Buyers’ News, © 1998, CMP Media Inc.
April 6, 1998
Await Changing Tide
and electronic-systems industries operate in their
respective environments, each of which exerts its own basic
supply and demand market forces. Although inextricably tied
to one another, the IC producer and the system manufacturer
are each out to maximize profits and always will
today’s systems producers are enjoying low IC prices, they
know that eventually the tide will turn. And when it does,
IC suppliers will be back in the driver’s seat, and the
semiconductor and electronic-systems industries will have
completed yet another cycle.
electronics industry can be thought of as an inverted
pyramid, with electronic systems at the top, followed by
semiconductors, semiconductor equipment, and semiconductor
materials. Using this analogy, the dollar-volume growth rate
of the IC industry has very little direct impact on the
1996, for example, semiconductor industry revenue declined
by 9%, versus 6% growth in electronic-systems sales. In
fact, if any direct relationship is to be construed, then it
is the health of the systems market that bears more directly
on the semiconductor industry.
it is true that cheap ICs will continue to have a near-term
negative effect on IC industry dollar volume, in general,
electronic-systems makers don’t care. Historically, IC
producers and electronic-systems manufacturers have always
tried to take advantage of each other.
1995, when DRAM suppliers were making 4-Mbit DRAMs for $4
and selling them for $12, did the DRAM producer take a
smaller but still profitable gross margin to help its OEM
customer? I don’t think so. Does a PC manufacturer now offer
to pay a struggling 16-Mbit DRAM supplier more than today’s
market value because it knows the DRAM producer cannot make
money at the current pricing level? No way.
a 16-Mbit DRAM sells for $3, $4, or $5 will have very little
influence on how many PCs are sold this year. In general,
lower pricing for processors and memory enabled the PC
producer to lower the price of its product and helped spawn
the birth of the $1,000 PC, which will most likely open up
the PC market to a wider audience. Whether the increased
unit volume of less-expensive PCs can make up for the lower
price point is one of the forces electronic-systems
manufacturers must deal with.
should be remembered that the IC industry dictates chip
pricing to the electronic-systems producer, not the other
way around. In 1995, OEMs would like to have paid less than
$12 for a 4-Mbit DRAM, but they were–and usually
are–powerless to change IC market pricing.
there was some talk about overall demand for ICs shrinking.
But the facts dispute this, given that in 1997, IC unit
growth increased 22%, while DRAM bit-volume growth surged
more than 90%. Both figures are higher than those in the
boom years of 1993 to 1995.
for ICs is not shrinking, the price is. Most likely, the
recent surge in IC unit demand is at least partly due to the
effects of the Elasticity of Demand theory, which dictates
that lower prices cause increased usage.
the last 20 years, the worldwide electronic-systems industry
has grown 5% to 15% annually. At the same time, the IC
industry’s annual growth rates have ranged between -20% and
perfect world, the electronic-systems industry would grow
10% annually, and the IC industry, 17%. Recognizing that IC
industry growth has rarely fallen within a comfortable
margin of 17% over the past 20 years, it is apparent that
the semiconductor manufacturer/OEM relationship has been
anything but perfect. Each continues their opportunism. A
shaky marriage indeed.
obvious that IC and electronic-systems companies have been
subject to their own set of supply/demand market forces for
many years, and I would expect them to continue. Beginning
in 1996 and continuing through this year, systems producers
have won and will continue to win at the expense of the IC
manufacturer. For 1999 through 2001, we’ll see.
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