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For the past decade the global semiconductor industry has experienced a prolonged period of lacklustre growth – by its standards at at any rate.
In its heyday, the computer and consumer electronics revolution saw the market grow by an average of 18 per cent a year between 1973 and 1996. One of the key enablers of this growth has been the ubiquity of electronic devices in everyday life, which allowed the prices of end-user products to decrease and the customer base to expand.
However, in recent times growth has fallen back significantly in spite of the internet and mobile telephone booms and it is most unlikely that long-term rates will return to the levels of the past.
Nonetheless, the industry is at present going through several important and far-reaching shifts that will underpin a renewed growth spurt over the next 10 years.
Two forces are preparing to drive this growth. The first surrounds the emergence of China which, based on current trends, will be the largest single semiconductor market in the world within five years.
China’s explosive growth means that its domestic semiconductor companies – unknown today – will rapidly become powerful global players that will totally reshape the market, much like the then-emerging semiconductor companies in Taiwan, Korea, and Singapore did in the past.
Today’s semiconductor giants must balance their centre of gravity towards east Asia in order to capitalise both on China as a market and on China as the global research and development hub that it will inevitably become over the next decade.
The proliferation of new terminals such as multimedia mobile phones, game consoles, and digital TV sets that are now combining previously separated products and functions into a single box is the second significant factor driving growth. These are often built around a single chip.
The resulting convergence of devices that integrate storage, security, multimedia, mobility, connectivity and computing on the same piece of silicon represents an enormous growth opportunity for the global semiconductor industry. This is focused on consumer architectures.
To meet the challenges of this consumer-driven marketplace, the breadth of knowledge and investment required to build the digital platforms that underpin these complex devices will accelerate industry consolidation.
This will occur as different players come together to share the massive associated R&D and manufacturing costs.
Today, the investment required for a new state-of-the-art fabrication module is around $4bn. In 10 years, when feature sizes will shrink and wafers may grow, the industry anticipates those costs to be in the range of $6bn to $10bn.
Interactions between process parameters and circuit design solutions are becoming even more critical. Close co-operation between the process development and integrated circuit design teams are one of the core elements of success.
Another key issue is the increased complexity of the software that drives these converged devices. To cope with this, chip manufacturers must help their customers shorten their time-to-market and decrease their costs.
This means that chip manufacturers must often supply complete reference designs to enable customers to bring their products to market more quickly. In fact, semiconductor companies must be able to offer total solutions, complementing Systems-on-Chips with what we call Systems-above-Chips. The Systems-above-Chips integrate all the functions required to build the final products, including application software and any manufacturing tooling and specifications.
At the same time, product life cycles are shrinking fast and device manufacturers are launching more models faster than ever before. For example, Nokia launched 34 handsets in the first half of 2005, compared with 25 throughout the whole of 2004.
All this entails an even larger role for chip companies to deliver full system platforms, which greatly increase the strategic importance of semiconductors in the electronic industry food chain. This will also boost revenue and profitability in the medium term.
In order to succeed in this challenge, semiconductor companies need to understand better the markets and customers they are serving. All parties need to collaborate in order to share key knowledge on applications, technology and most importantly, ideas.
In this view, they should overcome their traditional attitude of being very protective of their own intellectual property.
The ultimate goal is to integrate various functions and quickly bring them into single pieces of silicon or into complex system platforms.
Successful companies will be those that not only possess a broad product portfolio and master a large palette of hardware and software technologies. In addition to this, they will also have to be able to drive industry-wide innovations to support their products as well as the systems or platforms in which their products work.
Last, but not least, cultural and organisational change will be a main driver of change for the future. In a fast-changing world, winners will derive competitive advantage by empowering and harnessing know-ledgeable individuals at all levels, regardless of location.
The electronic industry is facing many challenges and opportunities, as it has done since its birth in the late 1950s.
Today, the potential rewards are enormous for semiconductor companies that can work with their partners and customers to master the complexity of developing digital devices in the convergence era.
This is no easy challenge and it is one that requires more than just scale to master.
Success will depend on deep industry knowledge together with the ability to co-operate but above all, the flexibility to adapt to ever-changing business scenarios.
The story of the semiconductor industry has always been a tale of the unexpected and the next few years will be no different.
Andrea Cuomo is chief strategy and technology officer at STMicroelectronics