BUILDING A VISION FOR THE EUROPEAN SEMICONDUCTOR INDUSTRY A STRATEGIC PROGRAM TO PROTECT AND STRENGTHEN CORE BUSINESSES DECEMBER 2009
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Section 1 Section 2 Section 3 Semiconductor industry success factors Focused players are more successful Europe's industry position The European semiconductor industry is slipping into obscurity Strategic recommendation Focus on core areas to protect and strengthen own position 3 16 21
Section 1 Semiconductor industry success factors Focused players are more successful
High-tech eco system The semiconductor industry is innovator and enabler for future high-tech application Impact of semiconductors on key downstream sectors worldwide 2007 Semiconductor as enabling industry Impact of semiconductors on downstream industries for Europe European data Service providers approx. $6,300 BN Automobile industrial defense medical space Telecom Operators Broadcast Internet service providers Games Service providers approx. $1,600 BN Automobile industrial defense medical space Electronics $1,500 BN Electronics $315 BN FAB equipment $43 BN Semiconductor $256 BN Materials $42 BN Equipment $2.9 BN Semiconductor US$41 BN Materials US$4 BN Note: World GDP (based PPP) = US$ 65,200 BN Note: EU GDP (based PPP) = US$14,800 BN Source: IMF, ESIA, WSTS, decision 4
Industry success factors Industry challenges amplify relevance of several key success factors for players Semiconductor industry challenges Semiconductor industry success factors Cyclicality: High volatility in market demand and price levels Race for innovation: Ongoing need for innovation in product functionality and technologies Fixed cost: Capital intense production and skilled personnel in sales and R&D essential for success Up-front investments: Long time to market requires early cash invest to hit market window 1 2 3 4 Market understanding and customer insights Innovative power and focused R&D Operational excellence and technology capabilities Flexibility and fast decision making What business design fits best to master the success factors? Source: Oliver Wyman 5
Market structure The semiconductor market is structured by applications and product types Illustrative Application specific products CSP, ASIC, ASSP, SOC, CHIPSETS, SW, system solutions etc. Wired Communication Wireless Communication Automotive & Industrial Chip Cards & Security Consumer PC & Peripherals Optical networks Line cards Access Network infrastructure Handhelds WLAN Bluetooth Cordless phones Infrastructure GPS Automotive electronics Power systems Industrial drives ID cards Keyless entry Phone card Entertain-ment (STB) Banking Insurances Cameras Video, DVD Audio Laptop Desktop Workstations Servers Printer Scanner Fax PDA Power, RF, analog/mixed signal Multi purpose logic (CPLDs, FPGAs, discretes, etc.) Processors (MCU, MPU, DSP etc.) Nonvolatile memory (FLASH, EPROM, EEPROM, ROM etc.) Volatile memory (DRAM, SRAM, MRAM etc.) 6
Value chain coverage Semiconductor companies in general belong to three value chain clusters Fully integrated device manufacturers (FIDM) ODM Integrated device manufacturers (IDM) OEM Wafer production System dev. Equipment dev. Product dev. Process dev. Front end production Back end production Component sales System integration Equipment vendors IP vendors Foundries Subcons Distributors EMS Fabless Typical coverage semiconductor companies Scope of this study 7
Semiconductor business models Market and value chain coverage determine semiconductor business models Market coverage Value chain coverage APPLICATION SPECIFIC PRODUCTS Fully integrated device manufacturers (FIDM) Wired Communication Wireless Communication Automotive & Industrial Chip Cards & Security Consumer PC & Peripherals ODM Integrated device manufacturers (IDM) OEM System Product Wafer production dev. Equipment dev. Process Front end production Back end production Component sales System integration General purpose logic dev. dev. Processors Equipment vendors IP vendors Foundries Subcons Distributors EMS Nonvolatile memory Volatile memory Fabless Market coverage Broad FOUNDRY IDM BROAD LINER Narrow FABLESS MEMORY PURE PLAY SPECIALIZED IDM Narrow Broad Value Chain coverage 8
ROA In % Sales multiple Adj. operating margin In % FCF/net sales In % Benchmarking results Focused business models are much more successful Adjusted operating margin 2001 2007 Cum. adj. operating profit 1 /cum. net sales Cash generation 2001 2007 Cum. free cash flow/cum. net sales 25% 20% 15% 22% 19% 19% 20% 10% 10% 10% 20% 10% 5% 0% -5% Fabless Foundry Specialized IDM 2% Memory Pure Play 0% IDM broad 0% -10% -20% Fabless Foundry Spezialized IDM Memory -20% Pure Play -6% IDM broad Adjusted ROA 2001 2007 Adj. operating profit 1 /total assets 15% 10% 5% 0% -5% 13% 7% 13% Fabless Foundry Speczialized IDM 1% Memory Pure Play 0% IDM broad Sales multiple 2001 2006 Average total market value/total sales 10 8 6 4 2 0 7,7 5,6 4,3 Fabless Foundry Specia-lized IDM 1,7 1,5 Memory Pure Play IDM broad Source: Annual reports, Oliver Wyman analyses 1. EBIT before extraordinary items; 2 does not include Intel; 3 not including ATI 9
Performance over time Focused players are more successful throughout all phases of the market cycle Profitability Adjusted operating profit 1 in % of net sales Cash generation FCF/Net sales 30% 20% 10% Focused business designs 30% 20% 10% Focused business designs 0% 2001 2002 2003 2004 2005 2006 2007 0% 2001 2002 2003 2004 2005 20062 2007-10% -10% -20% -20% -30% -30% -40% -40% Fabless Foundry Specialized IDM Memory Pure Play IDM broad Source: Annual reports 1. EBIT before extraordinary items; 2. 2006 data does not include Freescale (IDM broad) 10
CFO/Net sales In % Cost structure and cash flow drivers Fabless companies can afford the highest R&D cost while still generating superior profits Cost structure 2001 2008 Cost in % of net sales Cash flows 2001 2008 Cum. cash flows in % of cum. net sales 12 45% 50% 20% 69% 16% 80% 69% 8 Specialized IDM w/o Intel Fabless Foundry IDM broad liner 13% 22% Fabless 7% 6% 19% Foundry 15% 19% Specialized IDM 10% 8% 2% Memory Pure Play 19% 13% 0% IDM Broad 4 Memory Pure Play 0 0 4 8 12 CFI/Net sales In % COGS R&D SG&A Adjusted op. profit 1 Source: Annual reports, Oliver Wyman analyses 1. EBIT before extraordinary items 2. In 2006 without Freescale 11
Mediatek Qualcomm TSMC Intel Analog Devices Xilinx Altera National Semiconductors Texas Instruments Marvell Technology Group nvidia Powerchip Hynix Fairchild Semiconductor ST Microelectronics Elpida ATI UMC Freescale NEC Electronics Broadcom SMIC NXP Semiconductors AMD Infineon Technologies LSI Micron Chartered Atmel Adjusted operating margin In % Profitability by company Especially European companies suffer from a below-average profitability Average adjusted operating margin 2001 2007 Cum. adjusted operating profit 1 /cum. sales 60 40 20 European firms 0-20 Fabless Foundry Specialized IDM Memory Pure Play IDM broad Source: Annual reports, Oliver Wyman analyses 1. EBIT before extraordinary items; 2 Only incl. years 2006 and 2007 after acquisition of ATI Technologies; 3 Only until 2005; 4 Including Agere 12
High tech industry success factors Advantages of focused business designs Focused business designs better suited to fulfil the semiconductor industry success factors Advantages for focused business designs Challenges for broadliners 1 Market understanding and customer insights Deep understanding of trends and customer needs in target market segments Need to foresee developments in a wide range of markets and different types of customers 2 Innovative power and focused R&D Higher effectiveness of innovation processes due to re-use of IP, leverage of experience, etc. Variety of capabilities and projects may dissipate innovative power of R&D organization 3 Operational excellence and technology capabilities Faster learning curve Less complexity in operations and supply chain Need to reflect requirements of many different businesses within operations and supply chain 4 Flexibility and fast decision making Focused business operations allow for high management focus and quick decisions Complexity of organization in large conglomerates slows down decision making processes Source: Oliver Wyman 13
Recommendation Companies should assume a focused business design depending on characteristics of respective target markets Key characteristics Successful business models Application driven markets Communication Consumer Multimedia Etc. High level of functional innovation Short life cycles Advanced process technologies Same process technology for wide range of products Foundries Process design Production Fabless Application design Product design Product driven markets Analog/mixed signal Microcontroller Memories Etc. Focus on stable functioning (often in harsh conditions) Long life cycles Dedicated process technology for specific product Focused IDM Process design Product design Production Quality control 14
Section 2 Europe's industry position The European semiconductor industry is slipping into obscurity
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Market Shares Regional market shares The share of Europe in the worldwide semiconductor industry is decreasing since 1999 Semiconductor shares of total market Comments 60 50 40 30 20 10 Asia Pacific Japan Americas European Asia-Pacific is dominating the market further increase of share expected Americas is influenced by the strong local footprint of Intel Japan has some well-known players, but faces similar problems as Europe Europe has a peak in 2000/01, as Dresden became major production locations for AMD and Infineon 0 Please remember: 300 MM production of Infineon in Dresden was the most innovative production facility worldwide at 2000/01 Source: WSTS 16
CAPEX of regions European companies sign only responsible for 5% of the worldwide CAPEX within the semiconductor industry down from 13% in 2000 CAPEX of semiconductor companies Country of origin, in % 100 6% 100 100 100 100 11% 12% 11% 13% 100 100 7% 5% Europe 57% 36% 33% 32% 32% 27% 33% N. America 25% 20% 21% 22% Japan 46% 43% 37% 32% 35% 45% 40% Asia-Pacific/OW 7% 12% 1980 1985 1990 1995 2000 2005 2009E Source: Analyst Report JP Morgan, Analyst Report Deutsche Bank, Oliver Wyman estimate 17
Attractiveness of regions for future investments Competence in product R&D remains the key strength of European semiconductor companies without being a global leader in this field Attractiveness for future investments Product R&D Manufacturing R&D Manufacturing capacity 5 1 5 1 5 1 US Mainland China Mainland China Taiwan Taiwan Taiwan Europe US India Japan Japan Japan Mainland China India US India Europe Europe 5 More attractive 1 Source: Oliver Wyman's Race for Innovations! study 18
Research & Development competence level Chinese companies will improve its product R&D competence level significantly until 2015 which is a huge threat for European Semiconductor firms R&D competence level today and in 2015 Results from interviews with CEOs of Chinese semiconductor firms Basic research at companies Basic research at universities Product R&D at companies Product R&D at universities Manufacturing R&D at companies 4 More competent 1 Today s position Target position 2015 Source: Oliver Wyman's Race for Innovations! study 19
Section 3 Strategic recommendation Focus on core areas to protect and strengthen own position
Competitiveness vs. players from China and Taiwan Strategic recommendation A simple game board can help to derive the right strategy for the European semiconductor industry Game board for European semiconductor industry Illustrative High Let go 2 Exit 1 Strengthen and protect 4 Seek partnerships 3 1 2 3 Not important No competitiveness No support even if businesses are endangered Low importance Good competitive position Let go business, no need to support (yet) High importance Disadvantages vs. competition Try create partnerships for win-win situations Low 4 High importance Good position vs. competition Low Importance of segment for European economy High Help business with focused support Source: Oliver Wyman 21
Competitiveness vs. players from China and Taiwan Strategic recommendation Hypotheses Oliver Wyman Three areas seem to be strategic business segments for sustainable investments Classification of semiconductor market segments Examples, Oliver Wyman hypotheses High Let go Microcontroller Discretes FPGAs Etc. Strengthen and protect Automotive & Industrial Wireline comm. Chipcard & security Etc. Automotive & industrial Core industry for Europe Excellent customer access Requires special technologies (analog/mixed signal, power) High entry barriers Exit Commodity products, e.g. DRAM Etc. Seek partnerships Wireless communication Consumer Etc. Wireline Communication Core industry Technical advantages High growth rates Limited know-how in China/TWN Enabler for end-application Low Low Importance of segment for European economy High Chipcard & security European IP protection Access to confidential data High growth rates Enabler for end-application Source: Oliver Wyman 22
Requirements Companies and governments alike have to work on strengthening the European semiconductor industry Actions on company level Government level Focus business portfolio on segments with high attractiveness and competitiveness Invest in R&D and modern manufacturing for defined focus areas If necessary, build up partnerships with players in China and Taiwan to create winwin situations (e. g. access to local customers, foundry production) Align forces within Europe to maximize competitiveness in core areas Automotive & industrial Wireline communication Chip card & security + Define focus areas that are important for European economy and allow competitive advantages for European players, e. g.: Automotive & industrial Wireline communication Chip cards & security Etc. Develop vision how to further develop semiconductor industry in Europe Financing aid Industry clusters Education programs Etc. Align EU member states 23
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