El Segundo, Calif. — The global semiconductor industry is the most profitable it has been over the past decade, thanks to increasingly aggressive management of costs, capacity and competitive positioning, according to iSuppli Corp.
iSuppli’s report, iSuppli’s Procurement Pricing Index, What a Difference a Year Makes, finds that overall semiconductor supplier operating profitability rose to 21.4 percent in the fourth quarter of 2009, the highest level since the fourth quarter of 2000 when it reached 24.7 percent. Industry profitability soared in 2009, rising throughout the year after falling to negative 5.3 percent in the first quarter due to the global economic downturn, according to the market researcher.
“Chipmakers in 2009 reacted quickly and aggressively to meet the downturn by cutting costs and improving cash flow,” said Derek Lidow, president and chief executive officer of iSuppli, in a statement. “And as the market began to turn back up, the industry showed great restraint against adding production in order to avoid any overcapacity situations. This allowed the companies to recapture their pricing power to boost profitability.”
After falling by 5.4 percent in the first quarter of 2009, global pricing for electronic components, including semiconductors, began stabilizing in the second quarter and then rose sharply in the second half, according to the iSuppli Procurement Pricing Index (PPI). Pricing declined by slightly more than the historical average rate in the second quarter, decreasing by 2.7 percent, and then rose by 2.2 percent in the third quarter and by 2.7 percent in the fourth quarter.
Beyond capacity management, the profitability rebound reflects a more fundamental shift in the competitive structure of the global semiconductor industry, according to iSuppli.
Lidow said chipmakers are now focusing on specific market segments where they have pricing power and a competitive advantage, allowing them to garner better profit margins and to cut overhead.
Lidow cites several examples of the shift including Germany’s Infineon Technologies AG, which has divested its operations in the memory and communications markets to focus on its core business in offering semiconductors and system-level integrated circuits for automotive, industrial electronics, wireless and security applications. He predicts this trend will continue in the coming years, as Japanese semiconductor supplier divest themselves from various product segments and embrace more narrowly focused product lines.