After market downturn in 2015 and first half of 2016, semiconductors industry recovered and is projected for strong year-over-year growth in 2017 (+7.2%) due to inventory replenishment, expanding memory market and stronger pricing. By 2019, market will continue rising on 3.9% CAGR. Overall digitalization and increasing application of Internet of Things are driving the demand for sensor-enabled industrial equipment and “smart” automotive components. Industrial (+10.3% CAGR) and Automotive (+6.9% CAGR) are the fastest growing application areas, representing 45% of total semiconductor revenue increment of USD +41.2bn by 2019. 

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IoT CALLS FOR STREAMLINED SUPPLY CHAINS AND NEW DISTRIBUTION PLATFORMS

The slow-growth outlook for traditional applications such as smartphones and PCs highlights the importance of semiconductor markets outside of these categories. IoT enabled devices will surge, spiking the demand for low dollar value semiconductors used. Thus, for semiconductor companies IoT represents high-volume low-value market that will require streamlined supply chains. 

IoT devices market is still very fragmented with numerous small and medium businesses playing an important role on the market. Demand increase will result in smaller volumes per order and more scattered customer base. To capitalize on such market conditions semiconductor vendors will require new distribution models such as e-Commerce platforms.

MARKET CONSOLIDATION CONTINUES TRIGGERING SUPPLY CHAINS RE-DESIGN

Semiconductor M&A activity set a new aggregate value record of nearly USD 125 bn (+21% YoY) in 2016 as IoT- and automobile-driven deal-making gains momentum. IoT drove 24 deals accounting for 65% of 2016 aggregate deals value. Industry consolidation has boosted revenue growth for Top 25 semiconductor vendors in 2016 to +7.9% YoY. Based on KPMG Global Semiconductor Survey, M&A spending will continue rising in 2017 as most of the new deals will be focused on adjacent technologies to diversify and grow revenue. Continued M&A activity will result in mid-term structural re-design of supply chains. These accelerated market consolidations will, in most cases, drive network optimization.

CHINA SURGES IN CAPITAL SPENDING AND WAFER CAPACITY

In 2016, 69% of total Capital Spending worldwide was in Asia Pacific, as spending in the region increased by USD + 4.3 bn YoY, led by China, which alone had USD +4.5 bn YoY increment. China will continue the strong spending until 2019 with 10.8% CAGR, more than 3x faster growth than the rest of the world. Government stimulus package during the next five years will increase the demand for semiconductor manufacturing equipment in China.

As a result of increased spending, current 300-millimeter wafer capacity in China (415,500 wafers per month in 2016) could almost triple by 2020. Technology business unit leaders should take advantage of the increased investment opportunity in China. On the other hand, China's aggressive plans to develop an indigenous semiconductor manufacturing capability will likely create unbalanced supply in commodities and the low-end semiconductor market by 2020. All above mentioned effects of “Made in China 2025” strategy will shift supply chain focus and lead to new partnership models for semiconductor companies in the years to come.

Published: May 2017

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