Cost-cutting measures taken in 2002 to buttress semiconductor companies' sliding profits became evident in the year's rankings, as players exited flagging or noncore product lines, or combined efforts to share research and development and manufacturing resources.
But the efforts did little to shore up average selling prices, which continued their downward spiral as excess capacity plagued the industry.
As usual, the DRAM market produced the most drama, highlighted by Mitsubishi Electric Corp.'s decision to fold its DRAM operations into the Elpida Memory Inc. joint venture between Hitachi Ltd. and NEC Electronics Inc.
While the action didn't stir up the top tier, it added to the flux that followed Toshiba Corp.'s 2001 exit and lingering uncertainty over the fate of financially troubled Hynix Semiconductor Inc. And it could see Elpida push rising star Nanya Technology Corp. out of fifth place in the 2003 rankings.
On the SRAM front, where overall revenue dropped 33% last year, fourth-ranked IBM Microelectronics quietly bowed out, allowing No. 3 Cypress Semiconductor Corp. to gain share in the high-performance segment, while other top suppliers lost ground.
Not everyone scaled back investments. Samsung Electronics Co. Ltd. turned weakness in the DRAM market into its strength in NAND flash. By plowing capital into a state-of-the-art flash IC fab and setting an aggressive pricing strategy, Samsung came on strong in the overall flash market, rising eight positions to knock Advanced Micro Devices Inc. out of second place, all the while handily maintaining its DRAM market lead.
As excess capacity across the industry keeps severe pressure on IC pricing, consolidation continues. The recent merger of Hitachi's and Mitsubishi's semiconductor operations into Renesas Technology Inc. is expected to create this year an imposing new presence in four separate semiconductor categories--flash, logic, microcontrollers, and SRAM--and challenge longtime leaders for top rank.
And a NAND flash alliance between Hynix and STMicroelectronics Inc.--potentially adding the capacity of two leading-edge fabs--could this year create a challenger to Samsung's newfound dominance in that flash segment.
More importantly, it will contribute to further price pressure on NAND flash devices. According to Jim Handy, a Los Gatos, Calif.-based analyst with Semico Research Corp., the Hynix-ST alliance, coupled with Samsung's fab expansion plans, will leave the NAND flash market in a glut until 2006 or 2007.
"We expect to see 30% to 40% price erosion per year," Handy said, despite rising demand for consumer products that use removable memory cards based on NAND. In 2002, the NAND portion of the flash market surged 19% while NOR flash declined 24%, according to Semico.
NOR prices are expected to level off this year, after dropping severely in 2002. Cellular handsets remain NOR's driving force, though lower-than-expected handset unit shipments so far this year have kept NOR supplies ample, disappointing suppliers that had hoped to raise prices.
Intel Corp., which took significant share away from AMD and Fujitsu Ltd. in 2002, gave some back in the first half of 2003 when customers rejected its attempt to raise flash prices. At its peak last year, Intel had 35% flash market share. Its current share is below 30%, according to Handy.
AMD and Fujitsu, with their merged operation, Fujistu-AMD Semiconductor Ltd., will likely benefit from Intel's misstep, but more so Sharp Corp. and ST, which are already shipping 128-Mbit NOR chips--expected to be the volume driver this year.
Excess capacity also plagued SRAM suppliers, with pricing pressure expected to remain for the foreseeable future, said Brian Matas, an analyst at IC Insights Inc., Scottsdale, Ariz.
Of the top eight suppliers, only Cypress showed gains in 2002, due to its concentration on specialized, high-speed SRAMs, which generally command higher ASPs, Matas said.
Samsung in driver's seat
The top four vendors still control 75% of global DRAM sales. Analysts don't see this changing any time soon, but much depends on the fate of Hynix.
Matthew Godfrey, memory analyst with Phoenix-based Semico, said the biggest DRAM suppliers may only get bigger, taking market share from the smaller companies, which are challenged to compete in the race to 0.11-micron and 90nm processing and 300mm-wafer fabs.
Samsung for several years has held the lead, with an estimated $4.8 billion in DRAM sales and 31.7% market share last year, according to Semico. The Korean chipmaker has relentlessly pursued a strategy of being first to market with next-generation memory, garnering higher ASPs and profit margins. Samsung is one of the few DRAM suppliers that have remained in the black through several years of DRAM market contraction.
No. 2 Micron Technology Inc. was late to reach 0.11-micron processing, but claims it is now on track to achieve 50% of all its DRAM production at the process node by the end of this year.
Analysts expect Infineon Technologies A.G., in third place, to continue gaining market share, as a raft of new alliances come into play with Nanya Technology, Winbond Electronics Corp., and Semiconductor Manufacturing International Corp., while the company also ramps up production at its own 300mm-wafer fab.
Little MPU movement
Little has changed in the PC microprocessor rankings either. But Intel's pre-eminence has forced smaller contenders to branch out into new areas, which should give systems companies a little more variety, said Shane Rau, an analyst at IDC in Mountain View, Calif.
The segment has become so consolidated that the only hope the top suppliers have for growth is to stimulate demand through price competition and faster clock speeds, Rau said.
And compete the two of them did. Throughout 2001 and the first quarter of 2002, AMD managed to pick up a few points of market share with its high-end Athlon and Athlon XP processors. Intel responded by cutting prices on its Pentium 4 chips and hiking performance.
As for spurring demand, the strategy was "modestly effective," he said, noting that it will take an economic recovery to improve demand for PCs and processors, which IDC sees starting deep in the second half of this year.
Meanwhile, small players like Transmeta Corp. and Via Technologies Inc. are staying in the game by diversifying their target applications. Transmeta has established itself in the ultralow-power notebook arena, and recently made a foray into the embedded-computing space. Via has focused on "value" PCs, directing its sales toward Brazil, China, and India, as well as low-cost U.S. retail channels such as Walmart.com.
Intel, too, continues to assert itself in new markets. "The Centrino platform is a good example of how Intel is using its success in one or two spaces--mobile PC processors and flash memory--to wedge itself into the wireless LAN space," Rau said.
AMD, which exists mainly so buyers have a second source, will do well to trace Intel's steps in the mobile PC, workstation, and server arenas, he said.
Oasis of growth
Few segments escaped the economic downturn unscathed, but DSPs continued to provide an oasis of growth within the beleaguered semiconductor market, posting about a 14% increase last year, led by the wireless market. The DSP segment is on a pace to grow 20% in 2003 and 30% in 2004, according to Forward Concepts Co., Tempe, Ariz.
"There are two simple reasons: supply and demand," said Forward Concepts analyst Will Strauss. "This is also a market where we are actually seeing an increase in ASPs as the wireless market moves from 2G to 2.5 and 3G, which is requiring more horsepower per chip."
Texas Instruments Inc. increased its strong lead over its three main competitors last year, from 40% to 43.2%, and Strauss doesn't anticipate major shakeups in the vendor rankings in 2003.
Wireless in 2002 accounted for 65.8% of the programmable-DSP market, up from 55.1% in 2001, due primarily to a drop in both wireline communications and computer-related applications. The bulk of the wireless market is composed of DSPs used in digital baseband ICs for cellular handsets, although DSP use in wireless basestations is also showing significant growth, Strauss said.
According to Gartner Dataquest, San Jose, cellular handset shipments in the first quarter of 2003 were up 18.2% from the same period a year ago, with 113 million phones shipped compared with 95 million. A similar pace for the rest of the year would push the handset market past 450 million units, surpassing the 410 million shipped in 2002. Forward Concepts has projected a total of 490 million handset shipments this year, which could provide a much needed boost for flash memory and SRAM, as well as DSPs.
Microcontrollers also provided a refuge for some suppliers. Though the segment declined 3% in 2002, IC Insights forecasts 11% growth this year and a 4% rise in ASPs, as automotive systems and consumer goods build in ever more electronic controls.
A surprising push by Microchip Technology Inc. in the 8-bit segment has sparked interest anew, with Motorola Inc. investing significant R&D and manufacturing to advance its 8-bit capabilities, noted IC Insights' Matas.
Meanwhile, the formation of Renesas, with combined 2002 revenue of $1.99 billion and a formidable position in the 8-, 16-, and 32-bit segments, threatens Motorola's longtime MCU leadership of the $9.35 billion market.
Although 8-bit prices remain under pressure, strength will come from 16- and 32-bit designs, as system companies seek greater functionality for applications in automotive sensing systems, precision industrial and medical equipment, and retail point-of-sale terminals, Matas said.
Demand for more sophisticated power supplies and personal electronics with longer battery life propped up the analog IC segment, with the top two power management IC suppliers--ST and TI--also dominating the analog chart.
Third-ranked Infineon is quickly expanding its presence in power management--particularly in the automotive market--at a pace that could help it grow faster than other analog IC companies. But separated from the top tier by nearly $1.4 billion in revenue, Infineon is unlikely to topple either ST or TI for quite some time.
"ST and TI are fairly safe, probably for the next five years, but Infineon will start to challenge," said Gary Grandbois, an analyst at iSuppli Corp., El Segundo, Calif.
Fairchild Semiconductor International Inc. could potentially enter the top 10 in a few years, Grandbois said.
Power MOSFETs were among the devices under the heaviest price pressure in 2002, with ASPs falling 19% per quarter on average, after sustaining a 19% decline in all of 2001. Prices leveled off near the end of 2002, according to iSuppli.
Programmable-logic suppliers, still closely tied to the fortunes of telecom and networking OEMs, continued to get pummeled, showing combined negative growth of 12.2% in 2002. Yet, little has occurred in recent years to loosen the stranglehold of Xilinx Inc. and Altera Corp., which together held more than 80% of the PLD market.
Their dominance boils down to economies of scale and R&D budgets that allow rigorous work to advance the capability of PLDs while also coming up with new ways to further encroach on the low end of the ASIC market and get a foot into emerging applications in the storage, automotive, and industrial markets, said Bryan Lewis, an analyst at Gartner Dataquest.
ASIC vendors are responding with products that address time-to-market and reduce development cost. "This could stem some PLD growth, but PLDs still bring a lot to the market, in terms of flexibility," Lewis said.
The R&D-intensive nature of PLDs led Agere Systems Inc. to withdraw from the sector, selling its FPGA operations to Lattice Semiconductor Corp. in January 2002, though for Lattice poor market conditions offset any gains from the acquisition.
Meanwhile, midtier companies like Actel Corp. are "doing a good job of dancing around the niches that provide long-term opportunity to grow," including military and automotive, Lewis said.
With demand for communications infrastructure equipment on ice, suppliers of discrete logic felt the chill as the market contracted 22.8% in 2002, to $1.35 billion. All of the top six--accounting for 87% of total revenue--saw double-digit declines, and severe price erosion continues to plague suppliers, said iSuppli Corp. analyst Betsy Van Hees.
"Five months ago, HC/HCT logic gates were about 5 cents to 6 cents. We're seeing it now as low as 3 or 4 cents," Van Hees said. "There's nothing on the immediate horizon to stimulate a price increase or significant growth this year."
IDC's Rau contends that the elusive PC upgrade cycle--expected to spur corporate IT spending and lift the semiconductor market out of its doldrums--will kick in during the second half of this year. However, with manufacturing capacity in oversupply throughout the industry, analysts believe ASPs will stay under pressure for a long time to come.
Additional reporting by Darrell Dunn and Jack Robertson