Many purchasers at OEMs and electronics manufacturing services (EMSs) have seen their semiconductor supplier choices shrink over the past 18 months because of the record amount of mergers and acquisitions in the industry.
The reduction in the number of chip suppliers has caused much consternation among buyers, who are concerned about the long-term impact that consolidation will have on competitiveness, prices, lead times, and capacity in the supply base.
The good news is the amount of consolidation in the semiconductor industry in 2016 has eased compared to 2015 when there were 21 major mergers and acquisitions totaling $103.8 billion, according to researcher IC Insights. For the first three quarters of 2016, there have been seven major mergers and acquisitions totaling about $55.3 billion.
But the bad news for buyers is that more consolidation is likely. While there have been fewer acquisitions so far in 2016, “I don’t know if we can say that the wave of acquisitions is over,” said Brian Matas, vice president of market research for IC Insights.
While the breakneck pace of consolidation has scaled back, mergers and acquisitions will continue into 2017, although “the number of attractive options from both a technology and financial perspective is growing slimmer,” said Matas. However, potential M&A deals next year could be between very large companies, he said.
Consolidation is occurring because there has been slow growth in the semiconductor industry in recent years and chipmakers see it as a way to increase revenue, build market share, and improve profit margins. However, industry analysts and suppliers say it’s not just about growing sales during a period of slow growth that is driving consolidation. The high cost of producing new chips on new process technologies and the overall high-cost of developing new semiconductors and new chip technologies are also contributing to the trend.
They point out that the cost of developing new technologies and products and the price of new fabs is becoming prohibitive even for some of the largest chipmakers.
Suppliers also say that consolidation is good for the electronics supply chain because it helps merging companies become financially healthy and have the resources to invest in new technology, products, and capacity.
Fewer Options for Buyers
That may be true, but consolidation often causes sourcing headaches for buyers at OEMs and EMS providers. In the short term, consolidation means fewer sourcing options for buyers. It’s common and preferable for buyers to have two or more sources for a chip for a design. When one of those sources disappears because the supplier merged with another chipmaker, buyers often need to qualify another supplier for the part. With the amount of consolidation that has occurred, finding another source is becoming more difficult and there is risk that an electronics manufacturer may not be able to get all the parts it needs in a timely fashion.
Some buyers also question whether two companies that merged provide the same level of service as the individual suppliers did prior to the partnership. Merged companies often combine operations and resources and reduce their number of employees to cut costs.
Another concern of buyers is that when suppliers merge, they “rationalize” their product portfolios, eliminating some “redundant” products, which had previously been manufactured by both of the merging suppliers.
Buyers also want to know if merged companies can fulfill orders of all customers at the same cost and what impact the merger will have on lead times. Long lead times also increase risk for an OEM or EMS provider.
Some distributors report that consolidation is resulting in greater dependence on distributors due in part to concern about lead times.
Karim Yasmine, corporate vice president for Future Electronics, recently told me that buyers are increasingly looking to Future because of all the mergers and acquisitions in the supply base. “Customers are being put into a position of a more limited supply base and are increasing their dependency on us to hold inventory,” he said.
Buyers are saying, “‘I need you to be my supply chain insurance,’” he said. Inventory management programs are one way distributors help reduce risk for customers.
Customers may need their distributors to hold more inventory for them due in part to stretching lead times.
“Standard industry lead times have moved out,” said Yasmine. He said 10 years ago, when there were more semiconductor suppliers, lead times for some products “such as microcontrollers were four to six weeks. Today those lead times are between 12 to 16 weeks.”
He said customers don’t want to “take on that additional liability of that lead-time change. They are looking for partners like us to take it on,” said Yasmine.
“Customers don’t want inventory, no one wants inventory, but we are in the business of holding inventory,” he said.