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					Electronics

Major Industry Trends
If there is one sector that is changing the nature of the world we live in faster than any other, it is electronics.
From mobile phones to the internet, from telecommunications to satellite TV, electronics are ubiquitous,
and advancing by leaps and bounds, with more power being crammed into less space year on year. It is
fashionable at this point to quote Moore’s Law. Geoffrey Moore was the co-founder of the PC chip company,
Intel, and the man famous for predicting that the number of transistors on the same-sized piece of silicon
would double every two years—without bothering even to imply an end date for this process.
A few years ago, it was thought that Moore’s Law was running out of steam, as circuits were (a) becoming
small enough for quantum effects to introduce instability in current flow, and (b) becoming crowded enough
for the heat generated from operating the chip to start to be a real problem. However, advances in silicon
substrate technology (the introduction of metal oxide gates, for example) opened up the door again, and
Moore’s Law still holds good. Instead of Intel merely producing one central processing unit (CPU, the
calculating “heart” of a microcomputer) on a chip, it produced first two CPUs per chip, then four, then eight,
and we are very close to 16-CPU chips, with higher multiples possible and planned beyond this.
Simultaneously, the software industry is on a steep learning curve as it rewrites its applications to take full
advantage of the vast amounts of processing power becoming available, whether at the server, on people’s
desks, or on a plethora of handheld devices, from palmtop computers to mobile phones.
As the amount of cheap computer power available to engineers has increased, the power of electronics
to transform the world has moved forward in leaps and bounds. No part of industry is now untouched. The
ability to simulate real physics inside “the box” has allowed car makers to stress-test both virtual parts
and the whole design, long before metal goes anywhere near being machined. In advanced medicine,
biosciences companies model molecules and processes to predict drug interactions on target proteins or cell
constituents, before any real-world work is done. In the oil and gas sector, vast data sets from seismic and
advanced scanning of reservoirs are turned into visual, three-dimensional models that geologists can “walk
through,” to examine reservoirs “from the inside” before any well is drilled.
The ability to create and explore real physics through virtual models increases dramatically with each new
breakthrough in processing power. Advances in electronics truly have the power to change the rules for
whole industries.
The electronics manufacturing sector is generally separated from the electrical manufacturing sector by
a technical distinction. Under this, the term “electronics” refers to the flow of charge through non-metal
conductors, such as silicon in semiconductor implementations, and “electrical” refers to the flow of charge
through metal conductors. Electrical is all about wires, and electronics is all about semiconductors, broadly
speaking. The latter leads to printed circuit boards (PCBs) and memory chips, while the former leads to
white goods and power stations (with the proviso that almost all electrical goods these days have some PCB
control circuitry somewhere).


Market Analysis
From an industry perspective, electronics has spawned a vast range of specialist industries, from the IT
industry (dominated by the likes of IBM, and its competitors, at the mainframe end, and Intel and AMD at the
PC end), to the mobile-phone market. It includes TV-set manufacturers, video-game consoles, and, across
an array of industry sectors, a vast army of specialist control-systems manufacturers, not to mention the
aviation and auto sectors, both of which could not exist in their present forms without massive input from the
electronics sector. Then there is the medical devices market, and so on.
Asia, today, is regarded as the powerhouse of PCB and memory-chip production, yet it all began through
a combination of some breakthrough research in Japan, and US companies outsourcing first PCB
assembly, then PCB fabrication, to Asia to take advantage of cheap labor rates. Today, Asia’s dominance in
motherboard and memory-chip manufacturing has reached the point where a US air force colonel, Charles

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Howe, was prompted to write a strategic study looking at the potential impact on US national security of
having so much of the electronics industry outside the United States.
The point is not without irony, as the semiconductor industry began in the United States with innovations
such as Texas Instruments’ invention of the integrated circuit in 1958, and Intel’s production of the first 8-
bit microprocessor, the 8008, in 1972. Howe’s study gives a very clear account of the integrated circuit (IC)
design process. The basic design process requires electronic design automation (EDA) software in the
hands of experts. Fabrication involves “etching” or imprinting the designs onto silicon wafers.
Each new generation of chip tends to require either a totally retooled fabrication plant (“fab”), or a new plant
built from scratch. Each plant costs around US$3 billion, which means that each new generation of chip
represents a huge bet by the manufacturer that it can sell vast numbers of its chips to the various global
markets.
Very few companies in the world can bet on that scale and get it wrong twice, so semiconductor chip
manufacturing is a game with very high entry costs, and is played for very high stakes. Asian chip companies
generally play a safer game, and focus on producing not CPUs, but peripheral components, such as
motherboards and memory chips.
The entire semiconductor industry is tremendously vulnerable to downturns in the economy, as in all
markets, from PCs to mobile phones, the sale of new products is predicated on global growth. There is no
doubt that the semiconductor industry is suffering from the global downturn. The industry recorded its first
year-on-year drop in sales, at the end of 2008, since the dot.com crash in 2001.
According to the Semiconductor Industry Association (SIA), total sales for 2008 amounted to US$248.6
billion, down slightly from the US$255.6 billion figure for 2007 (#2.8%). In 2009, sales fell once again, down
by 9% to US$226.3 billion. Total sales for 2009 surpassed the SIA forecast of US$219.7 billion. However,
there were signs of improvement towards the end of the year. In December 2009, sales reached US$22.4
billion, an increase of 29% from December 2008, when sales were US$17.4 billion.
SIA president, George Scalise, was quoted as saying that “sales in the final quarter of 2009 were supported
by healthy demand in a variety of end markets including PCs, cell phones, and consumer electronics. In
2010, unit sales of personal computers and cell phones—which account for approximately 60% of total
semiconductor consumption—will grow in the low-to-mid teens, providing a solid platform for chip sales.
Consumer electronics are expected to grow in the mid-single digits,” Scalise continued. “We are also seeing
the effects of recovery in the enterprise sector and we believe this trend will continue,” Scalise noted.
The SIA added that China and India, two key emerging markets, are also driving demand. In addition to
purchasing consumer items such as handsets and computers, both regions are continuing to invest in
wired and wireless infrastructure. These investments in infrastructure create demand for a broad range of
semiconductor products. “Advances in technology are continually enabling development of new products,
such as netbooks and tablet computers,” said Scalise.
“Attractive price points for these products are creating new market segments that hadn’t previously existed,
and they are adding to overall semiconductor demand. With improving consumer confidence and signs
of economic recovery around the world, the semiconductor industry is well positioned for growth in 2010,”
Scalise concluded.

The Asian Semiconductor Industry
The Asian semiconductor industry began in the 1960s, with small pockets of foreign investment. Japan
established a semiconductor industry in the 1970s, and in 1979 Fujitsu became the first company to mass-
produce 64KB memory chips, with Japan cornering the world market in memory chips by the mid-1980s,
passing the United States in semiconductor production volumes. By the late 1980s, South Korea had
developed a thriving memory-chip industry, with companies such as Samsung enjoying rapid growth.
Taiwanese investment generated the world’s first “on-demand, fab-for-hire” plant, and Singapore, Malaysia,
and China have all developed significant chip industries.
According to Colonel Howe’s study, the first US outsourcing investment in the sector was by Fairchild
Semiconductor in Hong Kong in 1961. Outsourcing began with chip assembly (bringing the various
components together to complete a printed circuit board), then moved to fabrication, and, later, in the 1980s,
to chip design.
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Asia now accounts for around 60% of global sales, and is home to many of the world’s leading chipmakers.
Many analysts described 2009 as a terrible year for the industry, yet Asian markets, although declining,
performed relatively well compared to other areas of the globe. According to figures from iSuppli, the US
analyst house, shipments of semiconductors to Asia-Pacific declined by only 5.3% in 2009—by far the best
performance of any major worldwide region for the year. In contrast, Japan’s revenue fell by 20.7%, EMEA’s
by 20.5%, and the United States’s by 10.5%.
“In a dismal year for the chip industry, suppliers based in Asia-Pacific managed to eke out some growth in
2009 as they focused on hot semiconductor products and capitalized on strong demand from the region,”
Dale Ford, a senior vice-president at iSuppli, was quoted as saying. He added that, “these companies
represented some of the leading players in hot-selling product segments in 2009, including NAND and LEDs.
They also were able to cash in on semiconductor sales driven by China’s stimulus plan, which spurred
massive consumer spending on a range of electronic products during the year.”
Following the downturn seen in 2008 and 2009, Asian chipmakers are now looking forward to a rebound in
demand, and profits from 2010 onwards. Better-than-expected demand for personal computers and limited
output by smaller players have boosted prices of dynamic random access memory (DRAM) and NAND
memory chips, which began to benefit sector leaders such as Samsung Electronics, Hynix Semiconductor,
and Toshiba towards the end of 2009, and this trend continued into 2010. However, the sector’s history is
marked with volatile cycles of shortages and oversupply, and some analysts have warned the industry could
be setting itself up for a supply glut. Memory chipmakers returned to profit in late 2009 after several quarters
of losses, as prices rebound and PC demand grows, aided by strong growth from China. After over a year
of depressed spending on technology purchases, businesses are widely expected to invest more in 2010,
as they upgrade aging IT hardware, but a growing list of chipmakers with new investment plans threatens to
push the sector back into a volatile oversupply cycle.
According to the Electronic Industries Alliance (EIA), a national trade organization that includes the full
spectrum of US electronics manufacturers, national paranoia about where semiconductor work is done, or
who “owns” what, has the potential to be hugely counterproductive to the sector. As a sector that thrives on
R&D and innovation, the greater the number of participants, and the freer and more open the semiconductor
“universe” is, the better it will be for the sector, and for the global economy, the EIA argues.
In an initiative titled “The Technology Industry at an Innovation Crossroads,” the EIA argues strongly against
what it sees as the possibility of protectionist policies stifling innovation in the sector. “The core value of a
knowledge-based company or society should be innovation,” it says. The United States and other Western
countries should not be worrying about the possibility of China or India dominating the semiconductor
industry in years to come; they should be working to develop a vision and a strategy for the sector, the EIA
says.
This opens up one of the really important themes for the sector. Electronics has enabled the globalization
of business, and the electronics sector has itself, in turn, been shaped by globalization. “The resulting
reorganization of manufacturing (in all sectors) along global lines, plus the creation of new, globally
competitive service and knowledge-based industries (of which the semiconductor industry is a prime
example) poses unprecedented challenges. . .” the EIA says.
Countries with weak science and mathematics education, and with a dearth of R&D funding, will fall behind
countries that prioritize these areas. Similarly, countries that stay open to what the EIA calls “the brightest
foreign minds,” and that allow their companies to recruit the best from around the world, will prosper, while
those that seek to restrict high-paid knowledge jobs to their own nationals will fall behind.
The semiconductor industry has already enabled software designers to go some way down the road to
“virtualizing” our world, creating immensely powerful tools for solving real-world problems far faster than ever
before, and enabling new products, new drugs, and new forms of entertainment (of which the video-games
console and the mobile phone are two stunning examples) to be brought to market extremely rapidly.
It is a safe bet that this sector is going to change life as we know it almost beyond recognition over the
coming decades. As such, it is certainly a sector worth watching.




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More Info
Report:
 •     Spillman, Mark S. “The Asian semiconductor industry and it’s potential impacts to US national security.”
       2007. Washington, DC: Industrial College of the Armed Forces.

Websites:
 •     Electronic Industry Alliance: www.eia.org
 •     Semiconductor Industry Association: www.sia-online.org


See Also
Industry Profile
 •     Information Technology

To see this article on-line, please visit
http://www.qfinance.com/sector-profiles/electronics




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