Factors Affecting Semiconductor Industry

The semiconductor industry is high cyclical and often characterized by rapid and constant change, rapid price erosion, product obsolescence, short product lifecycles and huge fluctuations in demand and supply of the products. Major factors that affect the industry are as highlighted below:

Cyclicality

Historically, the market of semiconductors is known to be volatile. Demand and supply have cyclically fluctuated and caused pronounced fluctuations in margins and prices. The cyclicality of the industry arises from a set of factors which include fluctuations in the demand of end products that use semiconductors as well as fluctuations in manufacturing capacity available for the production of semiconductors.

Usually, semiconductor fabs take years to construct, plan and start operations. Manufacturers have also in the past, made capital investments in equipment and plant during market conditions that were favorable often, in response to anticipated growth demand of semiconductors.

New entrants’ threat

During the early days of the industry, design engineers with great ideas would often leave one company in order to start another. With growth of the industry though, setting up chip fabrication industries requires billions of investment in dollars. Entry costs therefore make it impossible or at times painful for all but the big players to enjoy the advantage. Despite this fact, there are indications that things might be changing again and that the companies will form alliances so as to spread the costs of manufacturing.

Technological competition and development

The semiconductor market is marked by intensive rivalry between companies. Chip makers are always under intense pressure to come up with a new product that is cheaper, better and faster than what was redefined as state of the art.

This pressure extends to foundries, chip makers, distributors and design labs. In essence, the pressure is felt by all connected to the businesses of ensuring the chips are developed from R&D into high tech equipment. The end result is an industry that is continually producing cutting edge technology while at the same time riding business conditions that are volatile.

Substitute’s availability

The semiconductor industry is under the threat of substitutes which is heavily dependent on the segment. While there is intellectual  property protection that might put to a stop the threat of new substitute chips for a certain duration, within a short duration, companies  start producing similar products at low prices.

There is  no question there are copycat suppliers in the market that are a major problem for the companies that spend millions or even billions in the creation of a more reliable and faster chip to recoup on R&D costs.

Buyer’s power

The industry is dominated by small number of large players as such buyers have little to no bargaining power.

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