Chapter 16
Managerial Economics in Action: The Case of the
Semiconductor Industry
Managerial Economics: Economic Tools for Today’s Decision Makers, 4/e By Paul Keat and Philip Young
Managerial Economics in Action The Semiconductor Industry
• Industry Background
• Industry Analysis
• Managerial Decision Making in Action
Industry Background
Market Structure
• Intel: Industry’s largest firm
• Top 10 firms: 50% market share
• Thousands of smaller firms: 50% market share
Industry Background Consumers
Region Share
United States 31.3%
Asia/Pacific 25.1%
Japan 22.9%
Europe 20.7%
Industry Background
Growth Prospects
• 17% annual compound growth rate since 1960’s
• Highly cyclical with roughly four-year cycles
Industry Background
Sources of Cyclicality
• Macroeconomic conditions
• Capital intensity
• Long lead times in production
• Lack of market power
Industry Background
Recent Downturns
• Inventory overhang
• Sharp decline in related industries
• Telecommunications
• Internet
• Dot.coms
Industry Background
Elements of Production
• Research and development
• Design
• Manufacturing
Industry Background Manufacturing
• Wafer and die manufacturing
• “Front end”
• Most capital intensive
• Packaging and distribution
• “Back end”
• Labor intensive
• Located in lower-wage countries
Industry Background Technology
Technology plays a critical role in this industry.
Moore’s Law: the number of transistors on a chip will double every 18 months.
Industry Analysis
The analysis in the following section are quoted from the Standard & Poor’s 2001 industry report.
References to the appropriate textbook
chapters are provided.
Industry Analysis
“Unlike most industry downturns, which have their roots in overbuilding of industry plant capacity, this one was instigated mainly by the weakening of the U.S. economy,
which caused demand for equipment and products that use chips to slow quite
suddenly.”
Reference: Income elasticity, chapter 4 Demand, chapter 3
Industry Analysis
“By September, PC sales began to sag, and DRAM pricing went soft after a strong
summer. By November, inventory congestion in electronic components distribution channels became plainly
apparent, indicating wide-spread weakness in the chip industry.”
Reference: Market surplus, chapter 3 Derived demand, chapter 4
Industry Analysis
“…in February 2001, it became clear that all chip segments would be hit hard. During
March, semiconductor companies of all stripes reported rapidly weakening order trends that compounded the challenges presented by the inventory overhang.”
Reference: Price takers, chapter 10 Market structures, chapter 10
Industry Analysis
“…the cause(s) of the current downturn
include rising U.S. interest rates in 2000, an abundance of information technology
equipment in places after a five-year period of unusually brisk capital investment by U.S.
businesses, and the inability of dot.com
companies to continue buying equipment with plentiful venture capital.”
Reference: Determinants of supply and demand, chapter 3
Industry Analysis
“…despite improved software tools for managing inventory, the industry has had
difficulty in accurately monitoring inventory levels. More contract manufacturers and
sub-contractors have entered the electronics sector, thereby creating more places on the supply chain where inventory can collect.”
Reference: Supply chain management, chapter 7
Industry Analysis
“Before the extent of the inventory overhang became widely known, the SIA forecast in
early November 2000 that worldwide chip sales would rise 22% in 2001. By early February
2001, the SIA acknowledged that their 2001 forecast was unlikely to be met. By April,
private forecasters were predicting double-digit declines for the chip industry in 2001.”
Reference: Forecasting, chapter 5
Industry Analysis
“A reduction in capital spending on plant and equipment by chipmakers is evident in the semiconductor equipment book-to-bill ratio maintained by SEMI. The January figure dropped like a rock to 0.89, and the downcycle was confirmed by the February ratio of 0.73 and the March ratio of 0.64.”
Reference: Derived demand, chapter 4
Industry Analysis
“Occasionally, however, the chipmaker has had to contend with unusual forces that alter sales patterns for semiconductors. The
present broad economic slowdown, which started in the U.S. and is rapidly going
global, is one such instance.”
Reference: Forecasting, chapter 5
Industry Analysis
“As companies face a ‘silent spring’ for
revenues, many seek to combine forces for a variety of reasons: to realign their product
mix, gain size, improve efficiency, or simply to add design engineers, who remain a
scarce resource.”
Reference: Mergers and acquisitions, chapter 15
Industry Analysis
“This is an industry where entrepreneurs challenge the goliaths on a regular basis.”
Reference: Market structures, chapter 10
Managerial Decision Making in Action
Standard Microsystems Corporation Market structure?
• Part oligopoly, dominated by very large firms
• Part monopolistic competition, easier entry and exit, smaller firms
Managerial Decision Making in Action
Supply and demand conditions?
• Very little market power
• Prices fluctuate mainly due to shifts in supply but more recently due to shifts in demand
Managerial Decision Making in Action
Technology?
• Fast moving
• Expensive to develop
• Critical in maintaining competitive advantage
Managerial Decision Making in Action
Government regulations?
• Minimal
• Certain environmental regulations affect the manufacturing process
Managerial Decision Making in Action
International dimensions?
• Industry: Global, activities spread evenly throughout, North America, Europe,
Asia-Pacific and Japan.
• Firm-level: Most customers are located in Asia-Pacific Rim
Managerial Decision Making in Action
Price and output levels?
• Price takers
• Cannot improve profit margins by raising price
• Can shift resource in segments with higher than average price relative to costs of
production
Managerial Decision Making in Action
Cost leader?
• Strive to be among the low cost producers
• Outsource both “front end” and “back end”
manufacturing activities
Managerial Decision Making in Action
Product differentiation?
• Spend heavily in R&D
• Retain and attract the best design engineers
• Strive to be technology leader
Managerial Decision Making in Action
Focus on market niche?
• I/O devices for the PC market
• Embedded products
• New product segment: systems logic chipsets
Managerial Decision Making in Action
Outsourcing, alliances, mergers, acquisitions?
• Outsource manufacturing completely
• Close relationships with suppliers
• Close relationships with large OEM customers
Managerial Decision Making in Action
• The Semiconductor Industry
– Price erosion – Competition
– Period of mismatched supply and demand
Risks?
Managerial Decision Making in Action
• The Personal Computer Industry
– Growth of PC market affects operating results – Products used in the volatile consumer PC
market
Risks?
Managerial Decision Making in Action
• Product Development and Technological Change
– Identification of market trends
– Identification of product opportunities
