If expanding industries typically indicate vibrancy, a race to acquire and consolidate is generally reflective of the opposite – a period of slowed growth in mature, once high-flying categories. And while many industries experience a period of stardom, followed by a sharp and steady decline, we should be extremely worried when they occur in industries that are fundamentally central to our socio-economic vitality.
Enter the semiconductor industry, where in the past 24 months, there have been at least 10 significant mergers and acquisitions, including big name brands such as Avago’s acquisition of Broadcom, Intel’s purchase of Altera, and Infineon’s acquisition of International Rectifier .
Further, since the year 2000, the semiconductor industry as a whole has grown at a mere 5% annually, as compared with 22% in the 1980s (see figure 1). The semiconductor “go-go years” of the 80s have been replaced by the more sedate, incremental growth rate of a mature industry – with fewer and fewer bright lights from product innovation. But does a shrinking semiconductor industry indicate bigger problems for the technology industry as a whole?
End of Moore’s Law
It is not a coincidence that this race to consolidate has coincided with the end of Moore’s Law as we know it. Moore’s Law depends upon the continuous reduction in the size of a transistor to maintain positive momentum in both cost and performance. Today, the realization of this bold prediction made 50-years ago has become an either/or proposition – either deliver on better performance or a lower price.
The problem began to rear its ugly head about twenty years ago: as the size of transistors continued to shrink, the cost to produce them got bigger. Other costs, such as designing, packaging and testing have also escalated, and the overall bill to develop an advanced silicon-based device – now in the 10’s to 100’s of millions of dollars – has become unaffordable to all but the well-funded, established companies.
Why It Matters
New chips are the fuel for the semiconductor industry’s growth, and, as the costs escalate, the number of new semiconductors (and their innovation contribution) decreases. But it’s not just the chip companies that stand to lose from this new reality. Industry luminaries predict that the sputtering of Moore’s Law will likely hinder the innovation and advancement to which we have all become accustomed,putting in peril many of the devices and applications that businesses and consumers covet, including virtual reality glasses, wireless power, autonomous vehicles, 5G mobile communications and advanced medical devices to name a few.
The de-coupling of cost and performance is due to three underlying trends for silicon chips; (1) the slower growth in end markets for semiconductors in general, (2) the cost to develop a new chip, and (3) the capital investments needed to build factories to produce each new generation of product.
Knowing this, it becomes clear why there has been so much consolidation in the chip industry lately: for many of the large semiconductor players, it’s simply less risky to buy existing revenues than to invest in new products and factories to develop and introduce new products. The total market size of the industry “pie” is relatively fixed, so organic growth from technological innovation is high-risk, in addition to being very costly.
The original wellspring of innovation – the venture-funded startup in the chip space has all but disappeared, as there is little venture money available given the poor cost-to-risk ratio for new product development and the less vibrant growth prospects.
Unfortunately, this is not good news for consumers as startups are often the source of the technology industry’s greatest innovations. Given these metrics, advancements in the semiconductor industry will continue slowly, putting us farther and farther behind on the promise of Moore’s Law.
A Glimmer of Light – the Growth of #GaN
Some exceptions can be found, however. Alternatives to silicon, such as gallium nitride (GaN) and silicon carbide (SiC) offer the potential for a refreshing return to the financial metrics the semiconductor industry enjoyed in the 1970s and 1980s. GaN in particular, is facing a period of rapid growth. This growth is coming from both the replacement of lower performing silicon devices and from emerging applications that are enabled by GaN’s superior performance. These applications – from those that make our lives more convenient to those that have life-altering impacts – are critical for the technological advancement to which we have become accustomed.
Given worrisome events of the last two years, I say it’s time for the semiconductor industry and the venture community to come together to rally around innovation – not consolidation. With that in mind, we will be able to fuel product development and propel advancement at the speeds to which Gordon Moore predicted just five decades ago.
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