During the most recent edition of the TalkING round-table talk, Joost Eyck, associate partner at strategic consultancy Altman Solon, outlined how quickly the semiconductor market has changed colour. ‘The world looks quite different than it did six months ago. They weren’t seven lean years, but the past two years have hurt many suppliers. Fortunately, we feel the traction again and orders are pouring in. ‘Let’s hope this is the starting signal for seven prosperous years’, said Eyck.
‘Enormous growth is expected towards 2030. A structural tailwind, driven by AI’, Eyck continues. ‘That growth is primarily found in data centres and wireless devices, so in the most advanced logic chips and high-bandwidth memories. If you want to benefit from the growth, you therefore need to have AI exposure in your portfolio. You need to be locked into the most advanced technology platforms and roadmaps.’
At the same time, the centre of gravity within the chain is shifting. Where the front-end was traditionally dominant, other elements are gaining ground. ‘The back-end is still much smaller, but is growing a lot faster. That’s not surprising when you consider that many of the performance improvements in, for example, Nvidia chips currently come from advanced packaging. The market for advanced testing systems is also growing extremely fast.’
For Dutch suppliers in the semiconductor industry, multiple issues are at play simultaneously. It starts with capacity. ‘The most pressing issue now is to scale up quickly to benefit from the wave of growth’, notes Eyck. ‘At the same time, you want a flexible set-up so you can scale down again if necessary in between. If you do that smartly, the two of them can go hand in hand, for example, through automation and outsourcing of non-core processes.’
Behind that lies a more fundamental question about dependency. ‘Over the past few years, the dependence on semiconductors has increased enormously. On average, that’s easily 40 percent, and for many suppliers much higher than 50 percent’, Eyck outlines. ‘That exposure has hurt over the past two years.’ Now that the question is back, the focus is shifting again. ‘Diversification is fading into the background again, while for sustainable long-term growth, you simply need a robust portfolio, both within the semiconductor industry itself and outside of it.’
Margins and innovation are also under pressure. ‘Despite the upcoming growth spurt, the margin pressure of recent years will persist’, Eyck believes. ‘So it’s important to implement sustainable cost reduction, for example, in procurement and operations through nearshoring and automation. And to rationalise your portfolio: get rid of bleeders as quickly as possible, focus fully on margin customers, and standardise your long tail as much as possible.’ At the same time, there is friction regarding innovation. ‘R&D activities at many suppliers have come under pressure, partly due to private equity, which is looking more critically at those budgets. Innovation, however, is the engine of the success of this ecosystem. Less innovation is not an option, because it worsens your competitive position.’
According to Eyck, that role of private equity will be decisive in the coming years. ‘In the Netherlands, more than half of the chain is already in the hands of private equity’, he says. ‘That has undoubtedly helped, with capital, expertise and experience. But it also comes with its own challenges. It can get pretty explosive.’ What is changing is the way those investors operate. ‘In recent years, they’ve ridden the growth relatively passively. However, we expect private equity to intervene more assertively in the assets to create true value. It will revolve much more around integration, economies of scale, and realising synergy within buy-and-build processes.’
That development coincides with a highly dynamic international playing field. ‘In the US, huge investments are being made in production and R&D, and OEMs expect their suppliers to set up their hubs locally’, says Eyck. ‘In Southeast Asia, the ecosystem is growing extremely fast and shifting towards high-end manufacturing. That window of opportunity to go along with this is becoming smaller and smaller. Other suppliers also sense their opportunity and jump in. Some Dutch suppliers are hesitant to take the step to Asia, and that’s understandable. The reality is that you don’t have that luxury.’
