The semiconductor industry cycle: an exciting roller coaster journey

International e-commerce newsletter Industry like the semiconductor industry, which is constantly fluctuating violently, is rare. For decades, people in the industry seem to regularly participate in the best roller coaster games, every year.

Over the past 10 years, the industry has experienced dramatic supply and demand fluctuations. In the months before the September 11th terrorist attacks, it was widely expected that demand would be very strong, so the semiconductor company's chip inventory was full. But after the incident, many semiconductor companies significantly reduced chip output. Business was very difficult at the time. Demand forecasting has been one of the most difficult issues in the semiconductor industry for decades. Manufacturers' inventory is often either too much or insufficient, and often it should be more when it should not be more, but less when it should not be less.

Similar to the situation in 2001, the inventory problem became the biggest heart disease of the semiconductor industry in 2008, and there are more and more early signs that the global economic recession is coming. At this critical juncture, the semiconductor industry was extremely cautious this time, fearing that it would once again be in a predicament of overstocking, so the production capacity was shut down faster than before, and the intensity was much greater. Some manufacturers even cut their output by 50%.

Overall, semiconductor production capacity has dropped to 50%, well below the usual average of 80%. As the recession is imminent, and I heard that it may last for several years, these manufacturers have sufficient reasons to quickly reduce production. There are signs around the world that this is not just a problem for the semiconductor industry, but that the overall economy cannot escape this catastrophe.

The semiconductor industry slammed on the brakes, which turned out to be one of the smartest moves the industry has ever taken. Drawing on previous lessons, manufacturers have reduced production and inventory costs. By slowing down production, the semiconductor industry not only saves money, but also prepares for the rapid improvement of the market situation in the future.

The most terrible nightmare in the semiconductor industry-the market crashed and stuck in the abyss for several years in a row, did not happen.

The recovery time of the semiconductor industry may be earlier than any economic cycle in its history, and it will be stronger and faster. In the second quarter of 2009, consumer demand began to be better than expected. The market is expected to continue to grow in the coming years. The industry has travelled a long distance this time.

Why is the semiconductor market picking up so fast? There are several reasons.

First, the US and Chinese government's economic stimulus measures have played a role. More funds are injected into the economy, stimulating consumer buying activity. As China invests to maintain internal growth, small luxury goods (laptops, media equipment and smartphones) continue to achieve unexpected growth and affect North America. This "small luxury goods" trend has spread to the United States, and the semiconductor industry has achieved sustained growth in the communications and consumer electronics terminal markets.

Secondly, despite the global economic recession, the demand in the Chinese market is strong, especially for mobile phones. Each mobile phone contains several semiconductor chips. In fact, according to Accenture's recent survey of consumers with Internet access, 63% of Chinese consumers occasionally watch videos on mobile devices. 59% use Web-enabled mobile phones, which is higher than the other countries in the survey.

Third, market demand for analog chips used in consumer electronics and communications equipment is still relatively strong. The sales of analog radio frequency and power management chips have remained stable in the field of GPS, WiFi and Bluetooth mobile phones, such as smart phones. The latest power management chip makes the battery life of smart phones longer than the smart phones using previous generation chips.

Similarly, GPS technology gives smartphones location and navigation capabilities, meeting the strong need to improve the customer experience. These analog chips are also used in other relatively popular consumer electronics products, such as Blu-ray players, set-top boxes, high-definition televisions and digital video recorders.

Fourth, more and more enterprise IT departments have finally begun to purchase and upgrade communication equipment. In addition, despite the severe economic situation, PC sales have been relatively strong.

In order to take advantage of these market opportunities in the current growth cycle, companies in the semiconductor industry need to perform fundamental structural optimization. They need to reconsider business models and strategies to improve the efficiency of business operations, reduce costs, and increase the efficiency of generating revenue and profits.

How to use market opportunities? There are several ways, including:

1. Renovating the sales team

An efficient sales team is critical to make the most of all customer relationships. A strong customer relationship management (CRM) system should be established to accurately reflect the sales pipeline. The CRM system should also be integrated with the company's product life management (PLM) and enterprise resource planning (ERP) systems to more closely integrate with relevant departments and processes throughout the organization.

Establishing new indicators and compensation structure is another key factor for improving the effectiveness of sales teams. These should enable sales staff to be responsible for pure sales (driven by commissions), pipeline health, accuracy of forecasts, time between sales stages, and conversion rates. Manufacturers should pay attention to the profitability, opportunity cost and strategic value of each transaction, not just the scale of the transaction. They should also consider measures to ensure that the potential value of each transaction is accurately described.

2. Improve R&D

Semiconductor companies should focus on improving R&D processes and efficiency, such as product life management and product portfolio management. It is becoming more and more important for semiconductor companies to have a deep understanding of specialized chip products such as microprocessors or analog devices, rather than a general understanding of many chip product types.

Manufacturers who focus on specific product areas that may gain design advantages, if they insist on one or two business cycles, may force competitors to change their focus. In addition, research and development efforts should pay more attention to the use of the unique advantages of manufacturers, the semiconductor industry trends are rapidly developing in this direction.

3. Innovative supply chain

Manufacturers should also focus on innovation and optimization of their supply chain operations and processes. They need to enhance their supply and demand planning process. In some cases, it will be necessary to reorganize its supply chain. Semiconductor manufacturers should consider integrating their external supply chain partners by developing and deploying extended relationship management capabilities.

In this way, these companies can promote the integration of important and accurate data from design partners and suppliers in manufacturing, and integrate customer and channel partner data in terms of demand. This can improve demand forecasting, production planning and capacity acquisition. And this allows chip manufacturers to make better decisions, improve customer service and increase profits.

4. Planning and execution

In order to increase visibility and use all available data, it is best to integrate all the different planning assets and processes throughout the organization into a single unified system. Planning algorithms must be evaluated and reset to optimize results, and comprehensive training must be deployed to familiarize all planning resources with the new system.

Data quality is very important to optimize the execution of the entire supply side. The Total Data Quality Management (TDQM) program trains employees to improve order entry, planning and reporting, and at the same time standardize the system. These TDQM plans are the key to deciding whether manufacturers can succeed in this new field. These management plans help vendors reduce errors, reduce the number of manual contacts when processing orders, and support better decision-making. This has led to more practical and meaningful capacity planning and demand forecasting.

Final thoughts

More and more manufacturers are asking us to help them prepare for the upcoming market competition. They asked to help them manage and monitor engineering capabilities and product inventory.

Now, inventory management should be given top priority. To this end, manufacturers should strive to supply their global distribution centers based on the latest demand forecasts, using comprehensive data and common processes. Like improving planning work, the final reward for optimizing execution is to be able to provide customers with the products they need as quickly and consistently as possible.

In addition, manufacturers need to be more cautious about product mix, product development, product innovation, R&D efficiency, product design business, product management, human resource management, supply chain performance, inventory optimization, operational efficiency, and knowledge delivery. In short, they need to transform from transaction-based companies to value-oriented companies. The added value provided by these companies will determine which companies will eventually take the lead in this industry recovery phase.