McKinsey on Semiconductors McKinsey on Semiconductors Number 1, 5 15 22 33 Autumn 2011 Creating value in Getting customers The challenge The evolution the semiconductor to say, ‘The price of China of business models in a industry is right!’ disrupted value chain 42 50 57 64 71 From source Will analog be as Getting Mo(o)re out of LED at the crossroads: Mastering variability to drain: Fixing the good tomorrow as it semiconductor R&D Scenic route or in complex supply chain was yesterday? expressway? environments Number 1, Autumn 2011 McKinsey on Semiconductors is written Editor: Brendan Hasenstab This publication is not intended to by experts and practitioners in McKinsey Editorial Production: Elizabeth Brown, be used as the basis for any transaction. & Company’s Semiconductors practice. Richard Bucci, Heather Byer, Nadia Nothing herein shall be construed as Davis, Torea Frey, John C. Sanchez, legal, financial, accounting, investment, To send comments or Venetia Simcock, Sneha Vats or other type of professional advice. If request copies, e-mail us: Art Direction and Design: Cary Shoda any such advice is required, the services McKinsey_on_Semiconductors@ of appropriate advisers should be McKinsey.com. Illustrations by Celia Johnson sought. No part of this publication may be copied or redistributed in any Editorial Board: Harald Bauer, Claus McKinsey & Company form without the prior written permission Benkert, Sri Kaza, Ulrich Naeher, Industry Publications of McKinsey & Company. Olivia Nottebohm, Nick Santhanam, Editor-in-Chief: Saul Rosenberg Florian Weig, Bill Wiseman Managing Editor: Lucia Rahilly Copyright © 2011 McKinsey & Company. All rights reserved. 1 McKinsey on Semiconductors Number 1, Autumn 2011 2 5 15 22 33 Introduction Creating value in Getting customers The challenge The evolution of the semiconductor to say, ‘The price of China business models in a industry is right!’ disrupted value chain As barriers to Chinese In light of increasing In a world where too many competition weaken, The progress predicted consolidation throughout companies still believe local and foreign semi- by Moore’s Law has the semiconductor that ‘if we build it they will conductor players slowed in recent years. value chain, companies come,’ practitioners of must consider issues such Players across the that wish to succeed semiconductor sales know as intellectual property semiconductor value chain must move quickly to otherwise. This article and knowledge transfer must adjust their close capability gaps. lays out the elements to fully capture approaches to compete as essential to extracting the opportunities in this the industry continues most value for current important market. to evolve. products by effectively communicating the true value of those products to customers. 42 50 57 64 71 From source to drain: Will analog be as Getting Mo(o)re out of LED at the crossroads: Mastering variability Fixing the supply chain good tomorrow as it semiconductor R&D Scenic route or in complex was yesterday? expressway? environments Supply-chain excellence Excellence in the R&D has proved elusive Many worry that 300mm function is only one piece Although adoption of Variability adds cost to for semiconductor players, manufacturing capacity of a world-class product- LED lighting has been slow, semiconductor production but a handful of will destabilize pricing development strategy. Via roadblocks can be systems, but the ability initiatives can yield across the analog semicon- a new diagnostic and overcome with a compre- to cope with it can also be significant improvement. ductor market. We jointly developed plan, hensive approach a critical source of profit. argue that only a few seg- we can significantly that includes operational A new approach goes ments have reason to reduce time to market for improvements, better beyond traditional tools be concerned. new chips while also marketing of products, and to help companies improving overall quality. other efforts. control variability in their processes and make intelligent trade-offs in order to maximize return. 2 Introduction Given the enormous and endlessly expanding role played by technology in the world economy, the layperson might be forgiven for assuming these are André Andonian, easy times for semiconductor companies. As our Harald Bauer, Sri Kaza, inaugural edition of McKinsey on Semiconductors Ulrich Naeher, notes, things are rather more complicated. and Nick Santhanam On the one hand, the semiconductor industry is certainly enormous: it has grown to almost $300 billion, driven by a cycle of continuous improvements in technology, growth in demand, and innovation in end-use applications. On the other hand, as the authors of “Creating value in the semiconductor industry” note, while the semiconductor industry contributes dispropor- tionately to growth in US labor productivity and delivers tremendous value to consumers, most chip makers capture only a small percentage of the value they help create. In fact, excluding Intel, which made handsome profits indeed, the industry destroyed approximately $47 billion in value from 1996 to 2009. If semiconductor players are to meet market pressure to grow, they must lead convincingly on technology in their segment or grow in subsegments where they can differentiate themselves. China is a critical source of growth for nearly all established semiconductor players. Luckily for them, China has not yet developed a strong 3 indigenous semiconductor business, despite as smart phones and mobile computing. Of 20 years of effort. However, the forces that have course, the challenges differ by subsegment. “The held China back are weakening, and the evolution of business models in a disrupted government has launched a slate of initiatives value chain” proposes models for success in the aimed at developing strengths in three fabless segment, explores the limits of vertical important new semiconductor markets: cloud disintegration, and discusses how miniaturization computing, the “Internet of Things,” and is bringing success to outsourced semiconductor electric vehicles. The result, as the authors of “The assembly and test (OSAT) players. challenge of China” show, is that China will fight to hold on to its own market and may even One piece of the industry has been free from compete for the developed-world market, too. Moore’s Law’s punishing investment implications: the analog segment has historically been Many of the industry’s challenges relate to stable and profitable. In “Will analog be as good keeping up with rapacious demand for new and tomorrow as it was yesterday?” the authors better products. So it is ironic that “LED at examine the implications of the industry’s first the crossroads: Scenic route or expressway?” 300mm-based manufacturing capacity. concerns an undoubted technological They ask whether this stability and profitability advance that is making extraordinarily slow will endure. progress into general use. The authors discuss five barriers to adoption that, if addressed, Despite many unsettling strategic issues, all could lead to an LED-dominated lighting semiconductor companies must still find ways to marketplace by 2015. improve bottom-line results in the near term. The supply chain offers one important opportunity. Indeed, one might say the whole industry is at a Obviously, an industry that combines high crossroads: breakthrough innovations are needed capital intensity with long cycle times and a to advance to the next node. Costs for manu- position far down the value chain will suffer supply- facturing equipment are rising exponentially. Few chain difficulties. But some are avoidable. can afford to compete on the technology As the authors of “From source to drain: Fixing frontier created by Moore’s Law. And growth is the supply chain” note, supply-chain performance concentrating only in select segments such varies significantly, even within the same 4 McKinsey on Semiconductors Autumn 2011 applications. The authors analyze excellent supply We close this issue with “Mastering variability in chains and discuss what it takes to create one. complex environments.” The combination of semiconductors’ complexity and the pace of Pricing represents another opportunity. The industry change make variability—a deep semiconductor industry, in which price declines are challenge to profitability—very difficult to manage. as certain as death and taxes, is particularly What can be done? The authors discuss a way prone to discounting to maintain market share. The of quantifying the impact of changes in lead time authors of “Getting customers to say, ‘The price and utilization on variability that can help is right!’” explain how companies can school their manufacturers manage that variability beyond what sales forces to get customers to see products can be done with traditional methods. through the lens of their value, rather than their cost. Only through value selling, they suggest, can We hope these essays encourage you on your the discounting cycle be broken. journey toward excellence. We invite comments at [email protected]. Next, we take on research and development. How can companies overcome a long history of time and budget overruns in the face of ever- changing customer expectations? The authors of Harald Bauer André Andonian “Getting Mo(o)re out of semiconductor R&D” Principal Director explain that getting R&D right implicates many functions, including marketing, sales, pro- duction, and even supply chain, and so urge a Ulrich Naeher Sri Kaza