http://www.nasdaq.com/article/...emiconductor-makers-for-iot-cm545494
Wave Of Megamergers Preps Semiconductor Makers For IoT
November 20, 2015, 12:46:00 PM EDT By Investor's Business Daily
Semiconductor sales growth is slowing. Interest rates are low. Big semiconductor firms are sitting on piles of cash. Combined, those ingredients have been the perfect recipe for chip industry consolidation.
"This year, there will be $120 billion spent on merging and acquiring in the semiconductor industry. That's the highest number we've ever seen," Jim Feldhan, senior analyst at Semico Research said in an IBD interview.
Auto, lighting and consumer device chipmakerNXP Semiconductors (NXPI) in March announced it would buy rivalFreescale Semiconductor (FSL) in a deal valuing Freescale at $16.7 billion, including debt. The combined company would have a $10-billion-a-year run rate and would be the No. 1 auto chip supplier and third-largest global chipmaker behindIntel (INTC) and No. 2 Samsung.
On June 2, microprocessor king Intel announced a deal to buy programmable chipmakerAltera (ALTR) for $17 billion. The week before,Apple (AAPL) chip supplierAvago Technologies (AVGO) announced a deal to buy broadband services chipmakerBroadcom (BRCM) for $37 billion.
After that surge of action, are any deals left on the shelf?
Industry veteran George Scalise, former head of the Semiconductor Industry Association trade group, said as long as there are good opportunities, the industry will continue consolidating.
"I think the pace will level off. I don't know if it will be in the coming year, but it's something that will run its course. There are not that many companies to play into," he said.
The 'Bigger Than PCs' Market
Semiconductor industry revenue growth has leveled off this year, but a huge driver for the next wave of innovation is already in place.
Autos are using more chips all the time as they move toward being autonomous electronic vehicles. Medical and wearable devices are boosting chip sales. And new features keep sales of Apple iPhones and Samsung Galaxy smartphones at a high level, even as the industry matures and growth rate slows.
Even larger and looming on the horizon, the Internet of Things is expected to encompass all of those products and applications. Analysts are forecasting that the associated market could be bigger than PCs in terms of billions of chips sold.
Basically, IoT means connecting everything to the Internet and to each other. That includes appliances, clothes, medicines, autos, homes -- virtually everything that's part of everyday lives.
Chip designerARM Holdings (ARMH) is among those investing heavily in new technologies to develop the IoT.
On ARM's third-quarter earnings call on Oct. 21, CEO Simon Segars said, "The Internet of Things will smarten our cities, homes, places of work and bring new efficiencies to health care, agriculture and transportation."
Meanwhile, while the industry waits for IoT to gain momentum, chip sales are slack.
The SIA trade group forecasts that global chip sales will rise just 2.3% this year to $343 billion. The growth rate is seen edging up to 3.1% in 2016 amid steady sales of autos and smartphones.
That would be a significant drop from 8.9% growth a decade earlier in 2006, and miles below the double-digit growth 30 years prior, when sales soared 31% to $228.5 billion in 1986.
"In the short run, there are not a lot of true killer apps," Morgan Stanley analyst Mark Edelstone said. "As a result, growth in the semiconductor industry has been more modest" than in the past.
Scalise, who ran the SIA from 1997 to 2011, said that despite the leveling off, he expects chip sales to continue growing.
"Overall the semiconductor industry is doing very well, and revenue continues to tick up. It's a case now where there are new opportunities emerging in the auto market and others," he said.
Brains, Memory & Sensors
It takes a lot of different types of chips -- and chipmakers -- to make smartphones, tablets and PCs.
Intel, the world's largest chipmaker with sales north of $55 billion a year, makes microprocessors -- the "brains" of PCs, network servers and other devices. It wants to get a foot in the door of the IoT market too.
Buying Altera gives Intel new types of chips that can be reprogrammed. "We are excited about the opportunities and innovations that integrated (programmable technology) will make possible, in both the data center and Internet of Things," CEO Brian Krzanich said during Intel's Q3 earnings call on Oct. 13.
Memory chips from Boise, Idaho-basedMicron Technology (MU), South Korea's Samsung and others temporarily hold data while a user is texting on a smartphone or playing games on a tablet.
Microcontrollers -- tiny special-purpose processors made byCypress Semiconductor (CY), and sensors made by NXP Semiconductors,Texas Instruments (TXN) and others -- measure and regulate brightness, temperature, weight and other factors.
Nvidia (NVDA) is a leading supplier of video chips, and Qualcomm (QCOM) provides communications chips.
When it comes to end markets, smartphones are among the biggest users of chips. UBS forecasts that Apple will sell 75 million iPhones in the December quarter. In the third quarter, Apple captured 94% of all smartphone industry profits, racking up $17.8 billion in smartphone operating income.
Semico's Feldhan said the smartphone arena is the only major semiconductor market currently growing unit sales at a double-digit rate, but that growth has limits.
"It's a big market, well over a billion units a year. But this year is probably the last year we will see a double-digit growth rate," Feldhan said.
"Once you get to 1.5 billion units a year, it's hard to maintain that. We expect 13% growth this year, then a drop to 8% next year."
While it cranks out iPhones, Apple is jockeying to be a leader in the Internet of Things too. The Apple Watch is one of the first smart wearable products, and Apple is rumored to be developing technology for autonomous, Web-connected cars.
Currently Apple makes the A9X -- the main processor used in the iPhone 6 and iPhone 6S. It's based on an ARM processor core.
Alphabet (GOOGL)-owned Google in October placed a want ad for a "multimedia chip architect" who can "lead a chip development effort," according to Business Insider. It may follow Apple's example and make chips for its Pixel tablets and other devices.
Even as the IoT starts to take shape, macroeconomic forces are keeping a lid on chip sales.
China's slower economic growth is pressing down on sales.
"The second-largest economy in the world has slowed consumption of tablets and other electronic devices. When you have that large a piece of the pie missing, that affects the world market," Semico's Feldhan said.
The currency-exchange rate is taking a toll too, Robert Castellano, principal at The Information Network, said.
"The strong dollar is throwing a wrench in the works. The Chinese predominantly are buying most of their chips (rather than making them). If they have to keep buying those in strong dollars, that impacts them in terms of being able to purchase chips," Castellano said.
U.S. Is Still The Chip King
"There's an unfolding of technology and new apps that continues to provide new opportunities to grow demand," Scalise said.
"Because of our research, the U.S.-based companies in the semiconductor business are going to continue to hold a roughly 50% market share here at home and globally."
And the focus of U.S. chipmakers on the emerging Internet of Things is one reason for that dominance, according to Morgan Stanley's Edelstone.
The IoT is still in very early stages, Edelstone said, and will require high semiconductor content to enable medical connectivity, wearables and the smart home.
"Those are all Internet of Things apps, and their numbers will continue to grow," he said.
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