Semiconductor Industry "Silicon Wars": Profitability Pressures Create New Industry Paradigm According to Mark Li, Sanford Bernstein Expert Analyst

Wall Street Transcript

67 WALL STREET, New York - October 4, 2012 - The Wall Street Transcript has just published its Semiconductors Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Semiconductor Capital Equipment - Cloud Computing - Mobile Device Consumer Demand - Enterprise Data Storage Demand - High Computing Power Technology - Semiconductor Inventory Burnoff

Companies include: Taiwan Semiconductor Manufactu (TSM), United Microelectronics Corpor (UMC), Advanced Semiconductor Enginee (ASX), Intel Corporation (INTC), Apple Inc. (AAPL), QUALCOMM Inc. (QCOM), Semiconductor Manufacturing In (SMI) and many others.

In the following excerpt from the Semiconductors Report, an expert analyst from Sanford C. Bernstein & Company discusses the increasing competitive pressures for the sector and the implications for investors:

TWST: You predict what you call the "Silicon Wars" to develop. Please tell us what that will entail and what the possible implications will be for the sector. Who do you expect to be the winners and the losers of the "Silicon Wars"?

Mr. Li: Yes, that is indeed a very important trend right now for the semiconductor industry, and it has very important implications for all of key major players in this space. The key of these Silicon Wars is, number one, the cost of leading technologies is becoming higher and higher. R&D expenses to develop one generation of these technologies can be easily a few hundred million U.S. dollars to $1 billion. And that's only R&D. Then, you also need to build capacity for the technologies, and the capacity price is also getting higher and higher.

The second element of Silicon Wars is rising competition among Intel (INTC), Samsung (005930.KS) and TSMC. These players used to be operating in different spaces of the silicon industry. Intel mainly did chips for PCs, and TSMC made chips for handsets, and Samsung concentrated on memory chips. So they had their own space before.

And now, the emergence of smartphones and tablets is making the boundary between PC and phones blurring. Going forward, it is expected we will have done more hybrid devices between PC and phones. So what's happening now is the competition from Intel, from Samsung and TSMC escalating.

So the Silicon Wars basically has these two factors - rising cost and intensifying competition. They would have pretty interesting implications. Theoretically, if you have rising cost, you would be trying to slow down your capex investment. So therefore, you would have a longer window to recoup your investment. You would also have better chance to transfer cost increase to customers. But what we are seeing is that competition pressure among Intel and TSMC literally are forcing them to accelerate instead of decelerate. They all want to gain more share to offset the cost increase. So they are actually spending more in capex. Because of this, the profitability of these players likely would be compressed in the next few years.

Regardless the outcome of this war, the undisputable winner is the arms dealer. So the companies that sell equipment to these companies to build capacity will benefit. The company we have in mind is ASML (ASML). They are the biggest tool vendor in semiconductor space, and has very high share. So they will be the winner on this Silicon War.

TWST: You believe China is poised to develop its domestic fabless industry. What factors do you believe will contribute to that development? And what do you believe the ramifications will be for the sector?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

View Comments (0)