SM 3027 Alexandru-Catalin Patrascu 0943785 DR Wolfgang Messner Group 6

EXECUTIVE SUMMARY INTRODUCTION THE INDUSTRY PERFORMANCE DAVID VS GOLIATH MONEY FOR THE NEW HORIZON THE STRATEGY Figure 1. ARM business model 8 WHERE NOW? BIBLIOGRAPHY APPENDIX 11 Figure 1. Details relating to mobile application processors to ship or sample during 2012 Figure 2. ARM holdings PLC: Summary of Finance Figure 3. ARM revenue sources Figure 4. Gartner-Hype-Cycle

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Executive summary

The economic downturn had an impact on the semiconductor industry but the latest estimates are showing signs of recovery. While Intel is controlling this industry, the microprocessor, the semiconductor end market with a $ 313 billion market and strongest demand is controlled by ARM, a small British firm with a different business strategy than Intel.

The latest details about the Intels mobile processor have ignited ideas among users and stakeholders. Is this ARMs end?

No. Comparing Medfield, Intels first SoC with ARMs based application processors (see appendix, figure 1) fails on every comparison. Intel has a long way ahead to catch up with ARMs microprocessors. The British company will maintain dominant market share in smart phones and tablets because of a superior tradeoff between performance and power consumption.

In a David vs Goliath battle, ARM has the resources and innovation to surpass Intel globally. The ARM strength is not the technology but the ecosystem, which gives a competitive advantage over its rivals. A federation approach of a business model with hundreds of producers, designers, tools that leads to an innovative ecosystem is a success factor for the industry.

Can a company with a manufacturing need really scale a business through an ecosystem?

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SM 3027 Risks to ARM Holdings include the cyclical nature of the semiconductor industry, competition from Intel and MIPS, quarter-to-quarter license revenue volatility, and a heavy reliance on consumer/enterprise spending to grow royalty units. At the lunch of Medfield mobile processor information on 8th of February 2012 Intel made it clear that is moving into ARMs domain. The announcement affected ARMs share price on the stock market and people start speculating on the companys future position in the microprocessor industry. Section one of this report will look into the semiconductor industry performance and the future estimates. David vs Goliath section illustrates the ARM s contextual situation and analyses the competitive stance of the company in report to Intel, the main competitor while section 3 and 4 explains the strategic and financial resources and the value chain of ARM. Last section provides a conclusion and a personal opinion of ARMs strategy.

The industry performance While the European debt uncertainty seemed to wane heavily on consumer spending during last year, the semiconductor industry giants are hopeful the worst is behind us and the US economy is not heading into its second recession in four years. The industrys performance depends upon customer demand. The three pillars of semiconductor consumption include: Consumer spending on electronics goods, Enterprise IT hardware spending, Carrier capital spending plans (wireless and wire line).

Each of these pillars is nearly equally weighted. The incremental weakening in the PC, low and mid-end handset markets and no signs of recovery in consumer electronics markets such as TV weakened in second half of 2010. The only semiconductor end markets that are strong are the smartphone, tablet and automotive/industrial markets, thus the microprocessors.

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SM 3027 Disruption in supply of components due to the Japanese earthquake and Thailands floods had a major impact in the second and third quarter of 2011 for semiconductor companies, increasing the uncertainty of the industry. However, Bloomberg estimates a 5 % grow in the chip industry for the financial year of 2012 while industry data points indicate chip industry orders have started to re-accelerate during the past 2 moths. Assuming the global economy is not derailed during 2012, and assuming buyers of semiconductors replenish chip inventories, upside may exist to the 2012 chip industry growth forecast. The biggest risk would be a double dip in the economy and end demand. Share loss in smartphone and tablets markets could also result in downside these estimates. But the grim risks seem unlikely for Benchmark Company. The think tank lowered the semiconductor sector rating from overweight to market weight which is an indication that revenue forecasts have become conservative enough, the demand for electronic goods would hold up in light of the economic downturn and that days of chip inventory held in the supply chain have reached an acceptable level. Also there are signs of innovation polices in Europe that could support an open innovation eco-system for particular industries, making information freely available to companies and act as catalyst for their development. It might be that some technologies or markets are more beneficial and likely to succeed with this type of organization than others.

David vs Goliath The release of the latest electronic tablet by Apple, the Ipad 3 with the A5X chip had brought yet more attention to ARM holdings. The chip is based on a quadcore architecture licensed from ARM and it is part of a new wave of processors that the British company wants to reassure its position in the microprocessor industry. In stake is a $313 billion market (Economist, 2012) .The battle with its rival Intel goes on microprocessors, the semiconductor end market with the strongest demand.

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SM 3027 Intel and ARM are different in size and approach. While the British company had in 2011 revenue of $588 million and pre-tax profit of $172 million the American had for the first nine months of last year around $40.1 billion in revenue and $13.2 billion in pre-tax profit (Economist, 2012). Yet, ARM still has the global edge within the mobile phones and tablets market and things are about to change. On January9, 2012 Intel released various performance and power benchmarks for its Medfield mobile processor. Intel announced design wins for Medfield with Lenovo and Motorola Mobility. Since these announcements, ARMs shares have underperformed the SOX by 1,200bp (Financial Time, 2012). At the surface, Intels Medfield benchmarks may look comparable to older generations of ARM-based application processors. However, by the time Medfield is ready to ship in 2012, comparable generation of ARM Cortex-A9/A15 multi-core processors will offer superior performance and power usage metrics relative to Intel. Based on superior performance and power use tradeoffs for ARM-based mobile application processors many experts in believe Intel has not finally got it right with Medfield (Benchmark, 2012). Medfield is Intel's first real SoC (system-on-a-chip) or system processor, where all components are found inside the same package. The advantage with this over previous Intel solutions is mainly lower energy consumption, but also smaller imprint, which is just as important in the hunt for thinner and slimmer smart phones. This is a way of saying to ARM: We are getting closer. What Intel failed to do was to compare ARM-based application processors that will ship to the market at the same time as Medfield. (See appendix, figure 1). Most of the ARM-based application processors that will soon hit the market are: Manufactured on a process node equal to or smaller than Medfields 32nm node. Use multiple Cortex A9 to A15 cores in order to deliver improved performance or lower power consumption to crunch smaller tasks. Deliver clock speeds (MHz) equal to or greater than Medfield. Deliver lower power consumption versus Medfield.

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SM 3027 However ARM is relatively disconcerted by Intels recently announcement of Tri-gate transistor technology. Semiconductor industry analyst Dan Hutcheson from VLSI research in an interview to BBC News said that the new process would secure Intels market dominance. He also added 3D architecture would not only benefit Intel's desktop processors, but the chips it manufactures for mobile devices (BBC, 2011). Remains to be seen whether Intel can leverage its almost 4 year lead in 3D transistors to gain share in tablets/smartphones. On the other hand, if ARM starts to gain substantial share in new-targeted markets such as PC/servers would achieve the kind of scale that Intel enjoys. ARMs presence is increasingly being felt in new end markets such as mobile computing (tablets and notebooks), servers and microcontrollers (MCUs). In addition, ARM is gaining momentum in graphics processing and physical IP. No specific targets on PC and server market share were announced. However, ARM indicated that it expects respectable shares in these markets by 2020. Mr. Chu the ARMs director of consumer client computing argues that the advantage of ARM ecosystem moving into the PC ecosystem is its bringing in new entrants, new competition, low power consumption, always-on always connected mindset and the competition associated with it. Youre bringing all of that into a space thats been highly uncompetitive for a while (Mashable, 2012)

Money for the new horizon

The new target for ARM would be costly. Specific knowledge, fast moving industry and the cost for R&D would capture a big chunk of the companys revenue. Arguments that are strong enough to prevent other companies to enter this industry. AMD and Intel are fierce rivals in a mature PC/servers chip industry but the ecosystem is a competitive advantage for Britons. Figure 2 of the appendix provides a 3-year summary and a 2-year J. P. Morgan forecast of ARMs finance. As seen, the company position is and would be more than stable to start the pursuit of rival competitors in the targeted industries.

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SM 3027 ARM has five distinct sources of revenue (see appendix figure 3). The main source was the Process Division (ARM PD) royalties representing 46% of the companys 2011 financial year. For the period covering 2010-2015, J.P. Morgan expects ARM PD royalty units to post a 20% compound annual growth rate, and by 2015, ARM PD royalty revenue should represent more than half the companys total revenue explaining the forecast (Morgan, 2012). Based on royalty units by segments reported by the company, 45-50% or more of ARMs royalty units are from end markets that are weak currently (J P Morgan). The new Windows 8 will be ported to the ARM processor architecture would help accelerate mobile computing share gains for ARM beginning from the second half of 2012 when they expect around 150 billion ARM units to be shipped between 2011 and 2020. Also, ARM should gain significant market share in the highly fragmented MCU market following a wave of licensing momentum for the Cortex Mclass cores (Bloomberg, 2012). Investors according to Bloomberg are fixated on the ability of the ARM community (ARM + licensees) to maintain dominant share in the smart phone and tablet market as well as the ARM communitys ability to penetrate the PC market with the pending launch of Windows 8 which is ported to ARM for the first time. Recent developments in the mobile and PC processor market have stimulated a battle between the Intel camp and the ARM camp which seems to go in favor of the British company.

The strategy Many analysts points at the business model and architecture itself as a competitive advantage for ARM and not its technology. The value chain design and the architecture make ARM different from other competitors. The British company is a Fabless chipmaker (Economist, 2012). ARM makes the design and market them but outsource to a third party to make the manufacturing. Has high potential grow and they are not burdened by the overhead associated with manufacture or fabrication (Bloomberg, 2012).

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Depending of the technology and the type of license, the prices for a chip license vary around several millions. After the third party makes the chip, ARM receives royalties for each chip sold by the manufacturing semiconductor company. Usually it takes around 3-4 years and can last 20 years. Figure 1 illustrates the process.

Figure 1. ARM business model

Source: ARM.com (2012)

ARM highlighted its flexible licensing options ranging from architecture license for companies who wish to design their own ARM compliant processors to single-use licenses for smaller/new companies targeting a specific high-volume market. ARM estimates that a top-10 semiconductor company saves 60-70% costs by licensing processors from ARM vs. developing internally. This lead to a federation approach of a business model with hundreds of producers, designers, tools, etc., while Intel looks more like a feudal kingdom involving very few outside (InnovationManagement, 2012). The big difference between Intel and ARMs revenue and size of trading is Intels control over design and manufacturing. They bring the chips faster and almost faultless to the market than the ARM and have 100% control over the know-how and revenues.

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SM 3027 Where now? Analyzing Apples triumph and Nokias fall reveals that the business model located around an innovation ecosystem is a success factor for global information and communication industry. The current ARM success proves that innovation based on ecosystem is a potent strategy for companies in semiconductor industry. It also provides expanding options. Tackling Intels supremacy in PC/servers or going to serves and microcontrollers and graphics and physical IP would be a winning card. Looking at Gartner-Hype-Cycle (figure 4, appendix) seems right to move into other sectors. Ahead, ARM has a potential enormous market. If the current ARM microprocessor market is limited to the number of persons on the planet the other markets provides an endless source of revenue. ARM will maintain dominant market share in smart phones and tablets because of a superior tradeoff between clock speed (performance) and power consumption, a tradeoff usually measured in DMIPS/watt. However, as demonstrated by recent announcements, Intel could land a few smart phone and tablet design wins simply due to the companys marketing muscle. Andersen a senior adviser to the Nordic Innovation Center argues that European companies have traditionally failed to achieve the kind of scale that Intel enjoys (Forbes, 2012). Well, the direction and the speed that ARM goes ahead make me believe that this company would be an exception. If in the past Intel enjoyed the Windows alliance, ARMs ecosystem and strategic alliance with Apple the largest company in the world by market capitalization (Economist, 2012) may have what it takes to emulate Intel.

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SM 3027 Bibliography BBC (2011) Intel unveils 22nm 3D Ivy Bridge processor, BBC technology [online] available at http://www.bbc.co.uk/news/technology-13283882 , (accessed March 15, 2012) Benchmark (2012) Intels release of Medfield details takes bite out of ARM share, Semiconductors & related technology [online] available at Bloomberg, (accessed March 15, 2012) Benchmark (2012) Processor license fees and royalties drive another strong quarter; raising estimates, Semiconductors & related technology [online] available at Bloomberg, (accessed March 15, 2012) Benchmark (2012) Lowering semiconductor sector weighting for overweight to market weight, Semiconductors & related technology [online] available at Bloomberg, (accessed March 15, 2012) Economist (2012) Apples share price , Finance and economics [online] available at http://www.economist.com/node/21551065, (accessed March 15, 2012) Economist (2012) The Difference Engine: Send in the clones, Tablet computers [online] available at http://www.economist.com/blogs/babbage/2011/03/tablet_computers_0?sort=2#sortcomments, (accessed March 12, 2012) Economist (2011) The different engine: Intel left outside, Science and technology [online] available at http://www.economist.com/blogs/babbage/2011/05/computer_processors, (accessed March 10, 2012) Economist (2011) Difference engine: The iPads third coming, Science and technology [online] available at http://www.economist.com/blogs/babbage/2011/12/tablet-computers, (accessed March 10, 2012) Forbes (2012) Intel vs ARM: Battle of the business model [online] available at http://www.forbes.com/sites/haydnshaughnessy/2012/02/24/intel-vs-arm-battle-ofthe-business-model/2/, (accessed March 16, 2012) Hunt, P (2011), Technology weekly, marketing communication [online] available at Bloomberg, (accessed March 10, 2012) InnovationManagement (2012) Entrepreneurs of the World, Unite in Ecosystems! [Online] available at http://www.innovationmanagement.se/2012/02/20/entrepreneurs-of-the-world-unitein-eco-systems/, (accessed March 23, 2012) Morgan, J.P (2012) European Semiconductors, European Equity research [online] available at Bloomberg, (accessed March 22, 2012) Pachal, P. (2012) ARM shrugs off Intels first smartphone [online] available at http://mashable.com/2012/01/13/arm-responds-to-intel/, (accessed March 22, 2012)

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SM 3027 Appendix Figure 1 Details relating to mobile application processors to ship or sample during 2012

Source: Benchmark (2012) Lowering semiconductor sector weighting for overweight to market weight

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SM 3027 Figure 2- ARM holdings PLC: Summary of Finance

Morgan, J.P (2012) European Semiconductor

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SM 3027 Figure 3. ARM revenue sources.

Source: Benchmark (2012) Lowering semiconductor sector weighting for overweight to market weight

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Figure 4 Gartner-Hype-Cycle

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