European Chip manufacturers have to be more aggressive

From 2000 to 2007, growth was an annual 3.3%. The slowdown is due to overcapacity and strong cyclical fluctuations. And things won't be getting better anytime soon: New Asian companies are taking over the global mass market for computer chips – to the detriment of established European and Japanese semiconductor manufacturers. "For years, established providers have been confronted with an increasingly difficult international market environment," says Martin Eisenhut, Partner at Roland Berger Strategy Consultants. "Our current analysis outlines four possible scenarios for the future. Clearly, only manufacturers that can sustainably offer high value-added products on the global market will be able to beat the lower-priced competitors from Asia." Higher added value through differentiation The new Roland Berger study, "Opportunities and challenges beyond Moore's Law", reveals that companies do not necessarily have to follow the well-known principle in order to succeed on the semiconductor market. Moore's Law states that the industry will double the number of transistors on a computer chip every one-and-a-half to two years – at the same unit cost. However, this requires high investment, often supported by government aid. For this reason, the center of gravity of this business model has been shifting more and more to Asia. As Roland Berger experts see it, the alternative for Europe and Japan's highly developed semiconductor industry lies in new generations of computer chips that offer a broader range of applications. They call this the "More than Moore" approach. This area, which already accounts for about 40% of the semiconductor market, is growing twice as fast as the traditional mass market. "Numerous innovations, for example in mobile communications, the automotive industry or renewable energy, have boosted demand for semiconductors with certain features," explains Michael Alexander, Senior Advisor at Roland Berger Strategy Consultants. "And it's in these areas that we expect major growth potential due to the widespread use of new, mobile devices and energy-saving products as well as the storage of enormous amounts of data." Four scenarios for the industry Using these current developments on the global semiconductor market, Roland Berger has identified four possible scenarios for companies that pursue the "More than Moore" approach. Which scenario will actually come to pass depends primarily on where the demand for semiconductors comes from in the next few years. It may arise from the basic supply to emerging markets or from new, high-quality products for mature markets. In terms of demand, the decisive factor will be whether Asian manufacturers succeed in utilizing their ample factory capacity to develop highly differentiated solutions. The four scenarios are as follows:

• A mass market forms: Simple and affordable products are gaining an increasing foothold on the global market, even for complex applications. Large Asian corporations and a few ambitious Chinese chip producers are the winners in this scenario. American, Japanese and European providers have few prospects here.
• Globalization of complex applications: New killer applications are popping up, international standards are emerging and the importance of regional customer relations is waning. In this environment, Asian and American groups with a strong international presence will have it relatively easy. Mergers between regional providers are possible and will strengthen their market positions.
• Incumbent sweet spot: In this scenario, manufacturers of high value-added products for complex applications need not fear new competitors. The established companies in Europe and Japan are at a clear advantage.
• Gravity shift for established providers: Over time, even the chip industry's premium segment will shift toward emerging markets like China and India. Established providers of high-performance semiconductor products will follow this trend in good time and strengthen their global presence in these growth markets. Companies that don't manage to make this transformation will lose out.

Further consolidation of the industry in sight Overall, the experts at Roland Berger expect the international semiconductor market to consolidate further. Already today, the industry's top five companies account for up to 40% of the market's total sales. "A rising number of small providers will get into financial straits over the coming years, as their profitability declines more and more," predicts Eisenhut. This means industry companies should take care to ensure that their return on invested capital (ROIC) stays above 10% over the course of an economic cycle. Eisenhut continues: "That's the only way for companies to be able to stay profitable and make the necessary investments in developing innovative solutions." For these reasons, the semiconductor industry has to decide today on the right strategy for tomorrow. Two paths are possible. Some firms will stick to their current strategy: growing organically, closing unprofitable production locations and drawing on government support. Other companies will pursue a more creative approach and attempt to reposition themselves on the market through innovative business models, acquisitions or partnerships. "Both options could be successful – provided companies have carefully reviewed their business models in order to determine what strategy fits best," summarizes Eisenhut. "However, in every business model, it's important to keep pay close attention to at-risk profitability and keep liquidity and costs under control."