Viewpoint: Semi companies will survive, thrive

The semiconductor industry has a rich tradition of managing its way through dramatic and unforgiving cycles, ranging from years of extraordinary growth to steep declines. After five unprecedented years of continuous growth, the industry is now facing a downturn that is stunning even to industry veterans.
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Stock prices for the top 25 semiconductor companies declined year-over-year by 45 percent. Of the 1,151 stocks tracked by the Global Semiconductor Alliance (GSA), 44 percent have hit all-time lows in the past two months. The market capitalization of dozens of member companies is dramatically less than the cash on their balance sheets. Many also have positive cash flow with little or no debt.

Despite today's dismal picture, semiconductor companies are in a much better position to weather the storm than in past downturns, and they will emerge stronger and ready for the next generation of opportunities.

The balance sheets of semiconductor companies are strong, especifically among the traditional fabless companies. Cumulatively, the top 20 semiconductor companies have more than $40 billion in cash.

Additionally, very few of these companies have long-term debt, especially traditional fabless companies. Of the semiconductor companies GSA tracks, less than half have debt on their balance sheets, and 16 have $1 billion or greater in cash.

While several large IDMs have accumulated a strong cash balance, they have also accumulated exponentially large amounts of debt that will be an enormous challenge to overcome. For example, of those companies with more than $1 billion in cash, Advanced Micro Devices (AMD) reported nearly four times the amount of debt to their $1.3 billion cash amount. Meanwhile, Micron and Linear Technology both have nearly a two-time debt-to-cash ratio. AMD is one of the latest companies to announce an asset lite business model.

According to 2009 estimates of GSA member companies, only 43 (or 32 percent) expect to lose money next year. That means semiconductor manufacturing remains a profitable industry.

Moreover, inventories are much leaner than during the disastrous 2001 bubble crash.

It can still be argued by market pessimists that price-per-earnings (P/Es) could, and even should, be lower. Having tracked industry P/Es since 1994, it is difficult to believe that P/E ratios are reflecting companies' true value. Even market leaders are trading at single-digit P/Es. For example, Texas Instruments is trading at 8.5 P/E and Intel at 10.6.

The end markets serviced by the semiconductor industry are more diverse than ever before.

The growth of the semiconductor industry is also being driven by the modernization of emerging economies such as China, India and Russia as well as African and South American nations. These emerging regions still have immense, untapped opportunities.

Today, semiconductor spending per IC is $0.29 versus a high of $0.89 in 1997, and an average of $0.64. Thus, the current downturn will not be exacerbated by a capacity glut, which previously touched off or prolonged industry downturns.

In order to manage their way through the current downturn, companies must study the industry leaders and observe what they generally do during down cycles.

Here are a few suggestions:
* A slowing industry growth is forcing companies to focus on appropriate an cost structure. That means companies that have chosen a fabless model have made the right decision.

* Success will increasingly require collaboration and integration of supply chain partners like designers, EDA and IP vendors, foundries along with assembly and test suppliers.

* Now is an ideal time for the industry to consolidate. But consolidation has yet to happen, and there does not appear to be much of an appetite for acquisitions.

* Successful companies have also developed their own process expertise. This allows them to control technology while alleviating the need for ownership. Having the talent to work more intimately with foundry partners is important.

* Develop software expertise. Companies focusing on methodology and productivity have a time-to-market advantage. This software expertise allows companies to provide solutions for customers.

* Product diversification helps companies protect margins. This is, of course, difficult for small companies, but it can reduce segment and customer dependence. This can be very important when one sector declines.

* Do not sacrifice R&D spending during the downturn. R&D dollars should remain the same or increase as a percentage of sales for those programs that are part of a company's long-term roadmap. This is a good time to shut down projects that are not strategic, but do not abandon projects that are strategic to your company's future.

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BY Jodi Shelton
Source：EE Times

Jodi Shelton is executive director of the Global Semiconductor Alliance.