An End of Year View of Semi Consolidation

The last couple of years have been tumultuous for the semiconductor market. IC Insights just released a report showing just how much consolidation has concentrated market strength in a small number of companies. The report (which excludes fabs) shows that the 5 top companies – Intel, Samsung, Qualcomm, Broadcom and SK Hynix – now hold 41% of worldwide semiconductor market share.

Contrast this with 2006 when the top 5 held 32% share. That’s a ~30% increase in share in a market that grew in the same timespan by about the same amount. In other words, the top 5 (who were not all in the top 5 in 2006, but that’s secondary to my point) have soaked up the great majority of growth in the market. In the musical chairs of semiconductor consolidation, if you’re not in the top 5 then you’ve grown revenue on average about 3% a year, hardly better than the US GDP – you’re just rising with the tide. It’s very hard to break out of that trap through M&A – who wants to lend money to a company with that kind of growth?

Of course, the top-end of the next tiers are still growing but not nearly as rapidly. The next 5 companies below the top on average gained 2% share in a growing market. The next 10 companies below that had essentially zero growth in share, still (in some cases) making money but moving the needle negligibly for what we’ve always assumed was a high-growth industry.

Again, this is an argument based on averages, indifferent to which companies are in those groups. Any given company may have grown more or less than these averages. Mediatek and Nvidia are two excellent examples, both likely to show ~30% growth this year (which has to make them prime targets for acquisition). But the bottom line for most other companies in this class is clear. Investor pressure to find buyers must be intense; expect more consolidation in 2017.

Of the top 5 this year, Intel and Samsung are no surprise. Both Qualcomm and Broadcom have made recent significant moves to bulk up, most recently seen in Qualcomm’s acquisition of NXP and Broadcom’s acquisition of Brocade. SK Hynix stays in the top 5 this year but not in auspicious circumstances; they are expected to post a 15% revenue drop for the year. Micron, immediately behind them are also likely to post a significant drop. Behind them are TI who are perhaps best positioned to jump into the top 5 next year, though falling quite a long way short of Qualcomm/NXP and Broadcom/Brocade combined revenues. Then again, Broadcom+Brocade looks like a different animal that perhaps doesn’t quite fit in a semiconductor ranking any more. But then the same could be said for Samsung I suppose. Which maybe points to a bigger truth – perhaps the best path to significant growth lies outside pure-play semiconductors.

You can read a more complete summary of the IC Insights report HERE.

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