Netbook Chip Demand Rises

An excellent article on The Street argues that while Intel are still dominant players in both the traditional PC/Notebook space and the netbook space, they are being challenged in both the notebook and netbook space. According to Robert Castellano at The Street:

....the Atom is propping up Intel's unit shipments in the mobile PC sector. It's (Intel) making little or no money on the Atom anyway. A more important issue is that it (Intel) may be losing market share in the notebook market. Why? Because Intel had to fill orders for netbooks in the fourth quarter of 2008 and the first quarter of 2009 and made Atoms instead of Penryns, resulting in lower margins on a $29 CPU. Once PC OEMs migrated to the AMD CPU, they stayed with it.

I've also forecast previously that while Intel's Atom will hold more than an 80% share of the 23.5-million netbooks sold in 2009, a movement is underway that will enable the processor from ARM Holdings (ARMH Quote) to gain a 55% market share in 2012.

What I find astonishing (not unbelievable mind you) is Castenallo's prediction that ARM processors will have a 55% market share of the netbook space in 2012. This would be a drastic inversion of the market share for both companies. I am assuming Castenello is making this assumption based on his knowledge of both the Intel and ARM roadmap (as far as he can see it anyway) and so this inversion must be troubling for Intel. Certainly ARM has been pressing them in the mobile phone space for many years and this does indeed seem to be the natural progression for them. It would be interesting to see if ARM in the future plans to move further along the product train and try (at some point) to compete with Intel in the notebook space.

In related news Electronics Weekly reports that ARM-based netbook chip orders are set to max out the 65 nm and 55 nm processing plants at both TSMC and UMC. According to Electronics Weekly:

According to the Commercial Times of Taiwan, both TSMC and UMC will be at 100% capacity utilisation for 65nm and 55nm processes by November, because of a flood of orders placed on them for ARM-based Netbook chips.

The orders are coming from Qualcomm, Texas Instruments, Freescale Semiconductor Via Technologies and Nvidia.

Freescale says it has three Netbook design-ins expected to go into production before the end of this year, while Qualcomm says it has half a dozen design-ins. If TI, Via and Nvidia have three or four each, then there could be 20 ARM-based Netbooks on sale before Christmas.

Both Paul Jacobs, CEO of Qualcomm and Rich Beyer, CEO of Freescale, point out that the new metric for measuring computing performance is going to be power efficiency rather than CPU speed. This massively favours ARM which has always designed for power efficiency as against Intel which has always designed for speed.

The Electronics Weekly article sheds further light on the growth of ARM chips on netbooks. Of course there is less visibility into the production of Atom chips as (although some of it apparently is being done at TSMC) most of it would still be in house anyway. ARM chips do seem to be making a big bang on the netbook stage and one wonders just how Intel are going to compete in the long term. Remember Intel are used to competing as the dominant market leader and not as one among equals so it will be interesting to see if they have the ability to alter their strategic approach to remain dominant and also to see if they adjust their business model to compete against ARM. One thing is for sure, many people around the world would prefer a weaker Intel.

Electronics Weekly: Netbook Chip-Set Orders To Max Out Capacity At TSMC & UMC
The Street: Intel's Grip on Notebooks, Netbooks Slips

IT Industry not Affected by Typhoon Morakot

More reports are floating in from the South of Taiwan of serious loss of life and damage to property. The BBC reports 'Hundreds lost' in Taiwan typhoon due to severe typhoon induced mudslides. Despite the massive loss of life and damage to property, Digitimes reports the IT industry has remained largely unaffected by the typhoon. Digitimes reports:

Taiwan's electronics industries appear to have seen limited affects from Typhoon Morakot which brought heavy rains over the weekend and caused seriously flooding in many areas in the southern and eastern parts of the island.

Many companies have already reported via filings with the Taiwan Stock Exchanged that their operations and businesses have seen little or no impact from Morakot.

Typhoons always are always dangerous and this one seems to be particularly dangerous. Hi Tech Taipei mourns with all Taiwanese people and with the families and friends of those lost and missing. Lets hope survivors can be found.

Digitimes: Taiwan IT industry not affected by typhoon flooding

TSMC vs. Global Foundries - Let the War Begin

Just caught up with an August 3 article on TG Daily where Morris Chang compares himself (oddly enough) to Joseph Stalin! Seriously. Ah well, its all related to the ground breaking of the new Global Foundries Fab (GF) in New York and the signing of ST Micro as a customer. According to TG Daily:

San Francisco (CA) - The Chairman of Taiwan Semiconductor Manufacturing (TSMC) recently told reporters that he expected to triumph in a protracted and bloody war with GlobalFoundries. The septuagenarian compared himself to Stalin.

"We consider GlobalFoundries to be a formidable competitor," said Morris Chang, who was quoted by PC World. "I really think the battle will be a high casualty one. My job is to minimize the casualties on my side."

According to Chang, the construction of GF's 4.2 billion Fab 2 chip factory in upstate NY indicated a strategy of "total" committment. The opinionated Chang also compared GF's strategy to German attempts to hold the line at Stalingrad after being surrounded by Russian troops.

"Like Stalin, I have no doubt of the outcome," boasted General Chang.

GlobalFoundries spokesperson Jon Carvill responded to Chang's questionable analogy by reiterating GF's "total" commitment to fair competition.

"The groundbreaking in NY and the announcement of our newest customer, STMicro, were huge milestone for us and represents a long-term commitment to delivering the world's most advanced technologies in high-volume to the market," Carvill told TG Daily.

However, Carvill did concede that TSMC was a "strong" and "well established leader" in the foundry industry.

"We look forward to competing with them and offering a true alternative for those companies looking for the world's most advanced technology and manufacturing capabilitities," added Carvill.

Well well, we have talked about GF a bit in the past (see Global Foundries Challenges TSMC and Globalfoundries Getting in on the Game).

This fight will be an interesting one and one that TSMC has not really had in the past. They have dominated the foundry industry for a long time and have been the clear leaders. Although there are other competitors, it would seem that TSMC are way in the lead. This might be a bruising battle and one which the GF execs have had a lot of experience with. After all, they did challenge Intel (and lost a brutal price war) and now they are challenging the behemoth in the foundry industry.

Of course, GF does not have the experience in the pure play foundry industry and while they may have the manufacturing expertise (and a lot of money), and while the industries are related, they will still have to climb the curve. There is no escape. Their advantage (I would imagine) would be that many of TSMCs customers would love to reduce the supplier power that TSMC currently has in the market and for this reason alone, may outsource some of their production to GF. However, although TSMC does stand to lose a lot, I think the bigger fallout will come for the other (smaller players) in the foundry industry.

Time will tell but I still think Chang's Stalin analogy is odd! Why didn't he use Churchill?

TG Daily: "Intel's" TSMC declares war on "AMD's" Globalfoundries

Semiconductor CAPEX Down - TSMC Capex Increases

The number of semiconductor companies spending more the one billion US dollars in 2009 on capital expenditures (CAPEX) has declined from eight in 2008 to just three in 2009. Fabtech cites an IC Insights reports. According to Fabtech:

The elite of the elite as far as semiconductor capital spending is concerned are in desperate need of new members, otherwise the ‘Billion-Dollar Club’ is in danger of closing its doors. According to IC Insights, only three companies, Intel, Samsung, and TSMC, are planning CapEx of over US$1.0 billion in 2009, down from eight companies in that club in 2008, and 16 companies in 2007.

Intel still sits at the head of the table with spending plans of US$4.7 billion, Samsung with US$4.5 billion and TSMC with its revised upward plans for US$2.3 billion spending in 2009. Compared to spending in 2008, Intel is spending 10% less, Samsung by as much as 33% less and TSMC is the only one increasing spending by 23%.

Capital spending as a percent of semiconductor sales will barely top 12% in 2009. Considering that it reached a record low of 16% in 2008, there is little joy for equipment suppliers.

However, the good news is that IC Insights believes this will lead to much stronger IC average selling prices (ASPs) beginning in 2010 and extending through 2012. Thus generating the profit margins required for greater capital spending.

Fabtech gets it right when it says this provides serious issues for equipment suppliers but this is nothing new and they were probably expecting the decline. Last year in August in Chip Manufacturing Orders Down we quoted a CNET article that anitcipated this decline. So really it is nothing new or surprising. Most companies have struggled in the past year and planning expensive capital projects is difficult to do when orders are not coming in. One would imagine it would take a longer period of time for these equipmenet manufacturers to recover. I assume the manufacturing companies will first need to develop a solid forecast of future sales before they start to invest.

There are some encouraging signs though. Earlier in the week we saw PC Demand is Climbing and other reports out of Taiwan suggest some parts of the chip design sector are in recovery mode with EDN reporting Top 20 semiconductor companies saw 21% sales surge in Q2, Reuters reporting Chip packager ASE sees higher Q3 shipments and the Wall Street Journal (WSJ) reporting MediaTek 2Q Net Profit Jumps 80%; Sees Stronger 3Q.

There does seem to be some sort of recovery in the semiconductor sector. Of course this will be driven by the consumer, enterprise and organizational spending on products and equipment that will largely be driven from demand and perception among users at the end of the value chain. From the consumer perspective, lower average selling prices on chips will make products cheaper so it does make products more appealing to consumers.

As for CAPEX spending by the big guns, well it might take a longer time and cycle for this to increase and enable the equipment manufacturers to increase their sales.

FabTech: Billion-Dollar Club’ members depleted

ACER Surpasses HP in Europe

Following up to our previous two stories this week Acer Climbing to No. 2 and PC Demand is Climbing the Guardian now reports ACER is no. 1 in Europe. According to the Guradian:

The Western European PC market declined in this year's second quarter, but only by 3.3%, according to the latest provisional numbers from Gartner. Acer increased its unit sales by 24.3% to 3.2m units to take top spot from Hewlett-Packard, which grew sales by only 1.4% to 3.0m units. This was mainly the result of Acer shifting almost half the netbooks sold in Europe.

Basically, the professional PC market plunged by 21%, hitting companies that sell a lot of business machines such as HP, Dell, Lenovo and Fujitsu. The consumer PC market grew by 21%, benefiting companies such as Acer, Apple, HP and Samsung -- those with more consumer-oriented products, and netbooks in particular.

Ranjit Atwal, principal analyst at Gartner, says: "Without mini-notebooks, the market would have declined more than 15%, but given the new routes to market and price points of these PCs, they have managed to prevent a more severe decline."

Well it seems the netbooks have helped ACER get ahead of the pack. It strange I see this today since last night I received an email from a friend saying how he enjoyed using is ACER laptop on a recent trip to the US. He said: "Acer seems to be making real market inroads here in the UK, and I much prefer their offerings to the Asus equivalents - they just look better built and classier." It seems he was right on the money.

Acer do need to be careful though. I have a friend whose ACER has failed five times and he has had to take it back to the ACER service center five times. They have not resolved the issue and, in my opinion, should offer the money back or give him a new PC. In Contemporary Strategy Analysis Grant wrote:

"During the 1990s, desktop PCs becoame commodity items idnetified by their technical specifications more than by their brand names. Yet, Dell Computer;s direct sales model allowed it to differentiate its PCs by permitting customers to design their own computer sustem and offering complementary services such as online customer support, three-year on-site warranty, web hosting, installation and configuration of customers' hardware and software." (Chapter 9, Differentiation Strategy)

The point being that while ACER is doing well in Europe and expanding globally, they need to back it up with the right level of support and services. If a computer inexplicably fails five times, they should replace it. When computers fail they cause frustration and emotional distress and PC makers should be attuned to that fact. I myself have owned two ACERs. The one got really old when it needed its first service and the second one we bought earlier this year and we are happy with it. But we are lucky and perhaps my friend just got unlucky with getting the wrong one out of the box. Other companies it seems may be more attuned to the bundling of services and customer care than does ACER.

I personally am very impressed with the Dell support here in Taiwan. I have had two HDD crashes so far and both times they have responded quickly and effectively (I lost a lot of data but that is not the support teams' fault). I have other friends who are equally impressed with Lenovo's service both here in Taiwan and in the US. ACER needs to be attuned to this and backup their brand promise and delivery with tangible and meaningful services and offerings that protects the consumer and makes each consumer feel secure with their machine. Preferably 99% of the PCs do not fail, but when one fails, they should act fast and without hesitation or discussion.

Guardian: Acer top in European PC sales, says Gartner

TSMC to Diversify - LEDs and Solar

Bloomberg recently reported TSMC is looking to diversify their business into the solar and LED industry. The reason to diversify is slowing sales growth. According to Bloomberg:

The chipmaker [TSMC] is considering purchasing companies in the solar and light-emitting diode industries, Chairman and Chief Executive Officer Morris Chang said in an interview at the company’s Hsinchu, Taiwan headquarters yesterday. He didn’t identify any acquisition targets or specify investment amounts.

“We can start out maybe first purchasing a small company, but use that as a nucleus for growth,” Chang, 78, said. “I think we have gotten into a situation where everybody seems to be really comfortable and not particularly hungry anymore.”

Chang, who replaced his handpicked successor as chief executive in June, pledged to boost growth by moving into new businesses after the global recession drove the company to its worst profit drop in seven years. Global sales of LEDs, or chips that light up television screens, are projected to double over the next four years and solar-cell industry revenue is estimated to climb an average of 45 percent in the four years from 2010.

Necessary Expansion

“It’s necessary for the company to expand into new businesses since sales growth in the core foundry business has slowed,” said Kenneth Lee, a semiconductor analyst at Fubon Securities Co. in Taipei. Lee upgraded the chipmaker to “add” from “neutral” and raised the stock-price estimate 12 percent to NT$65 on July 31.

Taiwan Semiconductor, whose customers include Intel Corp. and Texas Instruments Inc., on July 31 reported a third consecutive quarterly profit drop. The company forecast third- quarter sales that exceeded analyst estimates, citing a recovery in demand for computers and electronics.

The so-called chip foundry market, of which Taiwan Semiconductor controls a 49 percent share, will post a sales decline of as much as 20 percent this year and will take until 2011 to return to the same levels as 2008, Chang told investors on July 31.

Morris Chang is still kicking and ticking. Good for him. He is a five decade veteran of the semiconductor industry and he is still thinking of and searching for possibilities to expand the business and create growth for TSMC. The article later reports that Rick Tsai, Chang's successor and predecessor (odd but true) will head up the new business. But apparently some investors are not too happy with this announcement believing there is still enough room for growth in the pure-play foundry industry.

Of course I understand Chang's point. The industry has been hammered over the last year, the article says the industry will only properly recover in 2011 and yet somehow they need to lead growth in the company. The foundry industry (especially with Global Foundries thrown into the mix) is becoming a very crowded place and the competition harder and stronger. Diversification into new products and markets (classical Ansoff matrix stuff) may provide the only alternative.

What is interesting is the approach. According to Chang (see above) they may buy a small company and use that company as a "nucleus for growth," that is I am guessing they will emphasize organic growth rather than growth through aggressive merger and acquisition (M&A) activity. This might be a more sensible approach since as they grow organically they can learn about the in's and out's of the new business. Of course TSMC is in the fortunate position where they are market leaders, have enough capital to empower this organic growth and have both the leadership and technical capabilities to do so. However, this approach also feels similar to the way the technology industry was fostered and grown in Taiwan.

Another aspect to consider is that Many M&A do fail because the two companies are unable to work constructively together. One of my professors recently pointed out the failure of the Daimler Benz and Chrysler merger can in part be attributed to cross cultural clashes and misunderstandings. By purchasing a smaller company, TSMC will be able to dominate them and impose their culture on them and ensure the company grows and moves in the direction they want it to move in.

So why would investors be concerned? Well the article says the investors do like the "clean" business model TSMC currently has and that they believe this type of activity is 10 years too early. Granted the article only quoted one investor and one wonders how representative he is of the investors in general. Perhaps investors are concerned over the short term diversion of funds and resources that may stifle short term growth. They might also believe TSMC cannot succeed in this business as the industry sectors are vastly different in some way. Whatever the case may be, if the majority of shareholders are averse to this kind of activity, I am sure TSMC would not pursue it. One would imagine that this approach has also been discussed at the board level and that the board has given TSMC the go ahead. So why wouldn't they?

Comments and feedback always welcome.

Bloomberg: TSMC in Talks to Buy Solar, LED Companies, Chang Says

Taiwan Memory Restructures

In Taiwan Government to Invest in DRAM Industry we observed the Taiwanese gvt. was looking to invest in and consolidate the on-island memory industry to give it a more competitive structure and to help it obtain some of its own IP so marginal costs could be reduced through eliminating the licensing of patented technologies. In The Dream is Gone: No Gvt. Backed Merger for Taiwanese Memory Industry we quoted a Bloomberg article that suggested there would be no gvt. backed merger of the on-island DRAM industry and that Taiwan Memory would be an independent company. Today Taiwan News has an article on the restructuring plan of Taiwan Memory. According to Taiwan News:

Newly-established Taiwan Memory Co. (TMC) has officially filed its business plan with the Ministry of Economic Affairs (MOEA) to participate in a government project to restructure the DRAM industry, Vice Minister Hwang Jung-chiou said Tuesday.

The MOEA first put forth in March the idea of setting up the TMC as part of its efforts to consolidate Taiwan's ailing dynamic random access memory, or DRAM, industry. The company has recently completed its establishment, with registered capital of NT$500,000 (US$15,244).

Under a project unveiled in July, the government will allocate a maximum of NT$30 billion to support one or two local DRAM companies to compete with their foreign counterparts, particularly those in South Korea.

Companies interested in obtaining the government funding should apply with the MOEA within three months, after which the ministry will review their qualifications.

"TMC is a bellwether, and we hope it will pass the screening, " Huang said.

Huang, however, would not disclose the amount of investment requested by TMC.

To qualify for the funding, the applicants should have the ability to efficiently acquire overseas intellectual property and technology usage rights, as well as fair and balanced research and development records from both domestic firms and overseas partners, according to requirements set by the MOEA.

The MOEA also demands that the international collaboration must provide adequate training of local talent and that the re-structuring plan must aim to improve existing corporate structures and broker possible mergers and acquisitions.

TMC, which aims to develop its own technologies in collaboration with Japan-based Elpida Memory Inc., is so far the only company that has filed its business plan to bid for the funding.

MOEA officials said they believe the Formosa Plastics Group will also file an application.

Two of Formosa's affiliates -- Nanya Technology Corp. and Inotera Memories Inc. -- have maintained a partnership with U.S.-based Micron Technology Inc., a leading DRAM technology provider.

TMC originally hoped to cooperate with both Elpida and Micron, but Micron turned down the proposal in April and decided instead to further reinforce its long-term cooperation with Nanya and Inotera.

Nanya and Inotera executives have urged the government to give the Micro-Nanya-Inotera alliance the same level of support it would have given to a Micron-TMC venture.

Oversupply in the memory industry dates back a few years now to the first proposed launch of Windows Vista and the memory makers have been struggling ever since. Samsung, Elpida and Micron all have their own patented technologies but the big DRAM makers in Taiwan are manufacturers and while I am sure they do have some patents, the core technologies required to make DRAM chips must be licensed from one of the other companies. It is good to see the gvt. is urging companies to develop their own IP and have tied the financial assistance that will be allocated to the industry to both the development of local Taiwanese talent and also to encouraging companies to develop their own IP. In my view this will ensure the companies have a far more sustainable business model and ensure their per-unit marginal costs are comeptitive. However, R&D is typically expensive but if other companies can do it why not the Taiwanese. Taiwanese companies have already shown tremendous innovation in other areas of the high-tech sector. I don't doubt they can innovate in this sector too with the right motivation.

As for who gets the money, I would suggest Taiwan Memory will at least get some of it. It does seem to be the favored company with the head/founder John Hsuan being appointed by the gvt. to take over. As for the other alliance (Nanya/Inotera/Micron) well I suppose that would depend on their relationship to the key players in the gvt. We will be interested to see if the money does flow the other way (it is possible) but it may defeat the aims of the gvt. to establishing a competitive Taiwan based DRAM company on the island. Two or three DRAM companies may be one or two DRAM companies too many and therefore the gvt. may have little interest or motivation to invest/support a second alliance. We will see. Only time will tell.

As always your comments/observations are welcome.

Taiwan News: Taiwan Memory Co. files business plan for DRAM restructuring

Acer Climbing to No. 2

Yesterday, in PC Demand is Climbing we noted that PC demand had started to increase again due to a a strategic focus on prices from the main PC suppliers. We also noted "There was speculation earlier in the year that ACER would climb above Dell to no. 2." Well, as if on cue, Digitimes yesterday quoted an IDC report saying that Acer was second overall amongst PC vendors in in Q2 2009 with a market share of 18.5%. According to Digitimes:

Acer shipped 6.65 million notebooks in the second quarter of 2009, pushing its share in the global notebook market to 18.5%, compared to 17% in the first quarter, according to data compiled by IDC.

Hewlett-Packard (HP) retained its top ranking position with second-quarter notebook shipments totaling eight million units, but saw its market share decline to 22% for the quarter, down from 22.7% in the previous quarter, IDC said.

Total global notebook shipments reached 36 million units in the second quarter, up 5.6% from 34.1 million units shipped in the first quarter, IDC said.

Dell is certainly facing challenging times. In October last year in Dell's Business Model Struggling to Survive we noted that Dell had started to shift away from their traditional business model towards outsourcing their manufacturing. This started to occur during the big downswing in the economy and one can only imagine that realigning systems and processes with new overall strategic imperatives is very difficult during a normal economic cycle and especially challenging during a large downswing.

As for competing on price, it further highlights how increasingly commoditized PCs are becoming with very little room for product differentiation between competing vendors. And if companies are competing on price, they really do need to have a competitive cost structure throughout the business.

As for Acer, how have they risen so far? Last year in The Rise of Acer we quoted Drew Cullen who said Acer had "decided to build a brand business, to major on notebooks, and target small and medium business and consumers in particular. Also, it looked to the developing world – especially the BRIC (Brazil, Russia, India and China) economies as another growth engine." The article is worth a revisit.

Digitimes: Acer market share rises to 18.5% in 2Q09, says IDC

PC Demand is Climbing

Reuters reports that demand for PCs is starting to increase again but argues that the PC manufacturers have defended their market share (and tried to seize market share) with aggressive pricing strategies. According to Reuters:

A gradual bounce back in consumer demand is helping keep the struggling personal computer market afloat, but plunging prices and a shift toward cheaper machines will keep up the pressure on profits.

Globally, consumers are coming back to PCs, but they are doing so at prices as much as one-fifth lower than even a year ago, analysts say.

Hewlett-Packard Co, Dell Inc and rivals Acer and Lenovo have slugged it out to keep sales up and safeguard or take market share: a battle that of late has been waged by aggressive pricing, analysts say.

Pacific Crest Securities analyst Brent Bracelin noted PC prices have fallen for years, but the decline accelerated with the introduction of no-frills netbooks. He said PC makers have plenty of experience managing costs to maintain margins.

"There's always going to be pressure," he said. "The question is how well do you manage the supply chain and try to reduce costs at the same pace as the price decline or faster."

The global PC market is still limping along, with second-quarter shipments falling 5 percent from a year ago, according to Gartner. But that result was better than expected, and Gartner said the continued growth of low-cost laptops was a driving factor.

A bounce back in the PC sector is good for Taiwan. The bounce back, if real, will certainly seep through the supply chain and increase demand from PC component suppliers. This in the long run will have a positive impact on the Taiwanese economy and hopefully ensure people here will be able to find more jobs and opportunities. The other interesting side of this would be to understand who has lost and gained. There was speculation earlier in the year that ACER would climb above Dell to no. 2. Time will tell I suppose but my guess would be that in these times that demand frugality and attention to cost, the Asian suppliers might be better off.

Consumer PC demand is back, but at what price?