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Library Project: Industry Analysis Company: Intel Corporation Industry: Semiconductors

ISQA 8060: Dr. Deepak Khazanchi October 19, 2000

This article is being made available with the permission of the author, Mr. Vikrant Chaudhari.

Introduction: The global semiconductor Industry has undergone major changes with strong recovery in 1999 after undergoing downturn in 1998.Intel is the World's largest semiconductor chipmaker, which powers more than 80 percent of the PCs worldwide. Intel has become a household name in recent years indicating strong presence worldwide. It is known as key driver of the personal computer revolution. Industry Composition: The major players in semiconductor industry are Intel, NEC, Toshiba, Samsung and Texas Instruments. According to Dataquest market estimate for 1999 revenues, Intel is the biggest player with a market share of 16.1 percent followed by NEC (5.8%), Toshiba (4.7 %), Samsung (4.4%) and Texas Instruments (4.4%).
Herfindahl Index (Based on 1999 Revenues in millions of dollars) Sr No 1 2 3 4 5 6 7 8 9 10 11 Company (Country) Intel (U.S.) NEC (Japan) Toshiba (Japan) Samsung (S.Korea) Texas Instruments (U.S.) Motorola (U.S.) Hitachi (Japan) STMicroelectronics (France) Philips (Netherlands) Siemens (Germany) Others TOTAL MARKET Revenue 25,810 9,216 7,594 7,095 7,095 6,425 5,521 5,080 5,065 5,010 76,222 160133 Market Share 16.1 5.8 4.7 4.4 4.4 4.0 3.4 3.2 3.2 3.1 47.6 100.00 Squared Values 259.21 33.64 22.09 19.36 19.36 16.00 11.56 10.24 10.24 9.61 0 411.31

Since the market share of the smaller players are widely dispersed and do not add to the index value, the Herfindahl for the entire industry is close to 411, indicating intense competition. The industry is less concentrated and will not be affected much by mergers and acquisitions.
Market Share
Intel (U.S.) NEC (Japan) Toshiba (Japan) 16.1 5.8 47.6 4.7 4.4 4.4 3.1 4 3.4 3.23.2 Samsung (S.Korea) Texas Instruments (U.S.) Motorola (U.S.) Hitachi (Japan) STMicroelectronics (France) Philips (Netherlands) Siemens (Germany) Others

Geographic Dispersion: Semiconductor industry is global both in terms of usage and production. Most of the larger industries are based in United States and Japan. Europe and Asia/Pacific to have fair share in production. American region is the worlds largest region in semiconductor consumption accounting for 30 percent of total consumption. The Asia/pacific region, Japan, and Europe accounted for 25, 22 and 21 percent respectively. Two regions, Japan and Asia/pacific showed rapid growth in consumption in 1999. Intels 43 percent revenue for 1999 comes from American region, which shows a dominant presence in the largest market. Europe and Asia/pacific account for 27 and 23 percent Intel revenues respectively. Industry growth: In 1999 global semiconductor industry staged a strong recovery as compared to 1998 in which it went on a decline. Sales rose by 18.9 percent in 1999 aggregating $149 billion.

A strong demand together with improved pricing conditions has fueled growth in year 2000.Sales increased at an average of 30 percent every month compared to same month last year. Intel expanded its revenue at a compounded annual growth of 25 percent in 10 years beginning 1990. Sales for Intel increased by 11.78 percent in 1999 to 29.4 billion from 26.3 billion previous years. Intels revenue growth is 37.67 percent lower than the industry average. This shows that the company is growing significantly less than the peers. From a geographic perspective, the recovery has been broad based with Japan and Asia/pacific accounting for robust growth. Thus indicating reasons for less growth of Intel as it has limited presence in these markets. Current problems and opportunities: A key difference between semiconductor industry and traditional industries is that the latter relies on price increase to aid growth while the semiconductor industry operates in a persistent state of deflation. The advancement in semiconductor industry has led to decrease in cost of production and improved performance and throughput. With falling prices and improved performance more end-user applications are using semiconductors, which explains the relationship between falling prices and sales growth averaging 17 percent annually. Intel slashes prices for its processor chips every quarter by 10-to15 percent creating intense competitions, which results in further price reduction. This is creating problems for vendors and distributors with existing inventory. According to Moores law, since the invention of the chip the number of transistors on the chip have doubled every year and the trend continues. However the key question is: How long can Moores law hold true? According to design and manufacturing constraints

this law should hold steady for another 5 to 10 years. The industry has overcome technological obstacles so far, but in the future it may reach a threshold beyond which it will be difficult to make powerful and cost effective chips to achieve sales growth. Intels chip development process has followed the Moores law with speed of the processor doubling every year. Their major competitor in the fast processor market is AMD, who has released chips with comparable speeds. Cost patterns and profitability patterns: Declining prices are normal in a semiconductor industry. Hence it is common to find strong growth in sales with steady or declining revenues. Several factors influence profits in a semiconductor industry: capacity utilization of plant, raw material pricing, competition for a particular product in the market etc. Intel has good capacity utilization of plant, product mix of semiconductors for various market segments. It has used its semiconductor presence to leverage its communication and networking products to command higher sales resulting into higher profits. Semiconductor companies have a high fixed cost of goods sold due to high cost associated with manufacturing plants. The variable costs are small part in the total cost. Each incremental dollar of sales produces more profit on the bottom line, as fixed costs are spread over a larger sales base. Hence, the amount of change in profit is greater than that of change in sales. Profit margins also vary widely, depending on market segmentation and industry conditions. Intel so far has managed to develop cutting edge technology products ahead of its competitors commanding higher price resulting in larger profit margins. Market Outlook:

Currently the semiconductor industry is in the middle stages. Most of them are planning major expansion with high capacity utilization and strong demand for products in the market. High growth rate of approximately 20 percent will be achieved in both 2000 and 2001 based on revenues, which is more than the average annual growth rate of 17 percent that has been achieved over the past two decades. The new capacity, which will be completely functional by 2002 will result in weak pricing and therefore a downturn in year 2003.This downturn can be smooth or compensated by strong growth in Internet, wireless communication and broadband communication. Intel had a record third quarter revenue of $8.7 billion for 2000, a quarterly record, up 19 percent from the third quarter of 1999. The company expects revenue for the fourth quarter of 2000 to be up 4 to 8 percent from third quarter. Intels long-term debt/equity ratio is 83.33 percent lower than the industry average, which means the company may not be as financially constrained by interest payments as its competitors. The major factors of growth for Intel are strong growth of personal computer industry, continued success in technological advances, challenger AMDs performance, and strong U.S. economy. Recently it has made foray into networking, communication and software products by using its strong brand equity, existing distribution channels and semiconductor products. Its major fears for lower forecast are large backlog of inventory and delay in launch of Pentium4 processor. Marketing: In the semiconductor industry most of the products are sold directly to original equipment manufacturers (OEMs) and distributors. To get business from other companies semiconductor manufacturers approach customers early in the design process. The term

Design win indicates an acquisition of a contract from OEMs to supply products. More recently however companies like Intel and AMD have aggressively tried to create brand awareness among consumers. Intel specially has a very high level of brand awareness among consumers. Intel has created good brand awareness through billboards, television and magazine advertisements. It has tried to create brand loyalty by making sure that customer buys a PC with Intel chips. It has expanded its distribution channels through resellers and retailers for a wider market reach. Recently it has made merchandise available for purchase via Shop Intel SM web site.

References: 1. Marl Lapedus. Global semi sales hit record high. Electronic Buyers' News Special Issue 1232. 9 Oct. 2000 http://proquest.umi.com/pqdweb. 2. Company Info. Intel Corporation. 17 Oct. 2000 http://www.intel.com/intel/index.htm?iid=intelhome+company&. 3. Financial Analysis. Intuit Inc. 15 Oct. 2000 http://www.quicken.com/search/?search=intc. 4. T.W. Smith. Semiconductors. Industry Surveys. Newyork: Standard & Poors, 2000. Volume 168, No. 20, Section 2(May 2000):1-32.