The COVID-19 pandemic has disrupted a semiconductor industry ecosystem based on a complex interrelationship between suppliers, each of which offers unique high-tech services. Nevertheless, a crisis also creates opportunities. Once the immediate fire-fighting stage is completed, industry leaders can turn their attention to calculated but bold moves in four distinct areas, which we think will allow them to emerge stronger than ever before.
Chipmakers (chip foundries, integrated device manufacturers (IDMs), and fabless players) - are currently reacting to a variety of short-term to medium-term implications from the crisis.
In the short term, the impact has mostly been felt in the supply chain, and in operations and manufacturing. The outcomes we are witnessing include increase in stock-carrying and direct purchasing costs, product quality risks, capacity shortages, suboptimal customer-product reallocation, and a decline in customer service.
In the medium term, various semiconductor application areas will undergo changes in previous patterns of growth. Data center, communications, personal computer and healthcare applications will benefit from the crisis, or certainly be the least affected. Asian players may receive a boost given that there is less direct disruption in their own local operations and markets.
Prior to the onset of the pandemic, industry analysts were expecting 2020 to be a year of recovery for the semiconductor market, following the inventory-driven contraction of 2019. We are seeing significant revisions in these forecasts, with IDC and VLSI Research expecting an overall contraction in the semiconductor market of more than 5% in 2020, followed by a recovery in 2021. Analysis of past downturns suggests that leaders should resist kneejerk responses now. After the dot-com bubble and the financial crisis, all segments bounced back within approximately one year. Indeed, fabless players and foundries (fabs) soon found themselves on an even steeper growth trajectory than before.
Companies that want to prepare themselves for growth in the post-COVID-19 world should make bold, transformational moves in four areas:
1. Rebalance product portfolio: Identify those application and customer segments whose business outlook will undergo significant change. These segments should then be placed within an overall framework of required firm-wide differentiating capabilities. The portfolio of research and development (R&D) platforms and projects should be reprioritized. There will be numerous opportunities to monetize or, alternatively, to acquire relevant external intellectual property (IP).
Manufacturing and operations footprint as well as processes should be adjusted accordingly. Subcontracting, carve-out or spinoff options ought to be considered.
2. Reassess cost structure: The crisis opens up the opportunity for a fundamental rethink of the company’s cost structure. Scrutinize every spending category, even those previously considered to be unchangeable. Sometimes this audit will lead to a necessary revision of the operating model and ways of working. Measures may include:
a. R&D footprint: Use best best-cost approach the R&D footprint, and outsource any non-critical engineering.
b. IT and engineering tools: Increase the use of enterprise collaboration tools to achieve greater overall efficiency, and push for further adoption of electronic design automation (EDA) tools, supplier collaboration platforms, and tools for automation and big data in manufacturing.
c. Facilities: Rationalize the footprint of facilities such as small tech & sales offices.
3. Revitalize the company culture and update skills: Organizational culture and skills are vital if chipmakers are to become even more agile and innovative. During more stable periods, revitalizing the company culture and training employees in new skills are often set aside for another day because the timing does not seem right. The industry’s re-emergence from the crisis is a unique opportunity to press the reboot button, building on the current mindset of employees who will appreciate that change is inevitable and should be embraced.
4. Look out for M&A opportunities: Buyers who enter into mergers and acquisitions during downturns typically outperform their peers by more than 7% in the following 12 months. Moreover, results from our ongoing PwC COVID-19 CFO Survey indicate that more than 40% of CFOs are currently displaying either an unchanged or increased appetite for deals. Leading players will use the downturn to make calculated acquisitions, carve-outs or spin-offs, and purchase IP portfolios.
It is imperative that semiconductor industry leaders respond to this crisis in a considered yet undaunted way. PwC Strategy& has a wealth of insight, experience and tools [such as COVID-19 Navigator] to help chipmakers devise and execute mitigation plans, and chart a strategic way forward to succeed in this uncertain environment.
Andris Ogrins, Amit Adalti, Anand Sundaram, Gabriele Capomasi, Shreya Ruikar, Lyudmyla Kovalenko, and Giuseppe Franza also contributed to this article.