Factors Affecting Semiconductor Industry

Factors Affecting Semiconductor Industry

The semiconductor industry is one of the most rapidly changing industries in the market. It is known to be recurrent and characterized with many changes, short product life cycles, huge demand and supply fluctuations, rapid and constant change and price erosion. The industry is also characterized with technological changes and evolving market standards. Therefore, there are a wide range of factors affecting semiconductor industry as discussed below:

Key factors affecting semiconductor industry


For many years now, semiconductor industry has been known to be highly volatile. Demand and supply for semiconductor products have fluctuated cyclically causing pronounced changes in margins and prices. The cyclicality of the market and industry occurs due to many factors including changes in demand of end products using semiconductors. There are also fluctuations in the manufacturing space available for semiconductors production.

Normally, semiconductor industries take many years to plan, construct and even start operations. In the past, manufacturers have made various capital investments in plant and equipment during market conditions that were often favorable. This is in response to anticipated growing demand for the products.

Threat of New Entrants

When semiconductors industry was still new in the market, design engineers would go from one company to the other. Today however, the industry has grown and setting up one chip fabrication costs a lot of money (investment dollars).

Additionally, entry expenses are relatively high making it impossible and painful for all in some cases including big players to enjoy the benefits. Despite such issues, there are indications that in the near future, things may change and semiconductor industries will form or create alliances to spread manufacturing costs.

Technological advancement and competition

Technological competition is one of the major factors affecting semiconductor industry. The market environment is characterized with intense competition between rival companies. Chip makers on the other hand are often under a lot of pressure to design new and cheap products but faster and better to make them state of the art. This kind of pressure extends to distributors, design labs and foundries.

Pressure in essence is felt by all those who are connected to the business in an effort to ensure that the chips are carefully developed from Research and Development into high quality equipment. The end result is an industry that continues to produce cutting edge technology while ensuring the business environment is volatile.

Availability of substitutes

Availability of substitutes threatens the industry because it is largely dependent on the segment. It is worth noting that there is intellectual property protection that only offers protection against new substitute chips only for a short duration but there are many companies that still produce same products at lower prices.

Copycat companies on the other hand are highly present in the market hence, a major problem for semiconductor industries that spend up to billions in creation of a faster and a reliable chip. This is in an effort to cut down on research and development costs.

Buyer’s power

There are many players in the industry including large players. The number of consumers tends to be low and this means they have little or no bargaining power. Therefore, they purchase products at a price that large players settle on.

Intellectual property

Intellectual property also affects semiconductor industry. For example, the industry is high tech based and due to this nature, there are many intangible assets relating to proprietor technology and is of great importance. Therefore, companies that get products or supply products to the industry get many revenues from licensing IP right from pursuant to cross licensing arrangements.

Other factors affecting semiconductor industry include

Manufacturing in semiconductor industry is capital intensive based on the capacities that are necessary to achieve and maintain a competitive position. For instance, top ten capital spenders in the industry often account to only 60 percent of the industry’s spending budget. Product designs and manufacturing processes are also based on cutting edge technologies that need considerable research and development expenditure.

What’s more, high fab operating cost is fixed hence, an increase or decrease in utilization capacity that affects profitability of the industry significantly.

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