Obsolescence Insurance, a New High-Margin Business for EMS Companies
by 
Lisa Cairns
If there’s an example of positive impacts of consolidation on a market, the past few years in the memory sector could well be that example. I have to admit, as a general rule, I’m leery of waves of M&A that push sectors toward oligopolies. Along this vein, I confess to having been concerned during the heyday of the memory market consolidation, worried that the lack of competition would negatively impact healthy ASP, competition, and the availability of stock, particularly from a risk management perspective. However, it had looked as though the many consolidations had strengthened the memory sector and brought stability and steady production supporting sustainable ASPs.
Overall, the memory sector had been doing better post-consolidation, at least until the past year. Memory’s tale of woe has generally related back to the pricing and demand balance; the recent spate of troubles was no different. For example, Micron’s latest comments on their reported losses for 2Q16 underscore the pressures that have been plaguing memory recently, particularly for DRAM but also NAND flash. As EETimes reported on Micron’s announcement:
Micron said DRAM average selling prices (ASPs) and sales volumes each declined about 10% compared with the fiscal first quarter. Micron said NAND sales declined about 6% in the second quarter, primarily due to a 15% decline in ASPs partially offset by higher sales volumes. Micron executives said they don’t expect the pricing pressures that have plagued the memory chip industry in recent months to linger. But, they said, Micron expects to improve its competitive position in the second half of 2016 based on planned increases in bit shipments and cost reductions.
Overall though, the news has not been great for the semiconductor sector for a while, particularly with the disappointments in 2015 after all the positive momentum in 2014. So far, 2016 has been bumpy and replete with the ongoing fury of merger and acquisition. Most recently we’ve seen the announcement of Marvell Technology Group’s leadership stepping down, possibly signaling a sale of the company, as reported by Reuters.
Among the speculation as to the declining position of Marvell, Reuters noted the following: “Marvell, which has a market value of about $5 billion, has been plagued by a barrage of problems even as a declining market for personal computers has hurt demand for its chips used in hard disk drives.”
The impact of the PC decline has certainly affected many companies along the semiconductor and electronics supply chain, Marvell is not unique in this regard. General analyst consensus is not very positive for the semiconductor industry this year, as most peg the year to be riddled with challenges and likely declining demand. Recently, Gartner released the final numbers for 2015, indicating that the worldwide revenue for semiconductors was down 2.3% year-over-year. However, as Gartner further noted in the release, due the high number of M&As, the actual decline is somewhat masked, and would have shown a 1.7% decline in revenue for the top 25 vendors, and the rest a 3.9% decline.
So where is the good news in this story of merger mania? Is there something good to be said for all of the consolidation and what will the path forward look like? On the positive side of the mergers, it is clear that the shape of our industry in terms of demand, volume, and price points continues to be in a state of transition as we move from the technologies we knew and grew to the next wave of end-products and services that are re-shaping just about everything, albeit more slowly than anticipated.
Smart technology, or Industry 4.0, is gaining momentum, as IHS underscored at the opening of the year, but still faces challenges that have yet to be conquered, especially pertaining to standards and security, to name top points that thread across markets and sectors. On the other hand, growth drivers for revenue and volume increases are seen on the horizon, according to many major chip manufacturers across sectors, who are seeing improved competitive positions (due certainly to the fallout of the wider industry M&A activity), as well as the important moment of improved demand for high-end process chips and particularly the ROI from 16nm technology in production.
The question bears asking though, was the memory sector’s experience of heavy consolidation followed by improved market conditions a fleeting moment or was the significant shrinking of competitors beneficial to the long-term health and dynamics of the sector and our industry writ large? Similarly, and as a follow-on, will the current, wider swath of M&As cull weaker companies and create opportunities for better aligned companies with the latest technology demands and innovations?
There is no answer at this point, honestly, but it bears considering that the global economic outlook is uncertain and somewhat weakened, however, the longer horizon for the end of 2016 and forward is one that points to stabilizing markets and sustainable growth rates over the remainder of the decade. IoT and Industry 4.0 weigh heavily into the growth level opportunities for our industry, that is obvious, when and how the markets (and floodgates?) will open depends on everything from innovation within our industry to solving the challenges still on the table.
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