There is no tricky industry as the semiconductor field. Small mistakes here could set back a company immensely, both in terms of time lost and money spent that cannot be recouped. For in this industry, innovation is the only way to stay competitive, and consequently afloat. The development cycles are long, and firms must wager heavily on technology trends way before the products that they create find their way into the market. Think about that for a while…
This is an industry a billionaire would quickly turn into a millionaire, if I may paraphrase Buffet when he once described the airline industry.
And the figures themselves are boggling.
In 2014 alone, the chip companies worldwide spent $56 billion on semiconductor R&D efforts, with Intel leading the line, according to data from The 2015 McClean Report. Of the top 10 R&D spenders in the year 2014, five are based in the United States, three are from the Asia-Pacific region, with Japan and Europe represented by one each in a list that includes five IDMs, four fabless suppliers, and TSMC – the foundry operator.
The increasing cost of doing business is not helping matters. This has seen some firms opt for asset liquidation, but what we are mostly witnessing is the big fish swallowing their smaller counterparts in a merger melee. Take a few examples, courtesy of a compilation by the New York Times…
Intel took over Altera in a deal worth $16.7 billion this June. A month prior, Avago Technologies acquired Broadcom for $37 billion. A month before that, OmniVision Technologies was getting swallowed by Hua Capital Management in conjunction with CITIC Capital Holdings and GoldStone Investments in a deal worth $1.9 billion. And a month before that, NXP Semiconductors acquired Freescale Semiconductor at a cost of $11.8 billion.
This has been the trend between 2013 and 2015, and these are just examples in a list of many.
And it is understandable. In this industry, it has to be.
According to Mark Hung, an analyst with Gartner, it cost $10 million to $50 million to design a new chip and turn it into a product. Today, that figure hinges between $100 million and $200 million. Solving what he refers to as ‘weird and challenging physics problems’ calls for a lot of costly equipment, the reason we are seeing all the mergers and acquisitions.
This brings us to our point of the day: cost cutting, aka taking austere measures.
The semiconductor industry can slash costs through a systematic approach involving three key areas: material costs, R&D costs, and service costs.
While we won’t dwell on each of them today, you probably can guess what’s involved where. But I want to shift your attention to one often underestimated aspect of cost reduction. It falls in the material side of things: cutting costs through asset recovery.
Chip manufacturers can at times be accused of failing to employ the right method when recovering their assets, either through entering into partnerships with the wrong crowd, or doing asset disposition the wrong way.
Liquidating assets is one way these firms can recoup the initial outlay, but not finding the right partner to do that may live you shortchanged. In the case that some assets are no longer valuable given considering their age, semiconductors may also find solace in donating the equipment to a reputable dealer.
In terms of money, they kill the proverbial two birds with one stone. One way they accomplish this is not paying asset taxes any more, and second, donating equipment to such a recognized recovery solutions vendor earns them a tax deduction from the IRS that could be as high as 50 percent of the residual value.
In an industry where cost cutting is increasingly growing paramount, sealing leakages in the coffers through every possible way matters. This is particularly so considering the nature of high-end consignment synonymous with these companies, as well as the time frequency for doing so. In a 10-year-old period, you would be surprised by the funds that could be saved.