Design wins with personal computer makers put many
semiconductor firms on the path to riches.
). WhenIBM (
) picked Intel's 8008 microprocessor for its first PC, hearts
broke atTexas Instruments (
) and Motorola.
"Winning a socket" -- getting a chip designed into a
hot-selling product, still determines winners and losers in
Silicon Valley. The difference is that smartphone makers now call
the shots. When heavyweights likeApple (
) or Samsung redesign a product, chipmakers hold their breath,
says Dale Ford, an analyst at IHS iSuppli.
"Chipmakers have to continually work to defend their positions
in slots in next-generation devices," he said. "No one has room
to be comfortable."
Fabless semiconductor firms specialize in design, creating
electronic circuitry that, for example, whisks voice signals or
video over wireless communications networks.
Fabless firms outsource production to foundries, such as
Taiwan Semiconductor Manufacturing, which use specialized
equipment to cut thin silicon "wafers" into hundreds of
The highly specialized manufacturing facilities, called fabs,
and equipment cost billions of dollars.Intel (
) and other large chipmakers leverage such manufacturing assets
to gain a competitive advantage.
But fabless firms have lower capital costs. This usually gives
them higher profit margins than chipmakers that build their own
factories, says Standard & Poor's analyst Christin Armacost.
Many also pour a higher percentage of sales back into research
The downside comes during the industry's cyclical supply
squeezes. Fabless chipmakers, dependent on contract
manufacturers, sometimes get snubbed.
During periods of rapid industry growth, when demand is strong
and manufacturing capacity tight, "fabless firms may be unable to
procure enough chips to satisfy their customers' requirements,"
Armacost wrote in an Aug. 30 report.
Some are taking a hybrid approach, investing in foundries or
forming manufacturing partnerships to help ensure "dedicated
capacity" -- foundry space set aside to meet demand in crunch
times. Barclays analyst C.J. Muse expects more fabless chipmakers
to follow this path.
But the fabless business model has clearly gained favor.
Hundreds of chipmakers are now fabless compared to around 50 a
decade ago. IBD's fabless semiconductor group is up 8% so far
this year, and held a No. 14 ranking Friday out of 197 industry
groups. The chip manufacturers group ranked No. 179 and has a 1%
gain for the year. The chip equipment makers group ranked No.
150, with a 2% loss since Jan. 1.
Name of the game:
Fabless firms must pinpoint an emerging market and develop
"Having intellectual property that is measurably better than
the competition is a big advantage," said UBS analyst Steven
The semiconductor market topped $301 billion in 2011, up 3.7%
from a year earlier, says the Semiconductor Industry Association.
Fabless chipmakers grabbed 24% of that market, up from 9.6% a
decade earlier, says the Global Semiconductor Alliance, an
industry trade group.
Semiconductor demand is intensely cyclical. The market slumped
27% in 2001 after the dot.com bust. It fell nearly 14% in 2009
after the global financial crisis hit. Chip sales bounced back
strongly in 2010, growing 34%, as customers restocked.
In spite of the rise of smartphones and other mobile devices,
personal computers are still the biggest users of semiconductors.
Computers and peripherals, like printers and disk drives, were
35% of the semiconductor market in 2011, followed by wireless
communications at 21% and consumer electronics at 15%, says
But PC sales are slowing as consumers shift to tablet
computers. Analysts say that means the semiconductor market could
contract in 2012. But the wireless communications market will
grow 7.7% to $74.4 billion, forecasts market research firm IDC.
It estimates that the semiconductor market for wireless
communications will hit $93.1 billion in 2016.
One way to illustrate the changing market is to compare the
sales growth of U.K.-basedARM Holdings (
), which licenses microprocessor designs, to Intel, the biggest
supplier of chips to the PC market.
In the June quarter, revenue at ARM, which dominates in
smartphones and tablet devices, rose 12%. Intel's sales climbed
The fabless firms that count Apple or Samsung as customers
include several companies ranked near the top of IBD's fabless
semiconductor group, such asBroadcom (BRCM),Cirrus Logic
(CRUS),Peregrine Semiconductor (PSMI) andAvago Technologies
Wireless growth propelled Q2 sales this year at Qualcomm and
Broadcom, the two biggest fabless semiconductor firms in the
world. (Qualcomm belongs to IBD's telecom/consumer products
group.) Qualcomm's revenue jumped 37% in the June quarter.
Broadcom's rose 10%. Among other top fabless firms, U.K.-based
Dialog Semiconductor saw a 51% revenue gain.LSI Logic (LSI)
jumped 32% andHimax Technologies (HIMX) rose 17.4%.
"We have seen a perfect storm of weak demand in nearly every
market outside of Apple or Samsung... .We want to avoid the PC
supply chain," said Morgan Stanley analyst Joseph Moore, in an
Aug. 24 report.
Intel on Sept. 7 cut its current-quarter sales outlook by
7%.Dell (DELL) andHewlett-Packard (HPQ) also lowered Q3
expectations. Downgrades followed semiconductor stocks with
exposure to the PC market, includingAdvanced Micro Devices
(AMD),Marvell Technology (MRVL) andNvidia (NVDA).
Sales of new, thin "ultrabook" notebook computers have been
soft. And PC makers face an onslaught of low-priced tablets such
as Google's Nexus 7, Microsoft's Surface and Amazon's Kindle Fire
SD/HD, not to mention the possibility of an iPad mini from
And analysts are beginning to doubt the upside effect from the
pending introduction of Microsoft's updated operating
"We were hopeful for a boon to PC unit growth from Windows 8;
it is increasingly evident to the supply chain that this is
unlikely," said Citigroup analyst Glen Yeung, in a Sept. 12
Slumping PC orders have left distribution channels stuffed
with unsold chips. RBC Capital reported the inventory buildup
this summer has been higher than usual as global economies slow.
Semiconductor firms "are running 14% above their five-year
average in terms of inventory days," the note said.
One plus: Fabless firms generally hold less inventory than
chipmakers with factories. That's because they can notify foundry
partners to make fewer chips if their customer orders fall, says
Fabless firms are better off when they focus on specific
customers and end-markets, says IHS' Ford. Many are currently
homing in on devices for 4G wireless networks using LTE
(long-term evolution) technology.
NXP Semiconductors (NXPI), spun off from Philips in 2006, aims
to be a leader in NFC (near-field communications) chips built
into smartphones. NFC is a short-range wireless technology used
for mobile payment systems.
Makers of "analog" and "mixed-signal" devices such as
Peregrine and Avago are seeing strong demand in wireless, though
demand has weakened in industrial markets. In smartphones,
mixed-signal devices convert and boost radio frequency
Nomura estimates that smartphone shipments will jump 32% from
last year to 612 million units in 2012.
"Wireless semiconductor stocks should continue to outperform
in the back half of the year," boosted by Apple's iPhone 5 ramp
and new devices launched by Samsung, said Nomura analyst Romit
Intel, Nvidia and other PC-centric firms are rushing to
develop chips for mobile devices.
Still, it's not all about wireless. Shares inMellanox
Technologies (MLNX), a supplier of chips used in data centers
packed with computer servers, have tripled in 2012.
But even for companies doing business with Apple and Samsung
there's cause for concern.
Both Apple and Samsung are designing more of their own chips
internally, says Barclay's Muse. They use foundries to
manufacture the devices. As Apple and Samsung integrate more
features into homegrown chips, they'll have less need for outside
suppliers -- unless they offer something special, he warns.