Industry Analysis For Intel – US Semiconductor Industry

Industry’s Dominant Economic Characteristics

Intel Corporation operates in the Standard Industrial Classification (SIC) code 3674 listed as the Semiconductor and related devices and The North American Industry Classification System (NAICS) code 334413 listed as the Semiconductor and related device manufacturing. Companies operating in the U.S. Semiconductor and related device industry primarily engage in manufacturing semiconductors and other related solid devices. Some of the products manufactured in the industry include integrated circuits, diodes, solar cells, optoelectronic devices, memory chips, transistors, and microprocessors among other electronic devices (Boyd, 2011).

The U.S semiconductors industry is growing greener and faster. Companies are providing smarter and innovative solutions to the customers. Technological aspects have ensured that companies can manufacture devices that offer optimal performance at lower production costs. Emerging markets in China, Brazil, India and Africa offer expansion opportunities for companies operating in this industry. The market is changing, and consumers are going for eco-friendly products; companies are now manufacturing products with recyclable accessories (Chen & Lo, 2016).

This study seeks to analyse the economic and financial performance as well as present and the future trends of the U.S. semiconductor industry. The study focuses on different aspects of the industry which often influence the decision making by concerned stakeholders. In particular, the findings will be of help to companies and investors in determining the market dynamics and making financial decisions.

The key characteristics of the U.S. semiconductor industry include significant players and competition level, industry growth rate, revenue growth rate in the industry, Expenses, financial performance and the entry and exit barriers.

The U.S semiconductor industry is at the maturity stage of the business life cycle. Companies focus more on innovation for growth and expansion. Over 800 companies are operating in the industry (Brown & Linden, 2011). However, the leading manufacturers and suppliers of semiconductor products in the industry, based on Market Cap, are;

The industry has approximately 900 players with a growth of 1.7% per annum. Moreover, the semiconductor and related device industry are among the best performing export industries in America. The industry provides over 99,000 direct jobs and approximately 500,000 indirect jobs to Americans.

The U.S semiconductor industry is very competitive. The average growth rate in the industry is 12.4% per annum. The industry is expected to generate US$ 463.41 billion in revenue based on the past trend. In 2017, Samsung Group, the most significant player in the industry, generated the highest revenue of US$ 59.88 billion. The revenue growth rate in the industry between 2013 and 2018 is as shown below;

The significant expenses in the U.S. semiconductor industry arise from the acquisition of raw materials, labour, outsourcing and transportation and logistics. The industrial expenditure increases at an average of 6.1% per annum. The overall expenditure is expected to reach US$ 102 billion in 2018. The expenses growth rate in the industry between 2013 and 2018 is as shown below;

Financial ratio refers to a quantitative analysis technique used to evaluate different aspects of company performance during a given period. Ratio analysis investigates financial and financial aspects such as liquidity, efficiency, profitability and solvency. Profitability ratios analyse the ability of a company to generate revenue. Examples of profitability ratios include Return on assets and Return on equity (English, 2011). Liquidity ratios evaluate the ability of a company to meet its short-term financial obligations. Examples of liquidity ratios include the current ratio and quick acid test ratio. Lastly, efficiency ratio evaluates the ability of a company to generate income using its assets. Example of efficiency ratios is asset turnover, account receivable, working capital, inventory turnover among others (Deegan, 2013).

Competition and competitors

This section discusses the liquidity, efficiency, and profitability ratios for the U.S. semiconductor industry using the 2018 financial statements. Samsung Electronics and Intel Corporation have been chosen for comparative analysis. The information has been summarised as shown in the table below;

Return on asset evaluates the profitability level of a company compared to its average total assets ability. Return on asset of Intel Corporation is 9.95 which higher than the Samsung’s 5.56. The industry’s return on asset is 1.06. Therefore, Intel is the most profitable while the industry is least profitable (Kaplan, 2012).

Return on equity evaluates the ability of a company to generate revenue using the shareholders’ equity. Return on equity of Intel Corporation is 12.93 which higher than the Intel’s 10.11. The industry’s return on asset is 1.88. Therefore, Intel is the most profitable while the industry is least profitable (Kaplan, 2012).

Current ratio evaluates the ability of a company to meet its short financial obligations using its current assets. The analysis shows that the current ratio of Intel was 2.54 which was highest than Samsung’s 1.52 and industry’s 2.19. Thus, Intel maintains most liquidity (Tracy, 2012).

Quick Ratio evaluates the ability of a company to meet its short financial obligations using its most liquid current asset. Therefore, quick ratio is calculated after deducting inventories and prepaid expenses from the current currents. The analysis shows that the current ratio of Intel was 1.33 which was highest than Samsung’s 0.99 and industry’s 0.61. Thus, Intel maintains most liquidity (English, 2011).

Receivable Turnover evaluates the number of times a company can turn its receivables into cash. The analysis shows that Intel had the highest receivable turnover of 17.53 followed by Samsung 10.47 while the industry came last at 5.03. Thus, Intel had the highest efficiency level among the three.

Inventory Turnover evaluates the number of times a company can turn its inventory into cash. The analysis shows that Samsung had the highest inventory turnover of 10.28 followed Intel by 4.71 while the industry came last at 3.79. Thus, Samsung had the highest efficiency level of the three.

Asset Turnover evaluates the number of times a company can turn its asset into cash. The analysis shows that Samsung had the highest asset turnover of 1.22 followed Intel by 0.7 while the industry came last at 0.27. Thus, Samsung had the highest efficiency level among the three (English, 2011).

It is for new entries to successfully penetrate and succeed in the semiconductor industry because of the required high start-up expenditure. Large can protect the market against small and new companies using economies of scale. However, small companies are investing in technology, research and development. Besides high start-up cost, high technology and software requirements also hinder new companies from entering the industry. However, it is easier to exit the industry as far as a company has fulfilled the legal obligation (Okada, 2012).

The key factors that influence competition in the semiconductor industry are buyers and suppliers bargaining power, rivalry among key players in the industry, and the threat of substitutes.

Industry growth rate

Suppliers bargaining power: Suppliers have average bargaining power. Large players in the semiconductor industry enjoy the power of choosing their suppliers among thousands. Such companies can quickly minimise the power of suppliers by having several suppliers. However, suppliers have formed several groups as a mechanism of increasing their power of bargaining (Leitão, 2018).

Buyers bargaining power: There are millions of buyers in the semiconductor industry. The switching cost from one company to another is insignificant therefore buyers can buy from any company. Buyers are price sensitive therefore companies are manufacturing products at lower costs to increase their competitive advantage (Chen L., 2015).

Threats of substitute products: The industry is flexible to market changes. Therefore, companies can easily take away opportunities from substitute companies. However, the lower the threats from substitute, the higher the cost involved in research and development. The industry is competitive and volatile (Geng, 2017).

Internal rivalry among existing players: The industry is competitive. Companies in the industry engage in an aggressive competition to manufacture cheaper, faster and smaller products. Technology profoundly influences changes in the industry. Technology force competitors in the industry to develop new products before other companies do. Therefore, a high competition put pressure on companies to develop better and sustainable products. There is less differentiation among products produced by different players. Therefore, companies use technology to create differentiation (Geng, 2017).

Lastly, the company have many companies with almost the same market share which are regarded as significant players. Therefore, no single company can brag to have a high level of competitive advantage. The principal products in the industry are integrated circuit, complex SOC, microprocessors and memory chips. Lastly top companies in the industry are Samsung Group, Intel Corporation, NVIDIA Corporation, Texas Instruments Incorporated, Micron Technology, Inc., Analog Devices, Inc., Microchip Technology Incorporated, Skyworks Solutions, Inc., Maxim Integrated Products, Inc., Xilinx, Inc., and Advanced Micro Devices, Inc. (Park & Hong, 2016).

With increasing technological advancement, the semiconductor industry is expected to grow tremendously. The industry is expected to grow by 21.6% in the next five years. Demand for semiconductor products is expected to rise from the Internet of Things (IoT), AI programs, and AI driving electronics. As mentioned earlier, the current trend is projected to push the market growth by 9.5% in 2018 (Nenni, 2014).

Semiconductor products are used in the production of electronic devices, LED and flat-screen TVs, military systems and civil aerospace. Customers are demand for extended battery life, biometric surge and AI capabilities which provide growth opportunities for semiconductor companies. Likewise, the industry is expected to benefit from the innovation of data centres, connectivity, automotive, advanced software and communication. Other opportunities will arise from increasing demand for electronic devices used in infotainment, navigation and safety sectors (PCAST, 2017).

However, the growth opportunities are facing several challenges. For example, their security concerns surrounding connectivity of semiconductor products. Therefore there is the need to develop secure chips especially for semiconductor products used in industrial automation and medical electronics. Therefore, semiconductor companies should continuously innovate new products that address security issues and increasing demand (Porter, 2011) With increasing technological advancement, semiconductor industry is expected to grow tremendously. The industry is expected to grow by 21.6% in the next five years. Demand for semiconductor products is expected to rise from Internet of Things (IoT), AI programs, and AI driven electronics. As mentioned earlier, the current trend are projected to push the market growth by 9.5% in 2018 (Nenni, 2014).

Revenue Growth Rate

Semiconductor products are used in the production of electronic devices, LED and flat screen TVs, military systems and civil aerospace. Customers are demand for long battery life, biometric surge and AI capabilities which provide growth opportunities for semiconductor companies. Likewise, the industry is expected to benefit from innovation of data centers, connectivity, automotive, advanced software and communication. Other opportunities will arise from increasing demand for electronic devices used in infotainment, navigation and safety sectors (PCAST, 2017).

However, the growth opportunities are facing several challenges. For example, there security concerns surrounding connectivity of semiconductor products. Therefore there is the need to develop secure chips especially for semiconductor products used in industrial automation and medical electronics. Therefore, semiconductor companies should constantly innovate new products that address security issues and increasing demand (Porter, 2011).

Reduction in Corporate tax: The U.S government reduced corporate tax for companies operating in the semiconductor industry from 35% to 21%. Therefore, a reduction in corporate tax has created a favourable business environment to operate. Companies are encouraged to invest the funds that would have been used in tax on research and development (Grant, 2008).

Artificial intelligence: Many countries across the US and globally are now demanding for AI-based products. The new demand is likely to create new growth in new opportunities for semiconductor manufacturers and suppliers. Likewise, AI contributes improved production of semiconductor products by reducing production cost, increase output, and increase chip performance (Fleisher & Bensoussan, 2007).

Transition to the 10nm node: Manufacturers of electronics are shifting to smaller 10nm nodes. This is an opportunity for semiconductor companies to offer nodes with increased performance and power. However, the new development is likely to come with an increase in cost and required resources.

Autonomous vehicles: The increasing growth of electric vehicles also present a growth opportunity for the semiconductor industry. The demand for enhanced sensors, increased connectivity and battery performance present more growth opportunities for the industry (Magretta, 2012).

The dominance of the U.S. semiconductor companies in the market is facing a threat from companies such as Taiwan from China. The changes are as a result of customers and preferring portable devices. For example, Intel Company has a long time dominated the market due to the high demand of its PC chips. However, with the emergence of tablets and mobile phones, the dynamics in the industry has shifted significantly. Companies such as Taiwan and Samsung have become dominant in the global semiconductor market. Taiwan is dominating the mobile chip segment because of its manufacturing capabilities.

Between 2000 and 2013, Intel maintained its competitive edge in the semiconductor at a 20% market share and a revenue of US$ 48 billion annually flowed by Samsung at the US $ 32 billion. On the other hand, Taiwan was dominant in the pure-play foundries at a 46% market share.  Likewise, Intel’s growth has declined in the last five years while Taiwan’s has improved because of the latter’s capability to manufacture ARM. For a long period, Intel has dominated in the manufacture of now shrinking node technologies. Customers prefer to use the ARM in mobile devices because of the low power requirement. The development makes it difficult for Intel to compete with Taiwan using production cost (Magretta, 2012).

Significant Expenses

The scenario shows that industrial dynamics such as a change in consumers taste and preferences are forcing companies to focus more on cost reduction and investment in technology. To counter competition from Taiwan, Intel and Samsung have ventured into the manufacture of the mobile chip and other ARM devices. Semiconductor companies are now licencing for their mobile chips to be designed elsewhere as a way of reducing operating cost. In 2014, semiconductor companies were manufacturing 28nm node. However, the demand for improved performance and reduce power consumption forced the companies to shift to 22nm and 20nm. Today, the companies are producing 10nm node to conform to the market demands (Raghunath & Rose, 2017).

Companies are trying to take advantage of technological development to gain a competitive advantage. Others are shifting into middle and low earners market by manufacturing devices that are compatible with the market. The fight for dominance in the market is expected to intensify due to influence by customers taste and preferences.

The semiconductor industry is highly competitive. Companies rely on their production capabilities and economies of scale to reduce the production cost. Customer prefers devices which are faster, cheaper and smaller. Therefore companies compete in manufacturing the cheapest, fastest and smallest devices. Companies are under continual pressure to upgrade their products. For example, customers pressure mobile devices with fastest processors, bigger memories yet offered at lower prices. Any company that wants a competitive advantage in the industry must put the factors mentioned above into consideration.

The industry is being shaped by technological advancement. The semiconductor industry is forced to innovate products for the future. With fierce competition in the industry, a company’s success is based on its ability to manufacture products with superior advantage. Second, a company that seeks to be successful should take advantage of advancement in virtual reality, automated cars, big data, drones and augmented reality. This technology will changes who people interact globally hence present growth opportunities to the semiconductor industry. For instance, a company like Intel to diversify its market strategy by incorporating the manufacturer and supplier of mobile chips as well (Mazzucato, 2002).

Lastly, the ability of a company to apply economies of scale highly influence its performance in the industry. The revenue in the industry is expected to grow to the US $ 463.61 in 2018. The expenditure is also expected to increase to US$ 102 billion during the same period.  The success of a company depends on how effective it is in research and development which means incurring extra cost. However, with the reduction of corporate tax from 35% to 21% by the government, companies can use such funds to invest more in technology and innovation (Boyd, 2011).

Conclusion

The U.S semiconductors industry is growing greener and faster. The market is changing, and consumers are going for eco-friendly products.  Companies are using technological advancement to manufacture smarter and innovative solutions to the customers. Some of the products manufactured in the industry include integrated circuits, diodes, solar cells, optoelectronic devices, memory chips, transistors, and microprocessors among other electronic devices. The study has established that the U.S semiconductor industry is at the maturity stage of the business life cycle and companies focus more on innovation for growth and expansion. There are approximately 900 players with an increase of 1.7% per annum. Moreover, the semiconductor industry is among the best performing export industries in America. The industry provides over 600,000 jobs to Americans.

Most Significant Financial Ratios in the Industry

The U.S semiconductor industry is very competitive. The average revenue growth rate in the industry is 12.4% per annum. The industry is expected to generate US$ 463.41 billion in revenue based on the past trend. Financial ratio analysis has shown that the industry can meet its financial liquidity obligations. However, the analysis established that the industry is dominated by a few top companies with excelled financial performance and many small companies with poor financial performance.

Large players in the semiconductor industry enjoy the power of choosing their suppliers among thousands which easily minimise the power of suppliers. Likewise, there are millions of buyers in the semiconductor industry. With insignificant switching cost from one company to another, buyers enjoy high bargaining power. The industry is flexible to market changes making it easier to take away opportunities from substitute companies. Lastly, companies in the industry engage in an aggressive competition to manufacture cheaper, faster and smaller products. The high competition put pressure on companies to develop better and sustainable products. The success of a company in the semiconductor industry lies in its ability to apply technological advancement, use economies of scale to its advantage and be flexible to the changing customer preferences and market dynamics.

References

Boyd, S. B. (2011). Life-Cycle Assessment of Semiconductors. New York: Springer Science & Business Media.

Brown, C., & Linden, G. (2011). Chips and Change: How Crisis Reshapes the Semiconductor Industry. London: MIT Press.

Chen, A., & Lo, R. H.-Y. (2016). Semiconductor Packaging: Materials Interaction and Reliability. New York: CRC Press.

Chen, L. (2015). Sustainability and company performance: Evidence from the manufacturing industry. Linköping, Sweden: Linköping University Electronic Pres.

Deegan, C. (2013). Financial accounting theory (4th Edition ed.). North Ryde, N.S.W: McGraw-Hill Education.

English, P. (2011). Capital Budgeting Valuation: Financial Analysis for Today’s Investment Projects (1 ed.). New York: John Wiley & Sons.

Fleisher, C. S., & Bensoussan, B. E. (2007). Business and Competitive Analysis: Effective Application of New and Classic Methods. FT Press: London.

Geng, H. (2017). Semiconductor Manufacturing Handbook. California: McGraw-Hill Education.

Grant, R. M. (2008). Contemporary Strategy Analysis. New York: Blackwell Pub.

Kaplan, D. (2012). Introduction To Financial Statement Analysis. New Delhi: The Kaplan Group.

Leitão, J. (2018). Entrepreneurial, Innovative and Sustainable Ecosystems: Best Practices and Implications for Quality of Life. London: Springer.

Magretta, J. (2012). Understanding Michael Porter: The Essential Guide to Competition and Strategy. Chicago: Harvard Business Press.

Mazzucato, M. (2002). Strategy for Business (1 ed.). London: SAGE Publications Ltd .

Nenni, D. (2014). Fabless: the Transformation of the Semiconductor Industry. Washington, DC: Independent Publisher.

Okada, Y. (2012). Competitive-cum-Cooperative Interfirm Relations and Dynamics in the Japanese Semiconductor Industry. New York: Springer Science & Business Media.

Park, Y. W., & Hong, P. (2016). Building Network Capabilities in Turbulent Competitive Environments: Practices of Global Firms from Korea and Japan. New York: CRC Press.

PCAST. (2017). Ensuring Long-Term U. S. Leadership in Semiconductors – 2017 Report, Influencing China, Improving U. S. Business Climate, Moonshots for Computing, Bioelectronics, Electric Grid, Weather Forecasting. Washington, DC: Independently Published.

Porter, M. E. (2011). Competitive Advantage of Nations: Creating and Sustaining Superior Performance. New York: Simon and Schuster.

Raghunath, S., & Rose, E. L. (2017). International Business Strategy (1 ed.). London,UK: Palgrave Macmillan.

Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. London, UK: Bidi Capital Pty Ltd.

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