analysis of the semiconductor industry considers macro-
environment (demographic, sociocultural, economic, political, technological, and physical environment)
trends as of 2015. The case will discuss the value chain in the semiconductor industry and associated
evolution of the various business models practiced by industry players over the years. Competitive forces
in the industry are explained, encouraging readers to judge the strength and influence of those forces on
current and aspiring players in the industry. The external industry analysis is augmented with description
and brief internal analysis of some of the key players in the industry, positioned at different stages in the
supply chain.
The case provides a rich context for analysis of the semiconductor industry, and helps readers identify the
various opportunities and threats for incumbents and new entrants as well as strengths and weaknesses
of the successful players in the industry.

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2015: A turning point for the semiconductor industry?
On Friday, March 27, 2015, the Wall Street Journal reported that Intel Corporation, a chipmaker well-

known to general public because of the Intel Inside campaign, was in talks to buy chipmaker Altera

Corporation. The last significant acquisition made by Intel was of security-software company McAfee Inc.

in 2011 for $7.7 billion. After the news broke, Intels share price rose by 6.4% to $32, and Alteras, which

had been down by 2.5% the previous 12

months, shot up by 28% to $44.39. Alteras

market capitalization had gone up by almost

30% by the end of the day to $13.4 billion1

(See Figure 1). The news followed a series of

reports which said that the takeover talks

were just a rumor and that discussions of a

takeover had ended due to disagreement on a

purchase price. However, on June 1, 2015,

Intel announced that it would buy Altera for

Figure 1 : Year Over Year (YoY) change in revenue vs. YoY change in share price
of semiconductor companies as of March 27, 20151 $54 a share in an all-cash transaction totaling

to approximately $16.7 billion, its largest acquisition to date2. Although this move was going to burn

through Intels free cash pile, it was expected to boost Intels efforts to diversify and penetrate into other

markets.

Intel, the largest maker of electronic chips for Personal Computers (PCs) and servers, had been suffering

for the last several years due to a shift in consumer spending from laptop computers to tablets and

smartphones. Under the leadership of CEO Brian Krzanich, who took over in 2013, Intel had been trying

to break into mobile devices as well as wearable computing devices, but the efforts had not yet boosted

company revenues1. Altera, on the other hand, specialized in making programmable chips called as Field

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Programmable Gate Array (FPGA) chips which are primarily used in phone networks and data centers.

While Altera didnt manufacture its own chips, Intel had tried to build a new business out of manufacturing

chips for other companies and had been a manufacturing partner with Altera since 2013, when it reached

an agreement to offer Altera its most advanced production process1.

Even though this was Intels biggest acquisition to date, it appeared much smaller compared to the $37

billion acquisition of Broadcom by Avago Technologies announced on May 28, 20153. While Avago had an

extensive product portfolio targeting different markets including wireless communications and wired

infrastructure, Broadcom was a leader in semiconductor solutions for wired and wireless

communications. Although mergers and acquisitions (M&As) are common and reoccurring in the

semiconductor industry, experts argued that the volume of recent acquisitions - $65 billion as of June

2015 - indicated the phase of consolidation where mature companies were finding it harder to expand

their current business on their own1, 3.

Onset of the semiconductor revolution

In the large part of the world, a day without the use of electronics is extremely unlikely, if not impossible.

One of the earliest all-electronics computers, famously known as the Electronic Numerical Integrator

Analyzer and Computer (ENIAC), was built between 1943 and 19454. It was a room-sized machine that

took up about 2,000 square feet of floor space and consisted of close to 18,000 vacuum tubes5. A vacuum

tube was a bulky device used to carry electrical signals from one part of the machine to another. In the

latter half of the 20th century, two important inventions took place that paved the path for the modern

electronics revolution, and made it possible to develop computers that were 1,000 times more powerful

than the ENIAC yet small enough to fit in the palm of the hand. Since the invention of the transistor and

Integrated Circuits (ICs), the microelectronics industry - also known as the semiconductor industry - has

continued to shape and change our lives in myriad ways6.

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Bell Laboratories, one of the worlds largest industrial laboratories and research arm of the telephone

company American Telephone and Telegraph (AT&T), was working on a device to replace the extremely

unreliable and power hungry vacuum tube in the 1940s7, 8. Transistors, the heart of almost all the

semiconductor devices (more commonly known as chips) used in electronics products today, were

invented in 1947 at Bell Labs in New Jersey by John Bardeen, Walter Brattain, and William Shockley9. The

transistor basically acts as a switch that controls the flow of electric current through it, and is made of

crystalline solid materials called semiconductors; hence the name of the industry. Although there are

various types of semiconductors from which a transistor can be made (or fabricated, as per the industry

jargon), silicon based transistors are widely used.

William Shockley later left Bell Labs and opened Shockley Semiconductor Laboratory as a division of

Beckman instruments in Mountain View, California in 1956. After being unsuccessful in luring ex-

colleagues from Bell Labs to join him, he started looking for the best and brightest graduates from

universities to build the new company. This is how the Silicon Valley of today started - in fact, William

Shockley is said to have brought silicon to the Silicon Valley9. Shockleys management style was said to be

abrasive and sometimes abusive to his co-workers. After Shockley decided to discontinue his research in

silicon based transistors, a group of eight people who are rather infamously known as The Traitorous

Eight - Julius Blank, Victor Grinich, Jean Hoerni, Eugene Kleiner, Jay Last, Gordon Moore, Robert Noyce,

and Sheldon Roberts - split from Shockley labs and formed their own company called Fairchild

Semiconductor Company10. Most of the leading semiconductor companies from today, including Intel,

Texas instruments and AMD have grown out of Fairchild, oftentimes referred to as Fairchildren.

It was at Fairchild in 1959 where Jean Hoerni created the planar manufacturing process that allowed the

transistor to be mass produced. In the same year, Jack Kilby at Texas instruments and Robert Noyce at

Fairchild developed the second big invention in the history of semiconductor industry, the monolithic IC.

Until that point, the transistors in the circuit were built individually and connected manually, but with the

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planar manufacturing process it was possible to create multiple transistors at the same time and connect

them simultaneously to configure a complete electrical circuit on a single silicon chip11. These two key

inventions paved the way for the tremendous development in the semiconductor industry.

Moores Law

One of the Treacherous Eight and co-founder of Intel, Gordon Moore, published an article in Electronics

(vol. 38, number 8) in 1965, when he worked as the head of research and development (R&D) at Fairchild.

The article was titled Cramming More Components onto Integrated Circuits, in which, based on his

observations, he had predicted that the number of

transistors on an IC will double every two years9.

The prediction is famously known in the

technology circles as Moores Law. The doubling of

individual components (i.e. transistors) in an IC

every two years implies a 50% reduction in cost of

a given functionality in electronics every two years.

This exponentially fast growth in the technology of

semiconductors has transformed many aspects of

human life, while producing expectations beyond

Figure 2 : Manufacturing cost per component vs. number of components
per integrated circuit12
that of other industries, such as the automotive

industry. Consumers dont realistically expect the cars to cost half as much every two years, or the gas

mileage to double every two years, yet there has been a constant effort from the members of the

semiconductor industry towards reducing the sizes and manufacturing costs of the chips to achieve those

functionality strides in electronics9.

The year 2015 marked the 50th anniversary of Moores Law, which was really no more than an empirical

observation made by Moore. Remarkably, the advancement in the semiconductor industry has closely

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followed the prediction of biennial doubling of component capacity at minimal cost in these five decades.

The law is more about economics than performance, miniaturization or integration. The original diagram

from the 1965 article by Gordon Moore is shown in Figure 212. The idea is that more transistors integrated

on a circuit lowers the cost per transistor but only up to a certain point, after which the cost climbs steeply

as a function of lower yield from those additional components. Thus it has been a strategy of the players

in the industry to find the optimum point where manufacturing costs are the lowest, and then ship large

unit volumes to an increasing customer base13. While it is widely accepted that the Moores Law cannot

extend infinitely into the future, according to the Overall Roadmap Technology Characteristics in the

2013 report published by International Technical Roadmap for Semiconductors (ITRS), the components

scaling can be extrapolated to 202814.

IC manufacturing process

At the start of IC manufacturing process, highly purified, crystalized, less than a millimeter (mm) thick

silicon discs called wafers are obtained15. The minimum size of the components that make an IC is used

to denote a semiconductor manufacturing process or technology node. The smallest process in

production at present is the 14 nm process, where nm stands for nanometer (i.e. one billionth of a meter).

Depending on circuit complexity and the wafer size, anywhere between tens to tens of thousands of die

can be fabricated on a wafer15. A die is basically an unpackaged form of IC fabricated on a wafer. The

microprocessor designs can have close to a billion transistors per die. The wafer fabrication process

involves an average of 500 individual process steps16. With so small device geometries, any small particle

landing on the surface of the wafer can defect one or more die and significantly affect the manufacturing

yield. Thus, to minimize possible contamination, semiconductors are manufactured in a clean room a

small windowless room fitted with superfine air filters16. Manufacturing plants where the ICs are

manufactured are referred to as foundries or fabrication plants, or simply as fabs. After the wafer

fabrication, each die on the wafer surface is tested, the bad or failing die are marked with an ink dot, and

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the wafer is sawn up into individual die. The good or passing die are assembled into protective packages15.

The packaged die (i.e., ICs) undergo final tests again to check whether any defects were introduced during

packaging. The final fully tested product is then marked with the product type and shipped to the

customer15.

Semiconductor industry

The semiconductor industry has experienced ups and downs since the turn of the 20th century17. The

worldwide semiconductor sales showed an annual revenue growth of 36.8% in 2000, followed by a decline

of 32% in 2001. From 2002 to 2007, an uptrend in the global sales continued, only to see a decline of 9%

to $226.3 billion in 2009 due to the global economic slump. Semiconductor sales demonstrated a growth

path once again since the fourth quarter of 2009, with the exception of an annual decline of 2.6% in 2012

to $291.6 billion17. World Semiconductor Trade Statistics (WSTS), a non-profit organization of

semiconductor product companies, reported global sales of $336 billion in 201418, representing a growth

of almost 10% from the previous year sales of $306 billion17.

Semiconductor products are categorized based on the types of chips as logic chips, memory chips,

microprocessors, analog ICs, optoelectronic ICs, discrete semiconductors and sensors17. The 2014 sales

growth was driven mainly by 18.2% growth in sales of memory chips. Other higher growth rate product

categories included discrete semiconductors (10.8%) and analog ICs (10.6%)18. The growth from 2013 was

observed in all four major geographical markets - Americas, Europe, Japan and Asia-Pacific. Figure 3

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displays worldwide semiconductor sales and sales by geographical regions recorded by WSTS since 1976.

Semiconductor sales show an

average growth of 15% over the

years. Since January 2015, China

is included as a separate

geographic segment showing a 3-

month moving average sales of

$7.8 billion of the worldwide

sales of $27.7 billion as of March

2015. According to
Figure 3 : Annual semiconductor sales based on historical 3-month moving average from WSTS

Semiconductor Industry

Association (SIA), which represents the US leadership in semiconductor manufacturing and design, the

worldwide sales of semiconductors reached $83.1 billion in the first quarter of 2015, an increase of 6%

from the first quarter of 201419. John Neuffer, president and CEO of SIA said, Congress is considering a

legislative initiative called Trade Promotion Authority (TPA) that would help promote continued growth

in the semiconductor sector and throughout the US economy. Free trade is vital to the US semiconductor

industry. In 2014, the US semiconductor company sales totaled $173 billion, representing over half the

global market, and 82 percent of those sales were to customers outside the United States. TPA paves the

way for free trade, and Congress should swiftly enact it.19 TPA is a legislative tool that allows the President

of the United States to submit certain trade agreements to the Congress for a vote and enact them into

law within a set period of time20.

In terms of profitability, the industry is notorious for its boom-bust cycles. The industry overall shows

high profits for a few years followed by a sharp drop in profits in the next few years. The profit swings can

arguably be attributed to ups and downs in business capital spending, process migration glitches, and

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demand slowdowns21. Over its short history the semiconductor industry has evolved significantly and has

exhibited rapid growth of innovation in its products and services. With the rising awareness of

environmental issues, new versions of semiconductor devices are constantly rolled out with a focus on

reduction in power consumption. For example, the devices are being made to reduce heat dissipation,

capture solar energy, and create more efficient lighting solutions, with ongoing new development

efforts22.

Table 1 : 2014 Top 10 Semiconductor Sales Leaders ($ Million)23, 24

2014 rank 2013 rank Company Headquarters 2013 Total 2014 Total % change Market share
1 1 Intel US $48,321 $51,400 6% 15%
2 2 Samsung South Korea $34,378 $37,810 10% 11%
3 3 TSMC Taiwan $19,935 $24,976 25% 7%
4 4 Qualcomm US $17,211 $19,291 12% 6%
5 5 Micron + Elpida US $14,294 $16,720 17% 5%
6 6 SK Hynix South Korea $12,970 $16,286 26% 5%
7 7 TI US $11,474 $12,167 6% 4%
8 8 Toshiba Japan $11,958 $11,040 -8% 3%
9 9 Broadcom US $8,219 $8,428 3% 3%
10 10 ST Europe $8,014 $7,384 -8% 2%

The plethora of products produced by the semiconductor industry find their applications in a variety of

components that are used in various end markets. The changing nature of the end markets for

semiconductor devices is the main driver of variation in demand for semiconductor products. Traditionally

the markets shaping the semiconductor industry had been divided into categories such as computing,

communications (wired as well as wireless), consumer and industrial (which includes automotive, military

and aerospace)17. Lately a new opportunity is influencing prospects for the semiconductor industry,

known as the Internet of Things (IoT). Opportunity is still split between the different devices that can be

connected to the internet and the cloud that facilitates their existence22. The cloud is a widely used

metaphor for internet when speaking of internet based computing in which the servers, storage, and

required applications for computing are delivered to the client side through the internet. According to the

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market research firm International Data Corporation (IDC), the IoT market is expected to grow at a 7.9%

Compound Annual Growth Rate (CAGR) from 2013 to 2020. Experts in the field estimate that

semiconductor devices will account for roughly 10% of IoT device value22.

The semiconductor industry consists of several prominent and longstanding firms, spending considerable

capital in research since their inception. The top 10 semiconductor suppliers in the IC Insights November

update to the 2014 McClean Report, a monthly report with analysis and forecast of the IC industry, are

shown in Table 1. The global nature as well as the US dominance of the industry is evident as five of the

top 10 companies are based in the USA, with two from South Korea and one each from Taiwan, Japan and

Europe. Combined sales of the top 10 semiconductor companies showed a growth rate of 9%, just below

the 10% growth rate of the entire industry in 2014, representing more than 60% of total industry sales.

Micron jumped five spots in 2013 after its acquisition of Elpida in 201325. The top ranked companies

operate in different market segments and offer products in different categories.

The question of semiconductor industry consolidation and its maturity became a bone of contention in

2015 among the industry analysts and experts. John Pitzer, semiconductor analyst at Credit Suisse Bank

said, Were pretty bullish on the semiconductor sector overall because its the one tech sector where

you can strongly argue the barriers to entry are going up. The [equities] market proves this out. There are

semiconductor M&As plays taking place rather than IPOs because its a lot cheaper to buy than build the

technology. According to Christopher Rolland, FBR & Companys senior semiconductor analyst, the

semiconductor companies had become cash cows, with top-line growth rates of 5% to 7% a year, and free

cash flow of 7% to 9%26. Wally Rhines, CEO of Mentor Graphics, an electronic design automation company

that plays a crucial role in the semiconductor value chain, shared a different view. I had a belief one

that was shared by most semiconductor people that the industry was consolidating. The actual data

showed exactly the reverse. In fact, the combined market shares of the Top 1, top 5, top 10 and top 50

semiconductor companies had all been flat, or in continuous decline, for many years. The truth was the

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combined market share of the top 50 semiconductor companies has declined by 12% in the last 12 years

he said27.

Even when most semiconductor industry players do not directly sell their products and services to the end

consumers, the industrys sales are largely dependent on the consumer demand in its end markets. About

17.5% of the industry sales were attributed to consumer electronics semiconductors which are used in

TVs, videogame consoles, handhelds, set-top boxes, portable media players, DVD players and recorders

and digital cameras17. Through these end products the semiconductors reach to a large demographic of

all ages and ethnicities around the globe. Thanks to Moores Law, the semiconductor devices and hence

the electronic products using them had been becoming cheaper and more affordable to a large group of

even low-income earning people in the world. Sales of semiconductors for portable media players had

been the largest segment in consumer semiconductor market, followed by digital TV segment. Gaming

consoles were the third largest segment. The major drivers of consumer spending and growth in the

consumer segment of semiconductors were believed to be devices with improved graphics, increased

connectivity availability and speeds17. Keeping up with the speed of technological progress, the newer and

more innovative applications of semiconductor have been driving the overall industry growth. Packy

Kellys, leader of KPMGs global semiconductor practice said, As the surge in semiconductor demand from

smartphones and tablets begins to moderate, new technologies such as the Internet of Things and

wearables are emerging as additional revenue sources that can lower the likelihood of past boom and

bust cycles.28

According to IDC, the PC segment of the semiconductor end market was still the largest, and accounted

for 31.5% of the total industry revenues. However the PC market had been facing extreme competition

from tablets and smartphones as more and more consumers preferred to carry a portable and multi-

functional electronic device rather than rely on desktop or laptop computers. This shift had benefited

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companies that focused on mobile devices such as Qualcomm and Broadcom while hurting those that

focused more on PC/enterprise-based solutions such as AMD and Intel17.

The semiconductor industry has been a very important contributor in the economies of countries

including the USA and China. The two countries continued to be seen as top markets for hiring in the

industry, with employment growth also expected in India as software engineering is also very important

to highly integrated devices28. The semiconductor industrys contribution to the US economy grew 265

percent from 1987 to 2011, more than any other major US manufacturing industry. The US semiconductor

industrys contribution to the US economy was estimated to be close to $65 billion in 2011 and it doubled

its share of GDP since 1987 to 0.42%29.

Even though the US is the birthplace of the semiconductor industry and one of the major electronics

markets, its relative importance has decreased as emerging markets continue to expand. Over the years,

regions such as Japan, Europe, South Korea, Taiwan and China made a significant development in

semiconductor design and manufacturing. Although India does not have semiconductor manufacturing

capability, there are a large number of IC design centers in the country. There are significant differences

in the legal systems and IP protections in these regions involving licensing and enforcement regulations

and practices. If a US company wishes to engage in licensing outside of the United States, it has to ensure

that the licensed technology is backed up by patents, trademarks, copyrights and applicable

intellectual/industrial property rights in these countries. Companies such as Qualcomm, Micron and

Sandisk embarked on licensing programs or partnered with licensing companies to monetize their

extensive patent portfolios30. Most recently, Qualcomm was fined $975 million by the Chinese antitrust

authorities when Chinas National Development and Reform commission ruled that the company had

violated the countrys antimonopoly law31.

The biggest technological challenge facing the semiconductor industry is its ability to realize the benefits

of Moores Law. Semiconductor executives are divided about the future applicability of Moores Law, with

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a majority of them believing it will end after 10-nm nodes are commercialized, while some say the benefits

might continue for the foreseeable future. Increasing R&D costs and possibilities for technological

breakthroughs are most often cited as the biggest issues facing the industry. Other challenges are the high

cost of fabrication plants and semiconductor equipment, which coupled with price degradation of

semiconductor products pose a bigger challenge for even the large semiconductor firms28.

While the semiconductor industry has been widely known for high capital manufacturing requirements,

it is also highly water sensitive. To create an IC on a 300 mm diameter wafer may require approximately

2200 gallons of water including 1500 gallons of Ultra-Pure Water (UPW). The fabs can use up to 30-50

megawatts of peak electrical capacity, enough to power a small city. Continuous efforts have been made

by the fabs to reduce the water usage. At Intels fabrication plant in Chandler, Arizona, an average of 4

million gallons of water is recycled every day and through a reverse osmosis treatment, enabling the plant

to return drinking quality water back to the municipal supply. Through these measures and other water

conservation efforts, the company reduced the intake of public water by 80%. Implementation of

technologies for water conservation as well as treatment of waste-water ensured quicker returns on

capital investment for various foundries32.

Semiconductor value chain and business models

The economics of getting a new semiconductor product (i.e. an IC) to market is similar to how a new drug

is brought to market by spending an enormous amount of capital to develop, test and receive regulatory

approval before shipping it to the local pharmacy. However, once at that stage the drug is manufactured

for few cents and sold for a few dollars to recover the initial investment. Similarly, to develop a first IC

solution requires millions of dollars of capital for research, design, testing and compliance with industry

standards, but once qualified it can be manufactured in large volumes at a per unit manufacturing cost of

a few cents. The cost of building a fab is more than the cost of building a nuclear power plant; one major

company predicted that around $10 billion were required for constructing a fab in 20149. The

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manufacturing equipment used to make the ICs is also very expensive with prices of some equipment

reaching as high as $50 million. It is even more expensive to keep everything inside the fab clean; the air

in the fab must be completely changed every few seconds, as even a few random particles landing on a

die can ruin it. With a lifetime of approximately 5 years, owning a fab may therefore could cost around

$50 per second9.

For the first 30 years after the invention of ICs, all companies in the industry followed a proven business

model of integrated

manufacturing, which is now

called the Integrated Device

Manufacturer (IDM) model. In

this model a company designed

and manufactured its own

products, as well as handled

marketing and research. Until

Figure 4 : Semiconductor Industry Landscape
1980, every semiconductor

company owned its own fab(s) to manufacture its designs. However, as owning and operating

manufacturing assets became more expensive, the concept of outsourcing was employed to develop a

new model, the foundry model. As a first step the companies started sharing their in-house fabs with

other companies who needed additional capacity. This gave rise to pure-play semiconductor foundries

which did not have any design capabilities. This further led to emergence of another model called the

fabless model, in which a company didnt own a fab but would pay a company which had excess capacity

for manufacturing its ICs. Thus, the pure-play foundry segment allowed companies without the financial

muscle for their own fab to invest in design and innovation rather than in manufacturing, thus boosting

the innovation process at an unprecedented pace. Before the foundry business model emerged, starting

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a semiconductor company was enormously difficult; building a fab was capital intensive while starting a

fabless company required a complicated negotiation for excess foundry capacity at a friendly IDM.

However, once the foundry business model came into being, the cost and risk of entering a semiconductor

industry was significantly reduced, resulting in a surge of new fabless companies in 1990s. Around the

same time, another variance of the fabless model evolved, known as fab-lite model. Instead of switching

completely to a fabless model, these companies kept their old fabs and used the third-party foundry for

the most advanced ICs9.

The concept of outsourcing was not limited to the manufacture of semiconductor products. Specialized

software called Electronic Design Automation (EDA) software is needed to design ICs. This software was

once developed by each semiconductor company on its own. A separate, rapidly growing $4 billion EDA

industry has played a vital role to bring semiconductor technology and business to its current state. The

same is true for various components of ICs which previously were designed and made by the company

itself or custom made by another company. A robust market have emerged for licensing a plethora of off-

the-shelf functions to put on chips. The common examples of such units are memory and processors,

collectively known as Silicon Intellectual Property (IP). One of the dominant players in this niche has been

ARM Holdings plc. With a very few traditional IDMs and foundries in the world, emergence of fabless and

fab-lite models has been arguably the single most important development in the last 3-4 decades given

its impact on the growth of the industry9.

The semiconductor industry value chain and the interactions between the members of the supply chain

are shown in Figure 4. It is interesting that the leaders in the semiconductor industry (Refer Table 1) follow

different business models. TSMC employs a pure-play foundry model by exclusively offering

manufacturing services to the fabless-design companies such as Qualcomm and Broadcom. Intel is

essentially a pure-play IDM while Samsung is a vertically integrated IC supplier as well as an Original

Equipment Manufacturer (OEM).

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Competitive playing field

With the presence of different business models employed by players in the industry, and their various

positions in the supply chain, it is difficult to identify and separate the suppliers and buyers for the industry

as a whole. While the IDM companies such as Intel operate strictly in the semiconductor space, companies

such as Samsung, the third largest foundry, is also a big player in consumer electronics end products.

Samsung also has a complicated relationship with other companies such as Apple. Samsung is Apples

leading competitor in the smartphone market while at the same time also is its largest foundry vendor.

Nevertheless, since the fabless and fab-lite models are the most prevalent business models, it is useful to

consider the fabs and raw material producers as the key suppliers in the industry. Similarly, the OEMs such

as HP, Apple, and the Original Device Manufactures (ODMs), including Quanta Computer, Compal

Electronics, can be considered as the key buyers of the industry. For the companies employing the pure-

play foundry model (like TSMC or Global Foundries), key suppliers will be the raw material producers or

the fabrication equipment manufacturers. However, foundry model companies primary operation is to

provide the service of fabrication to the design companies.

It is difficult for a start-up company to compete with incumbent top leaders of the industry due to their

lower costs per unit from scale economies and spreading the high fixed costs of production facilities and

R&D over more units33,34. Fabless manufacturing offers the lowest cost route for any newcomer

organization. The industry is mostly dominated by the global players such as Intel, Samsung, Qualcomm,

among others, and incumbents have enjoyed certain brand strength. After starting one of most successful

branding campaigns in the history of the industry, Intel was able to capture a great deal of consumer

mindset over its competitors in the processor market; the logo Intel Inside is known by almost every PC

user35. However, in general, the brand equity in this industry does not influence the buyers significantly.

Given the pace of semiconductor technology development, a high level of R&D is required for a company

to sustain itself in this ecosystem. Looking ahead, graphene is talked about as the 21st centurys silicon,

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and carries some potential to perform better than the traditional silicon based semiconductors, offering

potential for first mover advantage. Concerns over environmental safety and health are ever increasing,

and energy efficiency is also a key aspect in todays new semiconductor designs. Thus, bringing a product

that is more energy efficient than an incumbents similar product can give an edge to a new player in this

concentrated industry. Semiconductor market growth is linked to GDP growth making it a promising

scenario that some key economies in the world have begun to grow once again. Developing economies

such as Brazil and India have strong potential in end-product markets such as automotive manufacturing

and are seeking to invest in local semiconductor manufacturing facilities34.

As the foundries and design companies strive to fit more and more transistors into their processors,

memories or other ICs, the equipment to fabricate them rapidly becomes obsolete and requires

replacement. The higher cost of the semiconductor equipment to manufacture ICs with smaller

technology nodes outweighs the benefits of producing more devices on a given wafer. Thus, a potential

slowdown of technology development may limit the influence of foundries to some extent.

Companies following the IDM Model are more dependent on a small number of manufacturers of fab

equipment and ultra-pure semiconductor wafers34. In 2011, combined sales of the top 10 leaders in the

Semiconductor Equipment industry, the industry consisting of suppliers to the IDMs and semiconductor

foundries, constituted more than 80% of the total industry sales in the same year36. The likelihood of

vertical integration between manufacturers of semiconductor devices and their key suppliers is very little,

given capital outlay and needed expertise in highly advanced but different technologies. For fabless

companies as well, there are very few options for outsourcing the manufacturing to an external fab. For

a given design, not all fabs can offer a particular process and technology required by the design, thus

reducing the number of potential vendors34.

The OEMs and ODMs constitute a strong influence on the semiconductor companies17. The OEMs and

ODMs sell variety of electronics products such as computer and networking devices, defense systems,

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industrial controls, vehicles electronics and consumer electronics34. These makers could be large

multinationals with their own manufacturing facilities as well as smaller OEM manufacturers, and have an

advantage when it comes to purchasing as they buy in large volumes34, 17. The automotive market is

estimated to drive a significant demand for semiconductors, with more and more electronic components

replacing mechanical parts to improve safety, infotainment, navigation and fuel efficiency in vehicles. As

a result, the semiconductors serving this market are expected to grow stronger than the industry over the

next few years34. The volumes of data across the world are rising at a strong rate, and a robust

infrastructure is needed to support this as well as to deal with the connectivity issues such as network

congestion, power reliability, privacy and security. Thus, demand for semiconductors from wireless

infrastructure manufacturers is also expected to increase over the next few years34.

The consumer electronics end market is also expected to generate moderate demand with continued and

increasing adoption of tablets, smartphones and wearable devices. As the IoT segment takes off, the

consumer market is expected to generate strong demand34. Product differentiation is very valuable in

cases of an Application Specific Integrated Circuit (ASIC) or a microprocessor, yet many discrete devices

and some integrated devices (e.g. memories) are completely commoditized and undifferentiated34.

Competitors in the microprocessor segment are sensitive to demand for computer hardware as the

segment primarily serves the makers of computing devices for corporations and consumers. On the other

hand, the product segments for analog chips, Digital Signal Processors (DSPs), logic devices, and memory

is more fragmented, and there are a number of players competing for market share in these markets17.

Given the outreach of semiconductor devices and their applicability in multitude of products, the number

of potential customers for the industry is very high34.

In none of the end markets is there a significant alternative to the semiconductors. Instead, the

semiconductors themselves are replacing many of the older technologies. For example, the

electromechanical control systems in cars are rapidly being replaced with electronics34. However, new

18
technologies such as bottom-up fabrication using nanotechnology have potential to replace conventional

semiconductors in the long term by offering devices with superior characteristics34. In the top-down

approach for fabricating microchips, undesired material is whittled away with tools to leave the final

product. In the bottom-up approach, the final product can be constructed from fundamental building

blocks through self-assembly37.

Players in the industry range from startups with less than 50 employees to huge multi-nationals with

thousands of employees. Rivalry among them is very high, although many of the big players have a

dominant position in different sub-segments of the market17. A few companies, such as Samsung and

Toshiba, have diversified into electronics equipment manufacturing, while other companies such as Intel

and Texas instruments have focused solely on semiconductor device development of a particular type34.

The competitors in the same sub-segment try to differentiate their products in terms of various

parameters including the chips performance (i.e. speed, reliability, and other features), power

consumption, life expectancy, and total cost of ownership17. For an end-user in the industry, switching

costs are negligible if a discrete semiconductor device is used since most devices work in the same way.

However, if the device is a programmable device like a microcontroller, then switching to a new

microcontroller from a different manufacturer requires the customers engineers to learn the new

device34. For a semiconductor company, once a requisite investment in the fabs has been made (or a

fabless manufacturing route is established), the cost to increase the output based on increased demand

is very low. However, exit costs of such an investment are very high and include sunk costs in research

facilities, fabs, and cost to establish research teams34.

Key players

Intel Corporation

Founded by semiconductor pioneers Robert Noyce and Gordon Moore, Intel is the largest chipmaker in

the world based on revenue and unit shipments17. It is most prominently known for its leading market

19
share in microprocessors for PCs. Intel also offers chipsets. If the microprocessor is considered the brain

of the computer system that processes system data and controls other devices, then chipsets can be

considered the nervous system, controlling data transfer between the microprocessor and input, display

and storage devices such as keyboard, mouse, monitor, hard drives17. Intel has a strong history of

introducing pioneering technologies starting from worlds first metal oxide semiconductor static RAM in

1970s to the 3-D Tri-gate transistor in 2010. These technologies introduced in their nascent stages have

become industry standards and further enhanced the companys market position38. Lead in technology

has enabled Intel to sustain its market leadership as well as strong cash position. Intel invested $8.4 billion,

$10.1 billion, and $10.6 billion in R&D, in 2011, 2012 and 2013, respectively, which accounted for 15.5%,

19% and 20.1% of the companys total sales in those years. The R&D investments of one of Intels main

competitor, AMD, for the same years were $1.5 billion, $1.4 billion and $1.2 billion, respectively38. The

combination of Intels network of manufacturing, assembly and test facilities with their global architecture

design teams gives it an edge over rivals, enabling direct control over the processes, quality control,

product cost, production timing, performance, power consumption, and manufacturing yield38. However,

the company has experienced decline in profit margins and revenues over the last few years due to lower

unit sales in the PC client group segment, stemming primarily from weaker PC demand. Intel has made

significant investments in the mobility segment but has yet to land a successful product, especially in the

smartphone market. The company is making progress in the tablets market, but its market share in the

smartphone market is almost zero according to industry estimates38. The Data Center Group (DCG) of Intel

offers platforms primarily designed for the server, workstation and storage computing market segments

and wired network products, with revenue growth of 6.9% in 2013, for a strong position in the segment.

In spite of its large market share and leadership, Intel faces tough competition from chipmakers such as

AMD, Qualcomm, Nvidia, Texas Instruments as well as emerging competition from OEMs that choose to

20
vertically integrate their own proprietary semiconductor and software assets, including Apple and

Samsung.

Taiwan Semiconductor Manufacturing Company, Limited (TSMC)

This largest dedicated chip foundry in the world was founded in 1987 by Morris Chang, who played a key

role in developing the stand-alone foundry strategy. Chips manufactured at TSMC are used in a wide range

of applications for all the end markets of semiconductors. However, it makes relatively few memory chips.

TSMC primarily operates in Taiwan, where it is headquartered, and the US; it employs around 40 thousand

people39. TSMC is the market leader in the foundry segment, manufacturing more than 8600 different

types of semiconductors using 202 different technologies for more than 440 customers. It is the leading

contract maker of semiconductors, estimated to have market share of 46.3% in 2013, higher than its rivals

GlobalFoundries, UMC and Samsung, with 2013 market share of 9.9%, 9.2%, and 9.2%, respectively.

TSMCs strong market position can be attributed to its leadership in advanced process technologies. In

2013, 78% of its revenues were derived from technology nodes of 130 nm or below and 66% of its

revenues were from technology nodes of 65 nm or below. R&D at TSMC is divided into centralized R&D

activities and R&D at each of its fabs locations. The company also maintains external R&D partnerships

and alliances with renowned research institutions including IMEC in Belgium, a European R&D consortium.

In 2013, TSMC established collaborative research centers with the National Taiwan University and

National Chiao Tung University in Taiwan. The R&D efforts enabled the company to provide its customers

access ahead of competitors to advanced process technologies of 45 nm, 40nm, 28nm and 20nm used for

volume production, prior to its competitors and other IDMs. TSMC also has a very impressive portfolio of

IP and is said to have approximately 20,000 patents. The company has been involved in a number of patent

infringement litigations. Nevertheless, the companys leadership in technology, coupled with its extensive

manufacturing capacities, allows it to easily meet the customers demand and ensure on-time-delivery of

the products. 62% of its total revenues in 2013 came from its 10 largest customers, indicating high

21
customer concentration. Thus, it is essential for TSMC to keep an eye on curtailment of purchases by its

top customers caused by increased competitive pressures, industry consolidation, design changes or

change in manufacturing sourcing policies. The overall brisk outlook for the global semiconductors with

strong growth in South America and Asia-Pacific would increase the demand for TSMCs foundry services,

enhancing its customer base and revenues. To increase the revenue and mitigate risks the company has

taken initiatives in the solar and solid state lighting businesses. The companys subsidiary TSMC solar is

engaged in R&D, design, manufacture and sales of technologies and products related to renewable energy

and energy savings39.

Qualcomm Incorporated

Qualcomm, a fabless semiconductor company, is a major developer of Code Division Multiple Access

(CDMA) technology for wireless voice and data communications, multimedia and Global Positioning

System (GPS) products. It also earns revenues from patent royalty fees through licensing agreements with

communication equipment makers. By gaining first mover advantage in promoting the CDMA technology

in 1989, the company has been able to sustain its leading market position in the wireless devices segment.

Qualcomms IC products and system software are used in various wireless devices such as mobile phones,

laptops, data modules, handheld wireless computers, data cards, and infrastructure equipment. In

addition to its internally sponsored R&D focused on extending the demand for its products and services,

it also performs contract R&D for various government agencies and commercial contractors. A leading

provider of smartphone chipsets, Qualcomm is a dominant player in cellular based processor market with

a market share of 66%. The companys Snapdragon processor has provided it strong brand recognition

enabling it to add new clients from existing and new geographies. In 2013, more than 10% of its

consolidated revenues came from its customer, Samsung Electronics. The ongoing 4G LTE rollout in China

in expected to benefit Qualcomm by creating a robust demand for 4G mobile handsets with shipments of

4G phones forecasted to grow at a CAGR of more than 180% during 2013-17. In the CDMA technologies

22
segment, Qualcomm competes with major companies such as Broadcom, Ericsson and Intel, as well as

with internally developed products by its customers such as Samsung electronics. In addition to the

intense competition across the companys segments, the rapid rate of technological changes in the field

of telecommunications exposes the company to inventory obsolescence risks. The changes broaden the

range and reduce the costs of telecom products and services thus forcing the company to upgrade its

products and technologies continuously. Being a fabless firm, Qualcomm depends on a limited number of

third-party suppliers for the procurement, manufacturing and testing of its products. This makes the

company vulnerable to not meeting customer demands in time due to interruption or delays in the supply

chain of its products40,17.

Samsung Electronics

The flagship subsidiary of the Samsung Group and one of the leading consumer electronics brands in the

world, Samsung electronics is also the worlds largest manufacturer of memory chips by revenue and

volume. It is ranked first in the Dynamic Random Access Memory (DRAM) and NAND (Negative-AND)

memory segments. Of the companys total revenue, 16% is from sales of its semiconductors. Its more than

30% gross margins in the memory segment tend to be highest amongst its competitors in the segment. In

2013, Samsung was able to offset the weakness in DRAM prices due to the PC consumption slowdown by

penetrating higher-end DRAM markets such as mobile devices and servers. Samsung has a strong focus

on innovation and R&D, providing a competitive advantage to the company. The Galaxy S5 Broadband

Long Term Evolution Advanced (LTE-A) smartphone launched by Samsung was the worlds first

commercially available broadband LTE-A smartphone. With a diversified geographic presence, the

company has reduced its exposure to risks associated with a particular geographic market, and enabled

development of close relationships due to proximity to customers. As demand for higher capacity memory

products increases and conventional semiconductor manufacturing technology is reaches saturation

levels in the NAND flash memory segment, more and more memory makers are moving towards 3D flash

23
memory production. According to industry estimates, of all NAND memory chips shipped worldwide,

approximately 65% will be produced using the 3D manufacturing processes by 2017 as compared to less

than one percent in 2013. Samsung began the volume production of 3D flash memory in 2013, realizing

this great potential in the 3D memory segment.17, 41

ARM Holdings

ARM holdings is a leading semiconductor IP supplier that is at the heart of many advanced digital products

such as wireless networking devices, consumer entertainment devices and security and storage devices42.

ARM, which is considered to have pioneered the concept of IP licensing in the beginning of 1990s, is a

leading provider of RISC microprocessor solutions used in various electronics devices, with an almost 75%

global market share. ARM typically licenses its IP to a diverse network of partners, who use the core design

to develop their own microprocessors, peripherals and System-on-Chips (SoCs). The companys partners

include some of the major semiconductor suppliers including Samsung Electronics, Qualcomm and Nvidia.

ARM derives its revenues from various sources such as licensing, royalties, development systems, support

maintenance and training along with consulting. Of its total revenues, 70% are derived from licensing and

royalties; the company enjoys high margins on these types of revenues. ARM focuses its efforts in the

wireless telecom industry and its sales are largely dependent on volume growth in mobile phones. The

microcontroller segment also emerged as a potential market for both ARM as well as it partners in the

2000s. Thus ARM made a strategic acquisition of Triscend, a company specializing ARM core-based

microcontrollers. Although ARM relies heavily on its partners for receiving royalties for its IPs, its partners

are not bound by any contract to exclusively manufacture their microprocessors based on ARMs

technology. Moreover, more than 80% of its revenues come from the international market, making the

companys profitability vulnerable to the global currency fluctuations. As ARM practices the IP business

model it has to spend large amounts for protecting its patents from infringements and is under constant

threat of patent infringement43.

24
Synopsys

Synopsys Incorporated is headquartered in Mountain View, California and provides EDA software, IP and

services used in semiconductor design and manufacturing. The company has a strong focus on R&D and

product innovation enabling it to enhance the appeal of its broad portfolio of EDA software and IP.

Synopsys operates in a highly competitive EDA industry and competes primarily based on product quality

and features (including ease-of-use), license terms, post contract customer support, interoperability with

its own and other vendors products, and price and payment terms. Key competitors of Synopsys in the

EDA industry include Cadence Design Systems and Mentor Graphics. The software products offered in the

EDA industry are regularly exposed to frequent defects as well as errors and thus it is under constant

threat of reducing its market share due to its customers switching to a different EDA vendor44.

Advanced Semiconductor Engineering

The various tools used for packaging fabricated ICs and automatic testing equipment to test packaged ICs

are referred to as back-end tools, as they are used in the latter stages manufacturing the semiconductors.

Steps that are included in back-end manufacturing are assembly, packaging, handling and testing of

individual chips17. Like the fabrication of ICs, back-end operations also have become more complex, and

demand substantial capital expenditure as well as research to maintain leading-edge packaging facilities.

Accordingly, most of the chipmakers are increasingly outsourcing these services. One of the leading back-

end service providers is Taiwan-based Advanced Semiconductor Engineering Incorporated (ASE Group)36.

ASE focuses its R&D efforts and acquisitions on enhancing its product and customer portfolio while

developing advanced testing solutions for customer requirements45. ASE acquired Yang Ting, a Taiwan-

based organization providing packaging and testing services, in 2012. The following year, the company

made an agreement to acquire Wuxi Tongzi Microelectronics, a subsidiary of Toshiba, to strengthen

assembly and testing services capabilities of ASEs Shanghai subsidiary. In the same year, ASE also

announced a joint development and production agreement with Infineon Technologies, a German

25
semiconductor manufacturer, for providing assembly services to automotive products. ASE depends on a

small number of suppliers for the raw materials, which can affect its financial position. However, the

semiconductors assembly and test services market has seen a promising growth in the past few years and

it is expected to grow further: per industry estimates, this market reached a value of $26.5 billion in 2013,

a growth of 8.1% in one year. ASEs robust portfolio of assembly and test services along with the strong

outlook of semiconductor assembly and test services market suggests that the company is better

positioned than its peers. Some of the key competitors of ASE are Amkor Technology, ChipMOS,

Siliconware Precision and Taiwan Semiconductor Manufacturing. In addition to the competing back-end

services providers, ASE also faces competition from IDMs who have in-house packaging and testing

capabilities. The IDMs who use ASEs services constantly evaluate ASEs performance with their in-house

packaging and testing capabilities. In addition to pricing pressures due to intense competition in the

segment, ASE also needs to meet stringent and evolving regulations related to the use, storage, discharge,

and disposal of chemical by-products and water used in packaging and interconnect material production

processes. In 2013, ASE faced a fine of TWD 600,000 ($20,300) by Kaohsiung City government for

discharging untreated industrial wastewater into the Houjin River45.

Gamble or strategic move?

Morgan Stanley published a report on June 4, 2015 focused on the flurry of M&A observed in the

semiconductor industry46. According to Joseph Moore, an analyst at Morgan Stanley, the semiconductor

industry consolidation appeared to be in the middle innings and more acquisitions were likely to follow.

For the largest chipmaker with manufacturing capability, it was not difficult to develop new technology

itself but it was cheaper and faster to acquire a small company like Altera which already held the

intellectual property in the programmable chips space. Intel expected that Alteras programmable chips

would enable new growth in the network, large cloud data centers or IoT segments, but Morgan Stanley

was negative on Intels approach stating that Intels objective of diversifying its core microprocessor

26
business through M&A has not gelled.47, 2 There was a reason to believe that more than expanding into

newer territories, it was Intel's attempt to salvage its struggling foundry business48. Altera on the other

hand had been largely dependent on TSMC for supply and test capabilities. In some instances, TSMC had

scrapped wafers due to manufacturing defects, resulting in longer manufacturing lead times. Altera

extended its manufacturing partnership with Intel in 2014 for developing products designed in 14 nm

process49. With Altera slated to become a business unit of Intel all of its current and upcoming products

on advanced nodes could be manufactured at Intel's fabs. Did the Altera acquisition turn out to be a sound

strategic move by Intel in this intensely competitive industry? Or did the near zero interest rates in a

stagnant economy influence the Intel managements decision to make an acquisition rather than keeping

the cash in bank?

References

The case is solely based on secondary information sources with specific references noted below.

27
INSTRUCTORS MANUAL
Case Abstract
In the middle of 20th century, two important inventions gave birth to a new industry the semiconductor
industry. The prevalence of electronics in almost all the parts of modern life is a manifestation of the
tremendous success of the semiconductor industry in a very short span of time. The microelectronics
industry, a more common name for the semiconductor industry, pertains to design and manufacturing of
all kinds of electronic chips found in various devices and appliances. The primary manufacturing material
of a typical electronic chip is silicon, which is a type of a semiconductor, hence the name. The case will
discuss the background behind the inception of this industry followed by an important phenomenon
called Moores Law that has been observed throughout the evolution of the industry. The case will also
explain briefly the manufacturing process of an integrated circuit, a technical name for a microelectronic
chip.
After laying the groundwork for readers not very familiar with the industry, the case will delve into basic
industry facts, such as market size and segmentation, used by industry analysts. The case can help readers
analyze the stage of the industrys life cycle and overall competitive arena including strategic positioning
of major industry players. The external analysis of the semiconductor industry considers macro-
environment (demographic, sociocultural, economic, political, technological, and physical environment)
trends as of 2015. The case will discuss the value chain in the semiconductor industry and associated
evolution of the various business models practiced by industry players over the years. Competitive forces
in the industry are explained, encouraging readers to judge the strength and influence of those forces on
current and aspiring players in the industry. The external industry analysis is augmented with description
and brief internal analysis of some of the key players in the industry, positioned at different stages in the
supply chain.
The case provides a rich context for analysis of the semiconductor industry, and helps readers identify the
various opportunities and threats for incumbents and new entrants as well as strengths and weaknesses
of the successful players in the industry.

Target Audience/Level/When in Term/Connections to Commonly Used Texts

The case is a clear application of industry (external) analysis, targeted for graduate students or advanced
(senior-level) undergraduate students in business or related programs (MBA, business administration,
managing technology). The case contains a considerable degree of technical detail, especially suitable for
MBA students in technology fields such as electrical engineering, computer engineering, computer
science, and information technology, or graduate students in the technical fields who are taking business
courses.
The case is typically best suited for use midway through the first half of a term, after instruction in the
tools of industry analysis (macro-environment assessment using PESTEL or similar framework, Porters
Five-Forces of Competition, strategic group maps, competitor profiles, overall evaluation of relative
industry attractiveness). The authors have found that the overall concept of industry (external) analysis
is clearer to students when undertaken prior to company (internal) analysis, to demonstrate the important
role and influence of industry factors in strategic decision-making. Students often are predisposed to look
at internal factors almost exclusively or predominantly, inadequately aware the powerful forces beyond
company control that play out in the external environment and form the context within which the
companies operate.
The industry analysis concepts and tools appear early in many prominent strategic management texts:
Thompson, Peteraf, Gamble and Strickland chapter 3;
Hitt, Ireland, and Hoskisson chapter 2;

28
 Hunger and Wheelen chapter 4;
Dess chapter 2;
F. David chapter 3.
This case can be used along with the respective chapter to help demonstrate tool application, or,
preferably, after the chapter, as an opportunity for comprehensive application of the entire set of tools
for industry analysis.

Learning Objectives
After being introduced to and studying recognized tools of industry analysis, and carefully reading and
considering the case information, class participants will be able to:
1. Apply a PESTEL-type macro-environment framework to identify specific opportunities and threats
in an industry.
2. Evaluate sources/relative strength of industry competition using Porters Five-Forces Analysis.
3. Recognize specific factors driving change in an industry, and resulting implications for strategic
decision making.
4. Pragmatically interpret information from a strategic group map, within the context of industry
positioning decisions.
5. Create a competitive strength assessment of key industry players.
6. Defensibly assess the overall attractiveness/outlook for future profitability of an industry.
7. Appreciate the significant influence of industry factors on firm performance.

Discussion Questions
1. Considering the various components of the semiconductor industrys macro-environment, what
key opportunities and threats must be considered in the strategic decision-making of the leading
semiconductor firms?
2. Identify the semiconductor industrys competitive forces. Explain the strength of each force
relative to the leading semiconductor firms.
3. Identify key industry factors and how they might be driving change within the semiconductor
industry.
4. Describe the semiconductor industrys market size and market segments. How is the relevant
competition positioned in the market?
5. Evaluate the competitive profile of key players in the semiconductor industry, providing
defensible numerical estimates of competitive attributes that are important for success in the
industry.
6. Is the semiconductor industrys future outlook conductive to strong profitability? Convincingly
explain.

Theory Discussion
Industry analysis rests on a theoretical foundation from industrial organization (I/O) economics; emphasis
is on developing business strategy based on a keen understanding of industry structure. Using the
structure-conduct-performance (SCP) paradigm, the structure of the industry should determine firm
conduct, which then determines firm performance.
Prominent concepts and tools for industry analysis stem from the work of Kenneth R. Andrews, Concepts
of Corporate Strategy (1971) and primarily, Michael J. Porter, Competitive Strategy: Techniques for
Analyzing Industries and Competitors (1980), both of Harvard University.

29
Discussion Questions with Answers
1. Considering the various components of the semiconductor industrys macro-environment, what key
opportunities and threats must be considered in the strategic decision-making of the leading
semiconductor firms?
Opportunities Threats
Industry facts
Global sales grew 10% from 2013 to 2014. (p. 7) M&As are common and reoccurring in the
industry. (p. 3)
2014 sales growth driven by 18.2% growth in sales of Consolidation is making mature companies
memory chips. (p. 7) expansion on their own difficult. (p. 3)
US semiconductor company sales totaled $173 billion, Industry is consolidating. (p. 10)
representing over half the global market. (p.8)
82 percent of US semiconductor sales were from
outside the US. (p. 8)
Rapid growth of innovation in products and services.
(p. 9)
Emergence of new markets due to IoT. (p. 9)
Product segments for analog chips, DSPs, logic
devices, and memory is more fragmented. (p. 18)
Political/Legal trends
Congress considering legislature to promote growth in There are significant differences in countries
semiconductor sector and throughout US economy and regions in legal systems and IP protections
TPA. (p. 8) involving licensing and enforcement
regulations and practices. (p. 12)
Economic trends
Profit swings in industry due to ups and downs in Dependent of consumer buying power
business capital spending, process migration glitches, therefore sales can decline due to overall
and demand slowdowns. (p. 8) [global] economic slump as seen in 2009. (p. 4)
Semiconductor market growth is linked to GDP growth
therefore will grow as key economies grow. (p. 17)
Social trends
Consumer interest in wearable computing devices (p. Shift in consumer spending from laptop
2) seeking portability and multifunction. (p. 11) computers to tablets and smartphones. (p. 2)
A day without electronic use for most people is
extremely unlikely. (p.3)
Technology trends
Per Moores Law, semiconductor devices, hence end- Because it is cheaper to buy rather than build
user electronic products, become cheaper to make technology, M&As are more attractive than
thereby more affordable to consumers. (p. 11) IPOs. (p. 10)
Growth of EDA is a separate industry within the Equipment to fabricate transistors need to
semiconductor industry playing a vital role in the evolve with advancing technologies for
growth in semiconductor technology and business. (p. processors, ICs, and memories rapidly
15) becomes obsolete and needs replacing. (p. 17)
As electronic components replace mechanical in New technologies, i.e. bottom-up fabrication
vehicles to improve safety, infotainment, navigation, using nanotechnology may replace
and fuel efficiency, demand for semiconductors will conventional semiconductors by offering
increase in the automotive market. (p. 18)

30
 devices with superior characteristics. (pp. 18-
19)
Demand from wireless infrastructure manufacturers
will increase due to increased volumes of data sharing
worldwide requiring infrastructure to support
quantity, power reliability, privacy, and security. (p.
18)
Semiconductors are replacing older technologies
rather than end market alternatives replacing
semiconductors. (p. 18)
Environment trends
Rising awareness of environmental issues bring focus Increasing concerns for environmental safety
on reduction of power consumption. (p. 9) and health. (p. 17)
Increasing concerns for energy efficiency. (p.
17)

2. Identify the semiconductor industrys competitive forces. Explain the strength of each force relative
to the leading semiconductor firms.
Power of new entrants = weak to moderate
Semiconductor M&As occur rather than IPOscheaper to buy than build the technology. (p. 10)
Once the foundry business model came into being after 1980, the cost and risk of entering the
semiconductor industry was reduced, resulting in a surge of fabless companies in the 1990s. (p.
15)
Start-up companies have difficulty competing with incumbent top leaders of the industry due to
their lower cost per unit from scale economies and spreading the high fixed costs of production
facilities and R&D over more units. (p. 16)
Fabless manufacturing offers a lower cost alternative for new entrants. (p. 16)
A recent report by Morgan Stanley focused on the influx of M&As in the semiconductor industry,
with more anticipated in the future (p. 26) therefore prohibiting easy entry into the industry by
new/small companies.
Power of suppliers = moderate Power of rivals = strong Power of buyers = strong
Difficult to identify and Due to increasing Semiconductor industry
separate the suppliers and consolidation, competition sales are largely dependent
the buyers. (p. 16) is fierce amongst fewer on consumer demand in its
Fabrication equipment and players. end markets, yet do not
raw material producers are Extreme competition lends directly sell their products
key suppliers in industry. (p. itself to strong focus on and services to end
16) innovation and R&D, consumers. (p. 11)
IDM-modeled companies providing competitive OEMs and ODMs
more dependent on small advantage. (p. 22) considered key buyers in
number of manufactures of A new player with energy industry. (p. 16)
fab equipment and ultra- efficiency innovations may OEMs and ODMs have
pure semiconductor wafers. have an edge over strong purchasing power
(p. 17) incumbents similar because they can be large
Vertical integration product. (p. 17) multinational with own
between manufacturers of Competition in micro- manufacturing capabilities,
semiconductor devices and processor segment is

31
 key suppliers unlikely. (p. sensitive to demand for buying in large volumes.
17) computer hardware (pp. 17-18)
Reduced number of because primarily serves Moderate demand from
potential vendors for makers of computing consumer electronics end
fabless companies because devices for corporations market of tablets,
not all fabs can offer a and consumers. (p. 18) smartphones, and wearable
process and technology for devices. (p. 18)
a specific design. (p. 17) Strong demand from
consumer market with IoT
innovation. (pp. 10-11)
For end-user in industry
switching costs are
negligible (for discrete
semiconductor device) since
most devices work in same
way. (p. 19)
Switching costs are high for
programmable devices
(microcontroller) because
requires expert engineering
for new technology. (p. 19)
Power of substitutes = weak
There are no real substitutes for semiconductors specifically, but graphene is considered to be the
silicon of the 21st century, replacing traditional silicon in semiconductors--still in very nascent
stage. (pp. 16-17)
New technologies, i.e. bottom-up fabrication using nanotechnology may replace conventional
semiconductors by offering devices with superior characteristics. (p. 19)

3. Identify key industry factors and how they might be driving change within the semiconductor
industry.
Drivers of industry and competitive change:
a. Changes in industry growth rate
Global sales grew 10% from 2013 to 2014. (p. 7)
2014 sales growth are driven by 18.2% growth in sales of memory chips. (p. 7)
Semiconductor sales see average growth of 15%. (p. 8)
US semiconductor company sales totaled $173 billion, representing over half the global
market. (p. 8)
82% of US semiconductor sales were from outside the US. (p. 8)
In terms of profitability, the industry is notorious for its boom-bust cycles. (p. 8).
b. Increasing globalization
Growth in 2013 in all four major geographical markets: Americas, Europe, Japan, Asia-
Pacific. (p. 7)
Developing economies such as Brazil and India have strong potential in end-product
markets such as automotive manufacturing, seeking to invest in local semiconductor
manufacturing facilities. (p. 17)
c. Emerging new Internet capabilities

32
 IoT market to grow at 7.9 % CAGR. (p. 10)
Changes in the semiconductor industry went from markets in categories such as
computing, communications (wired and wireless), consumer and industrial (automotive,
military, aerospace) to a market of IoT. (p. 9)
d. Changes in who buys product and how to use it
Semiconductor industry sales are largely dependent on consumer demand in its end
markets, yet do not directly sell their products and services to end consumers. (p. 11)
17.5% industry sales attributed to consumer electronics semiconductors used in TVs,
videogame consoles, handhelds, set-top boxes, portable media players, DVD players,
recorders, and digital cameras; reaching a large demographic of all ages and ethnicities
around the globe. (p. 11)
Changing nature of the end markets for semiconductor devices leads to a variation in
demand of semiconductor products. (p. 9)
The largest segment [in sales] in the consumer semiconductor market is portable media
players followed by the digital TV segment. (p. 11)
e. Technology change manufacturing process innovations
Specialized software innovations for the design and customization of various components
of ICs (i.e. EDA software) within the semiconductor industry has played vital role in the
semiconductor technology and business. (p. 15)
The emergence of fabless and fab-lite models deemed a single most important
development thus impacting the growth of the semiconductor industry. (p. 15)
A high level of R&D is required to sustain competitiveness in semiconductor technology
development. (p. 16)
The development of graphene to replace silicon offers first mover advantage. (p. 16)
Equipment to fabricate transistors to evolve with advancing technologies for processors,
ICs, and memories rapidly becomes obsolete and needs replacing. (p. 17)
f. Product and marketing innovation
Products produced by semiconductor industry are applications in a variety of end-market
components. (p. 9)
Devices with improved graphics, increased connectivity availability, and speeds are major
drivers of consumer spending and growth in the consumer segment of semiconductors.
(p. 11)
To develop a first IC solution requires millions of dollars of capital for research, design,
testing, and compliance with industry standards, but once qualified it can be
manufactured in large volumes at a per unit manufacturing costs of a few cents. (p. 13)
g. Entry or exit of major firms
For a semiconductor company, once a requisite investment in the fabs have been made
(or a fabless manufacturing route is established), the cost to increase the output based
on increased demand is very low. (p. 19)
Exit costs of the requisite investment in fabs or an established fabless manufacturing
route are very high and include sunk costs in research facilities and cost to establish
research teams. (p. 19)
h. Diffusion of technical know-how

33
 Prior to 1980, semi-conductor companies owned their own fab(s) to manufacture their
designs. Due to the expense of owning and operating manufacturing assets companies
employed the concept of outsourcing to develop a new model (foundry model).
Companies either just manufactured with no design capabilities (pure-play) or just design,
not owning a fab (fabless model). (p. 14)
Some companies maintain their old fabs yet use a third-party foundry for more advanced
ICs (fab-lite model). (p. 15)
Higher cost of semiconductor equipment to manufacture ICs with smaller technology
nodes outweighs the benefits of producing more devices on a given wafer, therefore any
slowdown of technology development may limit the influence of foundries. (p. 17)
i. Changes in cost and efficiency
A new player with energy efficiency innovations may have an edge over incumbents
similar product. (p. 17)
j. Regulatory influence government policy change
Congress considering legislature to promote growth in semiconductor sector and
throughout US economyTPA. (p. 8)
k. Changing societal concerns lifestyles attitudes
Buyers are not significantly influenced by brand equity in this industry. (p. 16)

4. Describe the semiconductor industrys market size and market segments. How is the relevant
competition positioned in the market?
a. Market size:
Number of potential customers is very high due to outreach of semiconductor devices
and their applicability in multitude products. (p. 18)
Semiconductors assembly and test services market has seen promising growth in the past
few years and is expected to grow further. (p. 26)
b. Market segments:
Manufacturing chips for other companies. (p. 3)
Semiconductor products are categorized based on the types of chips: logic chips, memory
chips, microprocessors, analog ICs, optoelectronic ICs, discrete semiconductors and
sensors. (p. 7)
The top ranked companies operate in different market segments and offer products in
different categories. (p. 10)
Microprocessor segment serves makers of computing devices for corporations and
consumers. (p. 18)
Analog chips, DSPs, logic devices, and memory product segments are more fragmented
with many players competing for market share. (p. 18)
Some companies have diversified into electronics equipment manufacturing. (p. 19)
Some companies focus on semiconductor device development of a particular type,
differentiating their product in terms of chips performance, power consumption, life
expectancy, and total cost of ownership. (p. 18)
c. Competition positioning:
Product differentiation valuable in ASIC or microprocessors. (p. 18)
Undifferentiated and commoditized in many discrete devices and some integrated
devices (e.g. memories). (p. 18)
Intel:

34
 o Largest chipmaker in the world based on revenue and unit shipments. (p.19)
o Despite significant investments in the mobility segment, has not landed a
successful product, especially in the smartphone market, but is making progress
in the tablets market. (p. 20)
o Strong position in server, workstation, storage computing, and wired network
products market segments with the DCG of Intel platform designs contributing to
6.9% revenue growth. (p. 20)
o Faces competition from chipmakers and OEMs that choose to vertically integrate
their own proprietary semiconductor and software assets. (p. 20)
Taiwan Semiconductor Manufacturing Company, Limited (TSMC):
o Largest dedicated chip foundry in the world employing over 40,000 people. (p.
21)
o Market leader in foundry segment manufacturing 8600+ different types of
semiconductors using 202 different technologies for over 440 customers. (p. 21)
o Leading contract maker of semiconductors with 46.3% of market share,
surpassing rivals. (p. 21)
Qualcomm:
o Sustains leading market position in the wireless devices segment by gaining first
mover advantage in promoting CDMA technology for wireless voice and data
communications, multimedia and GPS products. (p. 22)
o Realizes intense competition across companys segments per its IC products and
system software used in phones, laptops, data modules, handheld wireless
computers, data cards, and infrastructure equipment. (p. 22-23)
o Leading provider of smartphone chipsets and dominant player in cellular based
processor market with market share of 66%. (p. 22)
Samsung Electronics:
o One of the leading consumer electronics brands in the world. (p. 23)
o Worlds largest manufacturers of memory chips by revenue and volume. (p. 23)
o First in DRAM and NAND memory segments. (p. 23)
ARM Holdings:
o Leading semiconductor IP supplier of many advanced digital products, i.e.
wireless networking devices, consumer entertainment devices, security and
storage devices. (p. 24)
o Leading provider of RISC microprocessor solutions used in various electronics
devices with an almost 75% market share. (p. 24)
Synopsys Incorporated
o Provides EDA software, IP, and services used in semiconductor design and
manufacturing, operating in a highly competitive EDA industry. (p. 25)
Taiwan-based Advanced Semiconductor Engineering Incorporated (ASE Group)
o One of the leading back-end service providers, providing back-end operations
such as assembly, packaging, handling and testing of individual chips, used in the
latter stages manufacturing of semiconductors. (p. 25)
o Dependency on a small number of suppliers for raw materials can affect its
financial position. (p. 26)
o Its robust portfolio of assembly and test services along with the strong outlook of
semiconductor assembly and test services market suggests that the company is
better positioned than its peers. (p. 26)

35
 d. Strategic group maps:

The above graph shows a visual representation of the positioning of the key
players discussed in the case.
As can be seen from the figure, these players practice different business models
and have positioned themselves in different positions in the supply chain.
Some companies have a core focus of R&D and operations in a particular end
market(s) and have obtained a strong leadership position in that market. As you
can see from the case Intel is attempting to make a strategic move from consumer
end market to IoT end market through the Altera acquisition.

5. Evaluate the competitive profile of key players in the semiconductor industry, providing defensible
numerical estimates of competitive attributes that are important for success in the industry.
Five of the top 10 semiconductor companies show a growth rate of 9% (the industry is at 10%
for 2014) and represents 60% of total industry sales. (p. 10)
a. Company attributes relative to key success factors in the industry (summarized in competitive
profile in b)
Incumbents have enjoyed brand strength (i.e. Intel Inside) (p. 16)
Intel:
o Significant investments in R&D contributed to strong history of introducing
pioneering technologies, thus leading in technology thereby sustaining market
leadership and strong cash position. (p. 20)
o Retains a combination of an extensive network of manufacturing, assembly, and test
facilities with their global architecture teams give edge over the competition,
enabling direct control over the processes, quality control, production cost,
production timing, performance, power consumption, and manufacturing yield. (p.
20)
o Lower unit sales in the PC client group segment due to weaker PC demand causing a
decline in profit margins and revenues in recent years. (p. 20)

36
 TSMC:
o Strong market positioning attributed to leadership in advanced process technologies
with 78% of its revenues in 2013 from technology nodes of 130 nm or lower and 66%
of revenues from technology of 65 nm or below. (p. 21)
o R&D is divided into centralized R&D activities and R&D at each of its fabs locations
along with maintaining external R&D partnerships and alliances with renowned
research institutions thereby enabling the company to provide its customers access
ahead of its competitors and other IDMs to advance process technologies in volume
production. (p. 21)
o Leadership in technology and extensive manufacturing capacities allow ability to
meet customers demands and ensure on-time delivery of product. (p. 21)
o Taken initiatives in solar and solid state lighting businesses to increase revenues and
mitigate risks. (p. 22)
o 62% of total revenues in 2013 came from it 10 largest customers indicating high
customer concentration. (pp. 21-22)
Qualcomm:
o It has internally sponsored R&D focused on extending the demand for its products
and services and performs contract R&D for various government agencies and
commercial contractors. (p. 22)
o Its Snapdragon processor provides strong brand recognition enabling the addition of
new clients from existing and new geographies. (p. 22)
o A fabless semiconductor company, earns revenues from patent royalty fees through
licensing agreements with communication equipment makers. (p. 22)
o More than 10% of its revenues comes from a single customer, Samsung Electronics.
(p. 22)
o Anticipating a CAGR growth of 180% 2013-17 in 4G phones due to 4G LTE rollout
providing a robust demand for 4G mobile handsets. (p. 22)
Samsung Electronics:
o Penetrated higher-end DRAM markets (i.e. mobile devices and servers) therefore
offset the weakness in DRAM prices due to the PC consumption slowdown. (p. 23)
o Strong focus on innovation and R&D, providing competitive advantage. (p. 23)
o Its Galaxy S5 LTE-A smartphone was the worlds first commercially available
broadband LTE-A smartphone. (p. 23)
o Maintains a diversified geographic presence thus reducing exposure to risks
associated with a particular geographic market and enabling development of close
relationships due to proximity of customers. (p. 23)
o Began volume production of 3D flash memory in 2013 with anticipate potential in the
3D memory segment. (p. 24)
o 16% of total revenue is from semiconductors sales. (p. 23)
o With its 30% gross margins in the memory segment, making the company highest
amongst competitors. (p. 23)
ARM Holdings:
o Pioneered the concept of IP licensing. (p. 24)
o Licenses its IP to a diverse network of partners. (p. 24)
o Sales dependent on volume growth in mobile phones, focusing efforts in the wireless
telecom industry. (p. 24)

37
 o Derives revenues from licensing, royalties, development systems, support
maintenance and training, and consulting. (p. 24)
o 70% of total revenues are from licensing and royalties, enjoying high margins on these
types of revenues. (p. 24)
Synopsys:
o Strong focus on R&D and product innovation enabling it to enhance the appeal of its
broad portfolio of EDA software and IP. (p. 25)
o Competes primarily based on product quality and features (including ease-of-use),
license terms, post contract customer support, interoperability with its own and other
vendors products, and price and payment terms. (p. 25)
ASE Group:
o Focuses its R&D efforts and acquisitions on enhancing its product and customer
portfolio while developing advanced testing solutions for customer requirements. (p.
25)
o Acquisitions and joint development agreement(s)strengthened and increased
packaging, assembly, and testing service capabilities, along with assembly services to
automotive products. (pp. 25-26)
b. Competitive profile
Below are the numerical estimates of the competencies of the key players
Competencies Intel TSMC Qualcomm Samsung ARM Synopsys ASE
R&D strength 4 4 3 4 - 4 3
Supply chain 4 3 2 3 4 - 2
Product innovation 2 4 4 4 3 4 -
Brand strength 4 - 4 4 - - -
Revenue/Size 5 4 3 5 - - -
*- - Not enough information available in the case

6. Is the semiconductor industrys future outlook conducive to strong profitability? Convincingly

explain.
The answer to the question is yes! the semiconductor industry is conducive for profitability of its
players--but proceed with caution. Because of the technological scope, limited only by participants
imaginative endeavors, profitability is possible through product and process innovation and efficiency.
The caveat is that the nature of the technological beast lends itself to extensive capital costs in R&D
and rapid obsolescence, contributing to the trend in M&As, thus impacting the competitive field.
The overall outlook is favorable for continuing strong profitability in the industry, based on the
following factors identified through the industry analysis above:
Global market growth is strong.
Boundless product and process innovation enables ongoing product differentiation as well as
cost efficiencies.
As efficiencies grow, consumer costs decrease, further expanding the global market reach of
products.
Products using semiconductors are increasingly being seen as indispensable to modern-day
lifestyles.
Governmental facilitation of the semiconductor industry.
Entry barriers limit entry of new firms.
However, the experiences of various industry players demonstrate importance of caution to avoid
missteps in this generally attractive industry:

38
 In terms of profitability, the industry is notorious for its boom-bust cycles. The industry
shows high profits for a few years followed by sharp drop in profits in the next few years. The
profit swings can arguably be attributed to ups and downs in business capital spending,
process migration glitches, and demand slowdowns. (p. 8).
M&As within the industry are likely to continue as it is cheaper and faster [for larger
companies with manufacturing capabilities and the ability to develop own technology] to
acquire a smaller company that already hold intellectual property in the programmable chips
space. (p. 26)
(Per Qualcomm): With intense competition in various segments and the rapid rate of
technological changes in the field of telecommunications, companies are exposed to
inventory obsolescence risks. (p. 23)
(Per Qualcomm): Rapid technological changes broaden the range and reduce the costs of
telecom products and services thus forcing companies to upgrade products and technologies
continuously. (p. 23)
(Per Qualcomm): Fabless firms depend on a limited number of third-party suppliers for the
procurement, manufacturing, and testing of its products, making a company vulnerable to
not meeting customer demands in time due to interruption or delays in the supply chain of it
products. (p. 23)
(Per ARM Holdings): If a companys revenues are largely dependent on the global market, its
profitability is vulnerable to global currency fluctuations. (p. 24)
(Per Synopsys): Software products offered in the EDA industry are regularly exposed to
frequent defects as well as errors, and thus it is under constant threat of reducing its market
share due to its customers switching to a different EDA vendor. (p. 25)
(Per ASE Group): In addition to pricing pressures due to intense competition in the back-end
service providers segments, there are stringent and evolving regulations related to use,
storage, discharge, and disposal of chemical by-products and water used in packaging and
interconnect material production. (p. 26)

Teaching Strategy
Student preparation should begin with a review of the case questions, to become alerted to the focal
issues in this case. Next, students should budget adequate time for a conscientious and careful read
through the case, striving to comprehend the big picture as well as key details, taking notes they may
find helpful.
The teaching plan described here is for a 75-90-minute time block in class. If each student has completed
a written analysis according to the case questions for submission prior to discussion, 75-minutes will be
adequate. Another strategy is to assign the case questions in advance for less formal preparation, and
administer a 15-minute closed-book accountability quiz at the beginning of the class period whereby
students demonstrate their readiness for case discussion by writing answers to selected questions; a 90-
minute timeframe would work best with this format.
Prior to open class discussion, we often find it useful (especially in situations where the class is in early
stages of getting to know one another, or in an otherwise relatively quiet class) to break the class into
small groups for a 10-minute warm-up question, allowing time for students to sound out their ideas in
a smaller more comfortable group before providing input to the larger group discussion. A broad warm-
up question, such as What should Intel do to better position themselves moving forward, considering
the industry environment? Why? provides an engaging start for discussion while drawing on issues from
the deeper analysis for support, which will seed the later large discussion of each case question.

39
Alternatively, each small group can be assigned one of the case questions during the warm-up, preparing
to take the lead in that section of the overall class discussion.
During the warm-up, the instructor can prepare the board outline, in readiness for capturing key thoughts
contributed by the class. At a minimum, a detailed PESTEL-type template to record Opportunities and
Threats (similar to that in the answer to question 1), and Five-Forces Analysis template (similar to that in
answer to question 2), is suggested. Over the course of discussion, areas of the PESTEL framework with
many items listed on the board reveal highly influential environmental components in this industry, while
reinforcing the value of systematically considering each area of the PESTEL framework to flesh out
opportunities and threats that might be less obvious without such systematic thinking. Later in discussion,
key factors driving industry change (case question 3) can be circled from this detailed opportunities and
threats listing, and at end of discussion, evidence for conclusion about overall industry attractiveness (case
question 6) can be reviewed. Reserving space on the board to construct competitor profiles (see answer
to question 5) and also for unanticipated but valuable thought threads is also advised. Having a copy of
the strategic group map (Figure 1) for projection will be helpful for that part of the discussion (case
question 4).
To begin discussion with the entire class, it is often interesting to ask for general reflection on the case,
such as, What stood out to you as most interesting/surprising in the case? This enables discussion to
begin without a right or wrong answer, getting discussion underway and often providing useful insights
the instructor had not considered. Then, someone can be asked to provide a 1-2 minute synopsis of what
the case is about, with supplemental contribution from other class members as needed, ending with
identification of the main dilemma(s) posed by the case. Then the stage is set to move into sequential
analysis according to each case question, through to conclusion and epilogue see time estimates in Case
Discussion Outline below:

Case Discussion Outline

1 Accountability quiz 15 minutes
2 General introduction to the case: What stood out as most interesting/surprising in 10 minutes
this case? Brief case synopsis Identification of main dilemma(s) to address
3 Analysis of the macro-environment of the semiconductor industry, to aid in 15 minutes
identification of Opportunities and Threats case question 1. (To facilitate
discussion contribution from each student, a round robin format can be used here,
whereby each student contributes one item for this analysis, after which discussion
is opened up to fill in any important items not yet identified.)
4 Competitive analysis of the semiconductor industry case question 2. (Discussion 15 minutes
here can be facilitated by asking Which of Porters five competitive forces is
strongest in the semiconductor industry? Why? This will surface differing opinions
and supporting rationale, resulting in Discussion and deeper understanding of
several competitive forces. A follow-up question, Which of Porters five forces is
least strong in the semiconductor industry? Why? can complete the analysis.)
5 Identification of key factors driving change in the semiconductor industry case 5 minutes
question 3. (This question serves as a prioritized summary of the most significant
factors Impacting the industry, drawn from analysis of questions 1 and 2.)
6 Describing the major market positions in the semiconductor, using a strategic group 10 minutes
map case question 4. (A volunteer could explain what is portrayed on the strategic
group map. The class can be asked to identify the most/least desirable positions,
with underlying rationale for opinions, leading a better understanding of how

40
 specific opportunities and threats, and forces of change, differentially impact various
market positions.)
7 Construction of a competitive profile of key players in the semiconductor Industry 10 minutes
case question 5. (To save time, a small group could be assigned this question during
the warm-up phase of discussion, and already have a competitive profile matrix on
the board to show major competitors and ratings of their relative strengths on
important competitive attributes that they could then explain. Or, this could be built
on the board by the instructor using class discussion. Either way, ideas from the
previous analysis, especially the strategic group map, will be reinforced.)
8 Assessment of the overall outlook for future profitability in the semiconductor 5 minutes
Industry case question 6.
(This last question provides opportunity to summarize prominent factors in this
Industry revealed from application of all the industry analysis tools in the case.
The powerful role of industry context on profitability outlook becomes clear.)

9 The discussion concludes with a query about prognosis for Intels strategic move 5 minutes
described in last paragraph of the case, and resulting performance and strategic
moves thereafter epilogue.

Student Response
The case will be piloted in the MBA strategic management capstone course this upcoming spring semester
2016, scheduled towards beginning of the course in February. Reflections and feedback from the pilot
will be available for inclusion at the case conference.

Epilogue
On December 28, 2015, Intel formally completed the acquisition process of Altera Corporation. The
addition of Altera's products and services in Intel's leading-edge product portfolio is expected to give Intel
an edge in high-growth data center and internet of things market segments. Brian Krzanich, the CEO of
Intel said, "We will apply Moore's Law to grow today's FPGA business, and we'll invent new products that
make amazing experiences of the future possible experiences like autonomous driving and machine
learning." Dan McNamara, an Altera veteran and now the General Manager of the Programmable
Solutions Group (Alteras new name) at Intel, said, "Combining Altera's industry-leading FPGA technology
and customer support with Intel's world-class semiconductor manufacturing capabilities will enable
customers to create the next generation of electronic systems with unmatched performance and power
efficiency."50 The web services giants such as Microsoft Corp. and others have experimented augmenting
Intels Xeon processors with the FPGA chips sold by Altera in order to achieve improved performances for
tasks such as web searches.51 The first product priority of Intel after this deal is to extend this concept by
co-packaging the Xeon chips with the Altera FPGAs and boost the processor speed by 30%-50%.52 The
$16.7 billion Intel-Altera deal is just one of the 150+ chip company deals in 2015, worth more than $100
billion, according to Bloomberg. The M&A volume in the industry is the second largest on record after it
hit $115.5 billion at the end of the dotcom boom in 2000. Gary Matuszak, global chair of KPMGs
technology, media and telecommunications practice, said in a press release, M&A has become a greater
priority as semiconductor companies pursue a strategy to more quickly obtain the technology
breakthroughs and revenue they need to grow their businesses. The market pressure on semiconductor
pricing is one of the factors impacting revenue and making M&A more attractive." The 163 semiconductor
industry business leaders surveyed by KPMG expect that 2016 will continue to see the consolidation in
the industry and will match or even exceed the number of mergers and acquisitions seen in 2015.53

41
Acronym key
ASIC Application Specific Integrated Circuit
CAGR Compound Annual Growth Rate
CDMA Code Division Multiple Access
DRAM Dynamic Random Access Memory
DSP Digital Signal Processor
EDA Electronic Design Automation
ENIAC Electronic Numerical Integrator Analyzer and Computer
FPGA Field Programmable Gate Array
GPS Global Positioning System
ICs Integrated Circuits
IDM Integrated Device Manufacturer
IoT Internet of Things
IP Intellectual Property
ITRS International Technical Roadmap for Semiconductors
LTE-A Long Term Evolution Advanced (Mobile communication standard)
M&As Mergers and acquisitions
mm millimeter
NAND Negative-AND (Memory)
nm nanometer (one billionth of a meter)
ODM Original Device Manufacturer
OEM Original Equipment Manufacturer
PC Personal Computer
R&D research and development
SIA Semiconductor Industry Association
SoCs System-on-Chips
TPA Trade Promotion Authority
UPW Ultra-Pure Water
WSTS World Semiconductor Trade Statistics

References
The case is solely based on secondary information sources with specific references noted below.

1
D. C. D. C. DANA MATTIOLI, "Intel in Talks to Buy Altera," The wall street journal, 27 March 2015.
[Online]. Available: http://www.wsj.com/articles/intel-in-talks-to-buy-altera-1427485172.
2
K. W. a. M. Snider, "Intel to buy Altera in nearly $17B cash deal," USA TODAY, 1 June 2015. [Online].
Available: http://www.usatoday.com/story/money/2015/06/01/altera-intel-deal-chips-
semis/28293367/.
3
A. Gara, "Avago To Buy Broadcom For $37 Billion As Semiconductor Dealmaking Heats Up," Forbes, 28
May 2015. [Online]. Available: http://www.forbes.com/sites/antoinegara/2015/05/28/avago-to-buy-
broadcom-for-37-billion-as-semiconductor-dealmaking-heats-up/.
4
ENIAC - CHM Revolution, Computer History Museum, [Online]. Available:
http://www.computerhistory.org/revolution/birth-of-the-computer/4/78.

42
5
Invention of the PC - Inventions - HISTORY.com, History.com, [Online]. Available:
http://www.history.com/topics/inventions/invention-of-the-pc.
6
SEMI, Driving the electronics revolution, SEMI.
7
An Outline of the History of the Transistor, Public Broadcasting Service (PBS), [Online]. Available:
http://www.pbs.org/transistor/album1/.
8
P. Ganapati, "Dec. 23, 1947: Transistor Opens Door to Digital Future | WIRED," WIRED, 23 12 2009.
[Online]. Available: http://www.wired.com/2009/12/1223shockley-bardeen-brattain-transistor/.
9
P. M. Daniel Nenni, FABLESS The transformation of the semiconductor industry, semiwiki.com, 2013.
10
T. Poletti, "Commentary: The Traitorous Eight have become California icons," MarketWatch, 11 May
2011. [Online]. Available: http://www.marketwatch.com/story/traitorous-eight-feted-as-california-
icons-2011-05-10.
11
1959 - Practical Monolithic Integrated Circuit Concept Patented - The Silicon Engine | Computer
History Museum, Computer History Museum, [Online]. Available:
http://www.computerhistory.org/semiconductor/timeline/1959-Noyce.html.
12
Cramming more components onto integrated circuits. Moore, Gordon E. 8, 1965, Electronics, Vol. 38.
13
V. K. Andrew A. Chien, "Moores Law: The First Ending and a New Beginning," IEEE, 2013.
14
Summary 2013 ORTC Technology Trend Targets, ITRS, 2013.
15
S. W. Jones, "Introduction to IC technology," [Online]. Available:
http://www.icknowledge.com/freecontent/Introduction%20to%20IC%20technology%20rev%205.pdf
16
A. Zino, "Industry Surveys Semiconductors & Equipment," S&P Capital IQ McGraw Hill Financial, New
York, 2015.
17
A. Zino, "Industry Surveys Semiconductors & Equipment," S&P Capital IQ McGraw Hill Financial, New
York, 2014.
18
WSTS Semiconductor Market Forecast Spring 2015, WSTS (World Semiconductor Trade Statistics), 2
June 2015. [Online]. Available: https://www.wsts.org/PRESS/Recent-News-Release.
19
iconnect007: Article, I-Connect007, 7 May 2015. [Online]. Available:
http://ein.iconnect007.com/index.php/article/89984/global-semiconductor-sales-climb-amid-
macroeconomic-challenges/89987/?skin=ein.
20
Trade Promotion Authority (TPA). [Online] https://servicescoalition.org/services-issues/trade-
promotion-authority-tpa.
21
J. Handy, "The 3 Reasons Semiconductor Experience Revenue Cycles," Forbes, 28 5 2014. [Online].
Available: http://www.forbes.com/sites/jimhandy/2014/05/28/the-3-reasons-semiconductor-
experience-revenue-cycles/.
22
Zacks.com, "Semiconductor Stock Outlook - May 2015 - Industry Outlook," NASDAQ, 21 May 2015.
[Online]. Available: http://www.nasdaq.com/article/semiconductor-stock-outlook-may-2015-industry-
outlook-cm479082.
23
Nine of the Top 20 Semiconductor Suppliers are Forecast to Register Double-Digit Growth in 2014!, IC
Insights, 6 November 2014. [Online]. Available: http://www.icinsights.com/news/bulletins/Nine-Of-The-
Top-20-Semiconductor-Suppliers-Are-Forecast-To-Register-DoubleDigit-Growth-In-2014/.
24
Six Top 20 1Q15 Semiconductor Suppliers Show >20% Growth, IC Insights, 20 May 2015. [Online].
Available: http://www.icinsights.com/news/bulletins/Six-Top-20-1Q15-Semiconductor-Suppliers-Show-
20-Growth-/.
25
D. Nenni, "IC Insights Shows Big Changes to 2013 Top 20 Semi Supplier Ranking," www.semiwiki.com,
2 April 2014. [Online]. Available: https://www.semiwiki.com/forum/f2/ic-insights-shows-big-changes-
2013-top-20-semi-supplier-ranking-3972.html.
26
G. Bronson, "Semiconductor Industry Is Consolidating, but Analysts Still Like These Stocks - TheStreet,"
The Street, 29 January 2015. [Online]. Available:

43
http://www.thestreet.com/story/13028617/1/semiconductors-leading-growth-in-the-technology-
industry.html.
27
Do you think the semiconductor industry is consolidating? If so, think again, newelectronics, 15
December 2014. [Online]. Available: http://www.newelectronics.co.uk/electronics-blogs/do-you-think-
the-semiconductor-industry-is-consolidating-if-so-think-again/66515/.
28
KPMG Global semiconductor survey, KPMG, 2014.
29
M. Parpala, "The U.S. Semiconductor Industry: A Key Contributor to U.S. Economic Growth," SIA, 2014.
30
S. S. D. G. J. W. R. B. F. R. a. M. P. Stefan Tamme, "Trends And Opportunities In Semiconductor
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