Semiconductors are the building blocks of modern technology. Computer chips, processors, and memory, in all their various forms, are the enablers in almost everything we use. For the past 50 years, semiconductors have consistently made electronics smaller, faster, and more reliable and represent a ~$340 billion global industry.
The semiconductor industry, however, is maturing. Eroding prices are a challenge and long-term revenue growth forecasts are tempered. And, as with many other industries today, the threat of disruption is always lurking.
Semiconductor executives are well aware of the problems. And their solution is simple: diversify. The key, of course, is to figure out which products and services to expand and which developing markets to address—and the best way to get there.
For several years now, mergers, acquisitions and joint ventures have been the primary drivers of diversification. That’s expected to continue, according to KPMG’s latest Global Semiconductor Outlook, as many companies continue to believe that the best strategy is to acquire technologies that complement their current mix of products and services.
Get more insight from the 153 semiconductor executives we surveyed.
Other avenues may not have been explored as fully. Many executives in the KPMG survey say spending on R&D isn’t nearly enough to meet current customer demands or as focused as it should be on future growth opportunities. Yet combining acquisitions with R&D remains one of the best formulas for generating growth.
Companies also need the right strategy to expand: Diversification for its own sake could end up making things worse. So executives need to avoid investing in incremental or “me too” technology that will siphon resources from projects that offer better prospects for growth.
So where are some of the best areas to diversify? Internet-connected devices (known as the Internet of Things), connected automobiles and security systems offer some of the biggest growth opportunities. So do consumer electronics and wireless communications. Sensors and MEMS also rate highly.
Diversification can also mean moving into services—such as data storage, analysis and networking—where semiconductor companies can use their expertise in new ways. So instead of just providing chip capability, they can offer software and professional services that connect different digital systems and applications.
Chip makers don’t live in a vacuum, of course. Industry executives are constantly concerned about new competitors and disrupters. China’s commitment to a homegrown semiconductor technology is one of the biggest threats, but so is the momentum of global tech giants to develop their own computer chips. Geopolitical events are also a big worry, including the possibility that the U.S. may implement more protectionist trade and/or tax policies.
To develop the best diversification strategy, here are key five questions companies should ask themselves:
- What new or complementary technology do we need?
- What products and programs offer the highest return on investment?
- Should we acquire new technologies, develop them in-house or do some combination of both?
- Where should resources be deployed to implement the new strategy?
- What products, programs and even business units no longer fit our new business model and should be shed?
Read more of the key findings from our survey of 153 worldwide semiconductor executives.
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity. Some of the services or offerings provided by KPMG LLP are not permissible for its audit clients or affiliates.