Research Brief ST, Infineon and Philips Still Lead European Chip Makers Abstract: Infineon, Philips Semiconductors and STMicroelectronics differ in strategy and focus, but all cut spending in 2002. Partnerships with foundries or other vendors will give access to more capacity without heavy investment. By Adriana Blanco Market Statements ■ Philips Semiconductors is following a major manufacturing outsourcing strategy. It remains number-one worldwide in consumer application-specific standard products (ASSPs). ■ STMicroelectronics (ST) and Philips Semiconductors have product portfolios biased toward application specific products. ST remains the leading vendor of application-specific devices worldwide. ■ Infineon Technologies has a greater percentage of commodity products than the other two vendors. This tends to help the company during periods of market upturn. Infineon was the only one of the three vendors to increase its worldwide market share in 2002. Publication Date: 11 July 2003 2 ST, Infineon and Philips Still Lead European Chip Makers Vendor Rankings Semiconductor vendors based in Europe, the Middle East and Africa (EMEA) maintained their share of 11.3 percent of the worldwide semiconductor market in 2002. ST maintained the lead and Infineon Technologies moved up to second place, thanks to growth from dynamic random-access memory (DRAM). Philips Semiconductors dropped to third place. All three are among the top 10 worldwide semiconductor vendors. Highlights of their performance in 2002: ■ Their combined share of the EMEA market improved slightly, from 21.4 percent in 2001 to 21.9 percent. ■ Their combined share of the worldwide market increased from 9.9 percent in 2001 to 10.2 percent. ■ Infineon experienced double-digit growth on its worldwide revenue, moving up to number seven from number 10 in 2001 in the worldwide rankings. ■ ST fell one place to rank fourth worldwide, as a result of Samsung's strong performance, which climbed to second place because of strong revenue growth in DRAM. ■ Philips Semiconductors retained ninth place in the worldwide rankings. Although overall revenue dropped slightly, Philips remained the leading vendor of consumer ASSPs. For full details of vendor revenue generated from semiconductor shipments to EMEA in 2002, and our methodology and assumptions, please see "Semiconductor Vendor Market Shares: EMEA, 2002," SCSI-WW-MS-0180. Table 1 shows the rankings for the top 10 EMEA-based companies by worldwide revenue in 2002. Table 1 Top 10 Semiconductor Vendors Based in EMEA — by Worldwide Revenue, 2001 and 2002 Rank 2001 Rank 2002 Vendor 2001 Revenue ($M) 2002 Revenue ($M) Percentage Change 2001 Market Share 2002 Market Share 1 1 STMicroelectronics $6,365 $6,355 -0.2% 4.2% 4.1% 3 2 Infineon Technologies $4,328 $5,253 21.4% 2.8% 3.4% 2 3 Philips Semiconductors $4,402 $4,361 -0.9% 2.9% 2.8% 4 4 Robert Bosch $520 $592 13.8% 0.3% 0.4% 5 5 Micronas Intermetall $347 $464 33.7% 0.2% 0.3% 6 6 EM Microelectronic-Marin $141 $130 -7.8% 0.1% 0.1% 9 7 Melexis $90 $112 24.4% 0.1% 0.1% 8 8 Elmos Semiconductors $95 $92 -3.2% 0.1% 0.1% 11 9 Austria Microsystems $89 $82 -7.9% 0.1% 0.1% 12 10 Zetex $72 $81 12.5% 0.0% 0.1% Others $136,743 $138,635 1.4% 89.3% 88.8% Total $153,192 $156,157 1.9% 100.0% 100.0% 50.7% Distribution of Revenue and Market Share, by Location of Company Headquarters Americas $80,078 $79,096 -1.2% 52.3% Japan $41,873 $41,219 -1.6% 27.3% 26.4% Europe $17,213 $17,671 2.7% 11.2% 11.3% $14,028 $18,171 29.5% 9.2% 11.6% Asia/Pacific Source: Gartner Dataquest (July 2003) ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 3 Strongest Revenue Growth From Asia/Pacific The top three EMEA vendors have a broad product portfolio and account for a large portion of worldwide sales. This works well during a downturn, because this variety helps to dampen the effects of any single factor. However, during an upturn some products or regional markets might not grow quickly. Infineon's revenue generated from memory, mostly DRAM, accounted for 36 percent of its worldwide total in 2002, compared with 26.5 percent in 2001. This reflected growth of 70.6 percent for Infineon's DRAM revenue in 2002, fueled by strong bit growth. Application-specific devices for wireless applications also saw strong growth. Microcontrollers for smart cards were affected by low average selling prices (ASPs). EMEA accounted for 47 percent of the company's global sales, but the strongest growth came from Asia/Pacific. Nearly 60 percent of Philips Semiconductors' sales came from application-specific devices in 2002, a slight increase from 58 percent in 2001, with consumer ASSPs accounting for more than half of sales. Philips Semiconductors remains strong in the consumer segment, thanks to its road map to integrate semiconductor devices for consumer applications and its pricing strategy for electronic equipment manufacturers. The company also has a large market share in the TV set industry. The company's sales to most world regions declined in 2002, apart from Asia/Pacific, which grew by more than 30 percent. ST's revenue from application-specific devices accounted for 61 percent of its worldwide sales in 2002, a small increase from 58 percent in 2001. This kept the company in the top spot in the worldwide application-specific device rankings, ahead of Texas Instruments. Memory sales continued to decline in 2002, reflecting the difficult pricing environment for flash memory. Figures 1 and 2 present worldwide revenue for Infineon, Philips Semiconductors and ST by device and by region in 2002. Sales of application-specific devices accounted for a large part of their revenue. Revenue from EMEA and Asia/Pacific accounted for more than 70 percent of total sales for the three European vendors. Figure 1 Top Three EMEA Semiconductor Vendors — Worldwide Revenue by Device, 2002 Percentage 70% Infineon Technologies 60% Philips Semiconductors 50% STMicroelectronics 40% 30% 20% or S s en s T sp ota ec l a ifi pp c lic de a vi tio ce ns T se m -p al er ro ic M i ld a ot e on Op du tic ct al or s ur p m co et r sc ic s en nt e on G y or en M em G 0% po lo se gi er c al -p ur an pos al e og 10% 115954-00-01 Source: Gartner Dataquest (July 2003) ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 4 ST, Infineon and Philips Still Lead European Chip Makers Figure 2 Top Three EMEA Semiconductor Vendors — Worldwide Revenue by Region, 2002 Percentage 50% Infineon Technologies 45% Philips Semiconductors 40% 35% STMicroelectronics 30% 25% 20% 15% 10% 5% 0% Americas Japan EMEA Asia/Pacific 115954-00-02 Source: Gartner Dataquest (July 2003) Semiconductor Capital Spending and Manufacturing Revenue remained flat in 2002, and the semiconductor industry saw further cuts in capital spending. Infineon continued to invest in 300-mm manufacturing, but cut spending in 2002. The company has opted to enter into partnerships with foundries to cater for future capacity increases without heavy investment. Philips Semiconductors has consistently underinvested compared with the market average and it is planning to increase its use of foundries. ST has a more flexible approach to spending, compared with the other two companies. However, the company reduced its spending drastically in 2002. Table 2 highlights the major manufacturing activities for the top three EMEA vendors during 2002. ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 5 Table 2 Top Three EMEA Semiconductor Vendors: Capital Expenditure and Manufacturing Activities in 2002 Infineon Technologies Capex 2002 ($B) Estimated Capex 2003 ($B) $0.7 $1.0 Key Projects Delays, Closures and Sales Infineon entered into a joint venture production with Nanya Technology on May 2002 to develop 90-nanometer and 70nanometer technologies on 300-mm wafers Plans on hold for expansion in the White Oak fab in Richmond, Virginia, United States Announced cost crossover for manufacturing on 300-mm technology vs. 200-mm for DRAM devices in Dresden, Germany in December 2002 The company halted its partnership with Mosel Vitelic in Taiwan, the joint venture known as ProMOS On October 2002 Continued its partnership with UMC on a 300-mm fab in Singapore Philips Semiconductors $0.4 $0.4 300mm-line joint venture with ST and Motorola in Crolles, France Continuous investment in joint-venture manufacturing facility, known as Systems on Silicon Manufacturing Company (SSMC), with Taiwan Semiconductor Manufacturing Corporation (TSMC) and the Economic Development Board Investments in Singapore STMicroelectronics $1.0 $1.0 300mm-line joint venture with Philips and Motorola in Crolles, France Started building a new 300-mm facility in Catania, Italy, which was originally scheduled for completion in 2002 Phasing out fabs in Albuquerque and San Antonio, United States. Expected to close by the end of 2003 Closure of the fab in Ottawa, Canada, and the fab in Rancho Bernardo, United States Source: Gartner Dataquest (July 2003) The spending-to-revenue ratio for the worldwide semiconductor industry declined to 17.9 percent. The top three EMEA semiconductor vendors had ratios below the worldwide level. Figure 3 shows the ratio of worldwide semiconductor capital spending to revenue for Infineon, Philips Semiconductors, ST and the semiconductor industry overall, from 1990 to 2002. ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 6 ST, Infineon and Philips Still Lead European Chip Makers Figure 3 Semiconductor Vendors' Ratio of Worldwide Semiconductor Capital Spending to Revenue, 19902002 Percentage 60% Philips Semiconductors 50% STMicroelectronics 40% Infineon Technologies 30% Worldwide 20% 10% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 115954-00-03 Source: Gartner Dataquest (July 2003) Alliances, Divestments and Acquisitions The major activities of the EMEA top three in terms of alliances, divestments and acquisitions during 2002 are presented in Table 3. ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 7 Table 3 Top Three EMEA Semiconductor Vendors Major Alliances, Divestments and Acquisitions Infineon Technologies Alliances Divestments Acquisitions Continued partnership with United Microelectronics Corporation (UMC) to build a 300-mm fab in Singapore. Sold GaAs business in July 2002 to TriQuint Semiconductor Acquired the Bluetooth and Mobile Infrastructure devices and design activities of Ericsson Microelectronics in June 2002, as well as some back-end activities (module assembly), which includes 700 employees. The deal does not include the wafer fabrication plants that Ericsson owns in Sweden. Joint venture formed with AMD and DuPont Photomask in May 2002, to form Advanced Mask Technology Center (AMTC) to develop and pilotmanufacture next-generation lithographic photomasks. Entered into joint-venture production with Nanya Technology in November 2002 to develop 90nanometer and 70-nanometer technologies on 300mm wafers. Signed cooperation agreement with Semiconductor Manufacturing International Corporation (SMIC) of Shanghai, China, in December 2002, on the production of dynamic random-access memory (DRAM). Under the terms of the agreement, Infineon will transfer its 0.14-micron DRAM trench technology to SMIC. In return, SMIC will manufacture DRAM on the 0.14-micron process exclusively for Infineon. Philips Semiconductor Continues its joint venture, SSMC, with TSMC in Singapore. 300mm-line joint venture with ST and Motorola to develop new 90-nanometer CMOS process and nextgeneration 65-nanometer and lower technologies in Crolles, France, with TSMC. May 2002, alliance with Dai Nippon Printing (DNP) for the development and supply of high-end photomasks. STMicroelectronics 300mm-line joint venture with Philips Semiconductor and Motorola to develop new 90-nanometer CMOS process and next-generation 65-nanometer and lower technologies in Crolles, France, with TSMC. Acquired Alcatel Microelectronics in April 2002, retaining the digital subscriber line (DSL) business and selling the mixed-signal part of it to AMI Semiconductor. Extended manufacturing relationship with UMC in July 2002, by signing a multiyear manufacturing agreement, which also includes cooperation on manufacturing science. Source: Gartner Dataquest (June 2003) Gartner Dataquest Perspective Infineon, Philips Semiconductors and ST have very different strategies. The three companies have broad product portfolios and worldwide sales. Semiconductor vendors must focus on long-term strategies and, if possible, maintain investment in R&D to remain competitive when the market recovers. Infineon followed an "invest in a downturn" strategy, whereas ST has been more flexible and Philips Semiconductors has been much more cautious with its spending. However, all three European vendors reduced their capital spending in 2002. Infineon is exposed to the volatile DRAM market. Consequently it had increased revenue from strong bit growth in 2002. The company also saw improvement in revenue of its wireless products. It claims that its strategy of leading-edge manufacturing has helped it reduce costs. Throughout 2002, Infineon also focused on forging partnerships that will give it access to manufacturing capacity without incurring huge investment on its own. Infineon is considering moving its ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 8 ST, Infineon and Philips Still Lead European Chip Makers headquarters outside Germany, because of what the company regards as high taxation compared with its major competitors. Philips Semiconductors has emphasized that it wants to return to profitability by the end of 2003. To do so, the company has implemented an aggressive plan to streamline its manufacturing capabilities and outsource more manufacturing. The company remains committed to R&D spending, as its alliances show, and it will focus on its core capabilities for connected consumer applications. ST cut capital spending considerably in 2002, but the company is adamant that, if necessary, it has the infrastructure to increase capacity quickly by bringing in equipment from some of its fabs. R&D spending remained unaffected. Strategic relationships with customers continue to play a significant role in ST's strategy. The company again strengthened its product portfolio through acquisitions. ST's broad product portfolio has paid off well during the worst of the downturn. However, during the upturn, the company will face competition from vendors in more volatile markets that can grow faster in good times, as shown by it being displaced by Samsung in 2002. Investing in advanced R&D is key if a semiconductor company wants to remain at the leading edge of technology. The technological challenges for developing new products continue to increase, with tighter targets for cost and difficulties in managing ever-increasing system complexity. One solution for semiconductor vendors is to establish partnerships and pool expertise. Rising fab costs increase the risk for individual device manufacturers. The implementation of new technologies requires high levels of investment, which increases the need for collaboration to share risks and mitigate cost for the individual company. The industry has witnessed several examples of collaboration during the last downturn, such as: ■ The alliance between Philips Semiconductors, ST, Motorola and TSMC for developing 90-nanometer technology on 300-mm wafers. ■ The alliance between Infineon, Nanya Technology, Winbond and the semiconductor foundries UMC and SMIC. Costs and risks are shared when partnerships are formed, which makes it easier for vendors to succeed in times of market uncertainty, as proven by the top three EMEA vendors. The time to market of new products is becoming shorter and price premiums are shrinking. It is therefore crucial that any investments produce fast and efficient returns for the investor. To achieve this, vendors must increase fab productivity and speed up volume production. For more in-depth analysis on the changing business models for semiconductor vendors, please refer to "The Fabs and 'Fab-Nots ': Changing Dynamics in Semiconductor Manufacturing (Executive Summary)," SEMC-WW-EX-0244. ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 9 ©2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 11 July 2003 10 ST, Infineon and Philips Still Lead European Chip Makers This document has been published to the following Marketplace codes: SEMC-WW-DP-0309 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: +1-203-316-1111 +44-1784-267770 +61-7-3405-2582 +81-3-3481-3670 www.gartner.com © 2003 Gartner, Inc. and/or its Affiliates. 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