The semiconductor industry today faces a monumental challenge: putting the brakes on a ballooning cost structure that is making many fabless companies uncompetitive.
As much as 80% of a fabless company's revenue is eaten up by the cost of goods sold (COGS)—and the situation is only getting worse according to Accenture Strategy analysis. In 2014, top fabless companies spent nearly $33 billion on COGS. That's up a startling 65% from 2010, and it's caught the attention of investors who increasingly are calling on companies to take action.
Why the sharp increase? Conventional wisdom is a major culprit. Most companies have long believed they perform best when they focus on one manufacturing sourcing strategy and optimize it to become highly efficient. But that thinking is misguided. When companies build rigid processes to support a single strategy, they lose the flexibility to make necessary operational changes to control expenses. Fabless companies' strict adherence to either the Wafer Buy or Known Good Die strategy is constraining their ability to more effectively rein in supply chain costs.
Compounding the problem is that too many fabless companies are defaulting to Known Good Die. They're falling into the convenience trap, paying management fees associated with this strategy when they don't have to or shouldn't—just because it's easy to make foundries responsible for chip production. Those management fees are adding 2% to 4% to companies' cost structure.
At an even more basic level, many fabless companies aren't deploying the optimal strategy for their business because they use the wrong criteria to determine which sourcing strategy to adopt. They typically rely on the type of product a chip is destined for or the company's business model to shape their decision. This can lead to a mismatch between the strategy and the needs of business, and compromise a company's ability to control production costs.
In short, fabless companies are squandering millions of dollars and eroding margins because of inefficient manufacturing and testing of chips—and that must change for companies to restore competitiveness and profitable growth.
The solution: embrace a hybrid, flexible approach to manufacturing sourcing. Tomorrow, we'll talk more about this approach and how to forge a successful path that meets demand while maintaining flexibility.
James Wildenburg co-authored this piece. Wildenberg, also a managing director for Accenture Strategy, helps communications, media, and technology companies around the world develop and execute transformation initiatives that enable them to respond to changing customer demands and market opportunities. He focuses on the areas of customer care, operations, mergers and acquisitions, digital disruption and business strategy, and is a prolific author on topics related to supply chain and organizational performance. Wildenberg is based in Atlanta.