Semiconductor suppliers batten down the hatches

dark clouds are gathering for the semiconductor market

As the semiconductor market enters a period of instability, chip suppliers are being forced to drastically re-think their survival strategies, according to a report by researcher iSuppli.

With a shrinking roster of star performers, disappearing profits and scant chance of grabbing market share, the industry has entered a period of low expectations and diminished options, it reported.

“The semiconductor industry now is less profitable as a percentage of revenue than the notoriously low-margin PC business, something that hasn't occurred before, except during a short period of the severe market downturn in 2001,” said Derek Lidow, chief executive officer of iSuppli.

Semiconductor profits have declined since mid 2004, with quarterly net profits down to single-digits in 2008, when they were 19 per cent in 2004. While some of this is explained by short term volatility – such as the 2006 inventory write-offs and DRam price wars - the long-term trend is ominous. “The industry has lost its money-making touch,” said Lidow.

Where once the top tier of predatory manufacturers would snap up rivals from the two lower tiers, the industry is entering a new phase, he said.

“Now there is just a few outstanding performers followed by the rest,” Lidow said.

Meanwhile SanDisk has rejected a takeover offer by Samsung, after four months of negotiations. The takeover attempt sparks the rivalry between Samsung and Toshiba, which is a SanDisk partner. Toshiba and Samsung are the two leaders in NAND flash memory.

SanDisk said it terminated talks in early September after concluding that Samsung wanted favourable terms for a renewed cross-licensing agreement, and the Korean manufacturer’s offer "significantly undervalues" SanDisk.

Samsung hit back saying the U.S. firm had unrealistic expectations for its market value, after offering 26 dollars per share, a 93 per cent premium over its 4 September closing price.