Huge sales opportunities beckon in the market for connected devices but the challenges are numerous and semiconductor makers must leverage the strengths of component distributors to benefit from what is shaping up as the potential biggest growth area for the entire electronics industry, says research firm McKinsey & Co.
Within a few years the entire IoT value chain could be worth as much as $11 trillion, a trio of McKinsey researcher said, citing the results of a survey done in conjunction with the Global Semiconductor Alliance. The expected surge will result in the shipment of connected devices rising 15 percent to 20 percent at a compounded annual growth rate over the next five years. The number of IoT equipment is also predicted to rise to between 26 billion and 30 billion by 2020, from approximately 7 billion to 10 billion today.
Executives at semiconductor suppliers polled by McKinsey said they expect the market for connected products could become the primary driver of future sales expansion for the industry as smartphones — the current growth driver — reach saturation levels.
“The Internet of Things does indeed represent a major opportunity for semiconductor companies — one that they should begin pursuing now, while the sector is still developing,” said analysts Harold Bauer, Mark Patel and Jan Veira, in the McKinsey report. “We also found, however, that the timing and magnitude of the IoT’s growth may depend on how quickly industry players can address several obstacles, including inadequate security protections, limited customer demand, marketplace fragmentation, a lack of standards, and technology barriers.”
Electronic components distributors are the natural allies semiconductor manufacturers will need to deeply penetrate the IoT value chain, by creating new opportunities and boosting sales and margin, the research firm said. Their involvement in and connection with OEMs across multiple segments of the economy have put distributors in a critical position where they can ensure chipmakers’ IoT offerings reach more sectors of the economy quickly and at optimal costs. They would be able also to provide critical feedback about potential market segments of interest to semiconductor manufacturers.
Semiconductor vendors will need all the support they can get to benefit from the explosive growth which analysts and other observers see ahead for the IoT market. However, while the opportunities appear huge, the challenges are also daunting and include the fragmented nature of the IoT sector, low volume – depending on the device – potentially high development costs and the limited role chips currently have in most connected devices.
McKinsey said semiconductors represent only a small value of each IoT device with the majority consisting of software and integrated platforms. As a result, chipmakers may have to revise their strategic approach for growth in the IoT market and focus on bringing additional values beyond their silicon products, the research firm said.
“[Semiconductor vendors’] traditional focus on silicon, which allowed them to profit in many industries, may not be optimal for the Internet of Things because chips represent only a small portion of the value chain,” McKinsey added. “Instead, semiconductor companies will be required to provide comprehensive solutions—for instance, those that involve security, software, or systems integration services in addition to hardware. As with any major change, this move entails some risk. But it could help semiconductor companies transform from component suppliers to solution providers, allowing them to capture maximum benefits from the Internet of Things.”
This is where distributors can play a role, according to McKinsey. The largest distributors serve tens of thousands of customers and sell into numerous markets, many of them difficult for component vendors to reach directly. Since connected devices have been mainly developed so far for niche markets in consumer and industrial segments ably served by distributors, the companies would be better suited to getting IC platforms developed by chipmakers into multiple sectors without the need for additional and costly development works. This could require that chipmakers alter their operating models to serve niche markets with products designed for mass markets, the McKinsey researchers said.
“Operating models focusing on hardware and embedded software helped semiconductor companies thrive in many high-tech segments, but they may not be well suited to I0T customers,” they said. “A more appropriate organizational structure for the Internet of Things would emphasize a multimarket sales approach and a greater reliance on channel partners, such as distributors, as part of the go-to-market strategy. This arrangement is well suited to the I0T’s fragmented market, which contains very different companies, including many small businesses, with unique needs.”
Some components distributors have picked up on the opportunities identified by McKinsey and have begun developing solutions to help not just their suppliers but also software developers and OEMs benefit from the rapid increase in demand for connected devices. Arrow Electronics Inc., for example, in September launched a service dubbed “Arrow Intelligent Service,” which it said would facilitate the rapid introduction of IoT products by simplifying how manufacturers build and introduce connected devices.
Arrow Intelligent Service’s offerings are focused on the ecosystem rather than simply on components. It brings together a set of tools that would allow developers to “more quickly and inexpensively build applications that interact with IoT hardware through standard web services and Application Programming Interfaces, rather than through complicated and proprietary interfaces and development kits,” the company said in a press statement.
The distributor appears to have anticipated two of the key the concerns expressed by McKinsey; that some semiconductor developers may invest minimally in IoT research because of limited volume applications or fail to realize this emerging market requires a higher level of collaboration and incorporation of hardware, platforms, software and systems. Centennial, Colo.-based Arrow said it already sells discrete IoT building blocks, adding that its Arrow Intelligent Service unit would bring together a range of products that include semiconductors, “embedded computers, data hosting infrastructure, billing, analytics and third-party enterprise applications.”
This strategy would work better than simply selling components to developers because it brings together all of the pieces design engineers and manufacturers need to reach the market quickly with products and systems that can be used in multiple sectors of the economy, according to Aiden Mitchell, VP, semiconductor marketing, at Arrow.
“One of the biggest impediments in this exciting market is the cost and complexity of weaving together the various pieces of the IoT, each with its own unique and often complicated development environments and data structures,” Mitchell said in the statement. “Arrow Intelligent Services is a key initial step in our overall IoT strategy.”
Offerings like this will help semiconductor manufacturers better cope with some of the challenges McKinsey believes have cropped up as the market for connected devices expand. By partnering with distributors and other supply chain services providers within the larger IoT supply chain, semiconductor suppliers would be able to reduce investment costs but still be well-positioned to sell their products into multiple markets.
“Semiconductor companies that want to capture the IoT’s enormous growth potential might be tempted to move ahead quickly, without changing their existing operating model, but this could be a mistake,” McKinsey said. “The Internet of Things is unlike any high-tech segment that they have previously served, and their traditional strategies may not succeed with the new customer base. With so much at stake, semiconductor companies need to re-evaluate all aspects of their businesses and potentially make some significant changes.”