40% of semiconductor makers to perish

The semiconductor industry has become inflated with hundreds of competing vendors. However, within 10 years, 40% of semiconductor vendors are likely to leave the industry, says Gartner.

Analysts from the international research firm have identified five "megatrends" that will lead to significant changes in the industry. These megatrends include increasing device integration, the increasing scale and size of manufacturing, the shift from business to consumer markets, the increasing role of service providers, and new and disruptive technologies.

The key megatrend, Gartner says, is increasing device integration, which offers "tremendous benefits" in terms of increased chip speed, lower power dissipation, greater functionality per chip, lower system cost and physically smaller-end equipment.

"Increasing costs and complexity of design, increased system content and greater flexibility means fewer vendors will have the capability to supply chips in the future," says Jim Tully, VP and chief of research for Gartner`s emerging technologies and semiconductor group.

"The number of semiconductor vendors has risen steadily from about 120 vendors in the mid-1980s, to roughly 550 in 2003. Within 10 years, the industry will experience significant consolidation."

Another megatrend concerns the increasing costs and scale of semiconductor manufacturing. Fabrication plants are becoming extremely expensive, and next-generation "fabs" will inevitably become too expensive for most existing companies.

"To survive, large and costly fabs will need to achieve significant economies of scale, and they will require high volumes of chip production, preferably standard chips that can be produced in a standardised environment with large batch sizes. These standard chips will then be customised after manufacture for specific applications," Tully says.

"This will result in fewer chip manufacturers in the future, but it won`t result in higher chip prices because the industry is capital-intensive and is highly competitive."

The third megatrend relates to the growing importance of consumer markets. By 2013, more than 50% of chip sales will be for equipment markets targeted at consumers. One of the challenges for vendors is that the consumer market can be unpredictable.

"Consumer markets are normally high volume and the overall market size is large," Tully says. "However, margins on consumer products are very low and the value of individual product categories can be surprisingly small. The falling number of chips per application, because of integration, is playing its part in dampening the growth in these applications."

In the past many semiconductor products were standalone; however, the industry must prepare for the increasing role of service providers. Increasingly, large numbers of equipment are being interconnected, both over the Internet and in LANs. This makes them accessible to companies offering upgrades, content and other services.

New technologies have driven the semiconductor industry from the beginning, and new technologies will continue to drive the industry. Most of these have been incremental technology developments.

However, Gartner says, disruptive technologies will have a significant and unpredictable impact on the industry. Examples of disruptive technologies include inkjet processes, light-emitting polymers, carbon nanotubes, molecular transistors and protein-DNA logic.