Zacks_Analysts' Blog : Competition Peaks for Chip Makers - Analyst Blog

Since the bursting of the tech bubble in the late 1990s, semiconductor companies have improved inventory management, streamlined operations and transferred manufacturing to cheaper locations. This enabled a stronger focus on research, helping differentiation and consequently profit margins.

Although companies like Intel (INTC), STMicroelectronics (STM), Texas Instruments (TXN) and National Semiconductor (NSM) continue to operate their own facilities, many smaller players, such as Intersil Corp. (ISIL) and Semtech Corp. (SMTC) decided to take the outsourcing route.

This was a boon for Asian manufacturers, especially Taiwan Semiconductor Manufacturing Co. (TSM) and United Microelectronics (UMC), which were the first to capitalize on the opportunity. Chartered Semiconductor (CHRT) and Semiconductor Manufacturing International (SMI) joined later, but continued to benefit from the trend.

Taiwanese companies have thrived over the past decade by using the cash generated to increase investment and research. The result was improved technology and cost competitiveness.

However, with demand from China and other emerging markets mounting, the trend appears to be reversing now. Consequently, the need to produce even cheaper semiconductors in large volumes is on the rise. Further, demand in mature markets is centered on innovation, which increases manufacturing complexities. The cost of advanced tools that could facilitate all this is currently a strain for most manufacturers.

Taiwan has been worst affected since it was already competing over price. With the recession shrinking demand, Taiwanese semiconductor makers have surplus capacity and too much inventory at hand. Although the government has stepped in to help, no clear plan is evident as of now. We strongly believe that this environment will result in increased consolidation in semiconductor manufacturing and R&D collaboration among companies.