I N D U S T R Y O U T L O O K D E C E M B E R

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1 INDUSTRY OUTLOOK DECEMBER 2012 Shifting Sands: Semiconductor Makers Face New Challenges as Momentum Moves from Developed Economies to Emerging Markets

2 Changing consumer preferences and buying habits for smartphones, tablets and notebooks can quickly reshape the fortunes of semiconductor manufacturers in global markets. S emiconductor manufacturing companies are facing a number of significant challenges, as market momentum shifts from the developed economies of the United States and Europe to the emerging markets of Brazil, Russia, China, India and other countries in the Asia-Pacific region. While these market changes offer tremendous opportunities for semiconductor companies, they also present unique challenges for these businesses. If companies do not effectively address these hurdles, they might end up missing out on the potential for revenue and market-share growth. A critical component of dealing with shifting markets and new challenges is working closely with a global technology partner that has extensive experience in these emerging markets and that understands the cultural, political, regulatory and technological aspects of doing business in these regions. Semiconductor companies need a new set of strategies to be successful. If you look at consumer behavior in India or China, there are very different buying patterns, and the reason a product succeeds or not is very different from that of other regions. Arvind Jayabal, General Manager of Semiconductor Solutions, Wipro Technologies FAST-GROWTH EMERGING MARKETS Growth in the semiconductor market has begun to shift away from the established markets of the developed countries toward China, India, Russia and other countries that are seeing increases in demand for consumer electronics and other products that use semiconductors. We ve been working with multiple semiconductor companies some of the leading North American and European companies and we are seeing that there is a shift in the customer base tilted in favor of Asia-Pacific and other developing markets, says Arvind Jayabal, General Manager of Semiconductor Solutions at Wipro Technologies, a leading global IT and business service provider. The momentum is certainly picking up in these markets. Research firm International Data Corp. (IDC) in Framingham, Mass., in its Semiconductor Applications Forecaster released in July 2012, reported that semiconductor revenues worldwide will grow 4.6 percent in 2012 to $315 billion. 1 The firm also forecast that semiconductor revenues will increase 6.2 percent to $335 billion in 2013 and grow at a compound annual growth rate (CAGR) of 4.8 percent from 2011 to 2016, reaching $380 billion in Worldwide Semiconductor Applications Forecaster, IDC, July jsp?containerid=idc_p DECEMBER 2012

3 Although gross domestic product (GDP) growth has slowed in China, India and Brazil, demand for smartphones, tablets and notebooks remains strong in those regions, according to the IDC report. Asia/Pacific will continue to grow its share of semiconductor revenues, with year-over-year growth of 7 percent in 2012 and a five-year CAGR of 6.4 percent, reports IDC. 2 A SHIFT IN STRATEGIES Before having any real chance for success in the emerging markets, semiconductor manufacturers need to understand that the buying behaviors and preferences of enterprises and consumers are quite different in the developing markets than they are in the developed markets. The way people evaluate and purchase consumer electronics, and the consideration they give to the various features and capabilities, is not always the same as it is in the U.S. or in Europe. And this difference has a direct implication for semiconductor makers in terms of their development processes, product characteristics, pricing and go-to-market strategies. What worked successfully in developed economies such as the U.S., Europe and Japan might not necessarily work in developing markets such as Brazil, China and India, Jayabal says. Semiconductor companies need a new set of strategies to be successful. If you look at consumer behavior in India or China, there are very different buying patterns, and the reason a product succeeds or not is very different from that of other regions. Jayabal cites a leading mobile phone manufacturer s experience in the mobile phone market in India as a good example of how developing markets can differ from others and present unique challenges for electronics manufacturers. The company was one of the dominant players in India. It was unbeatable for a long time and had a large market share, Jayabal says. But then a Chinese manufacturer entered the Indian market and quickly displaced most of the company s market share, essentially because of a single feature: dual subscriber identification modules (SIMs) on a single mobile phone. This feature enables users to have two different phone numbers at the same time, which is an attractive capability because for many in India buying two smartphones is not feasible. The company could not see the change in buying patterns in India, Jayabal says. The Chinese company flooded the market with local brands, and within five quarters the formerly dominant company had lost about 40 percent of market share. Some leading global semiconductor companies are already making efforts to address the market shifts, but in large part companies in the industry need to develop new ways of working, Jayabal says. Some have been slow to adjust to this new world, and right now they are struggling to achieve revenue growth because of the shift. 2. Ibid. 3 DECEMBER 2012

4 Finding the Right Partner A key factor in creating a strategy for success will be how effectively a semiconductor company partners with the larger ecosystem in these new markets to address the fragmented needs of the markets without compromising on profitability and effectiveness. As semiconductor businesses enter these developing markets or expand their operations there, they can benefit from partnering with companies such as Wipro Technologies, which offers systems integration and consulting services that can help companies more rapidly prepare for the demands of these markets. Wipro has been working with semiconductor makers in countries such as India and China, providing offerings such as R&D services, product testing and a variety of shared services. Wipro is helping semiconductor makers plan and deploy back office and manufacturing systems so that they are optimized to meet the demands of the developing markets, and are flexible enough to accommodate the frequent and dramatic shifts that can characterize these markets. Business opportunities abound for semiconductor companies in the developing regions of the world, particularly China, India, Russia and Brazil. Much of the market growth can be expected to come from these countries, and those companies that are best prepared and that work with an experienced partner are more likely to succeed. EMERGING MARKET TRENDS Some semiconductor companies have begun assembling entire mobile phones for developing markets, rather than just supplying components for the devices, Jayabal says. MediaTek in Taiwan is one example of a phone chip supplier that has successfully adopted this strategy. After the phones have been manufactured in low-cost regions such as China, all you need is a good marketing plan, some air time on TV, and you can be up against major smartphone brands in no time, Jayabal says. There is a significant shift in the semiconductor space, in the way these companies are responding to changes in the market. Leading U.S. semiconductor companies such as Intel have done the same. Intel s first mobile phone was launched in India. In April 2012, Intel and Lava International Ltd., one of India s fastest-growing mobile handset companies, announced the general availability of the XOLO X900, the first smartphone with an Intel chip inside. Reducing the cost of research and development (R&D) is a big part of addressing the developing markets for semiconductor companies. What typically happens is 80 to 90 percent of the work is done in a single place that tends to be costly, Jayabal says. Companies such as MediaTek are conducting R&D in Taiwan, where the cost of delivery is much lower than in other locations. We re seeing a big shift in which the larger semiconductor companies are starting to see that the current cost of delivery is not good enough to compete with the new breed of players, Jayabal says. Another trend although still in its earliest stages is a move to open source software. Open source allows semiconductor companies to be more open about how some activities can be done as a shared service, Jayabal says. The entire software stack can be managed as a shared service. In the coming years, we will see this become a common means of software delivery, and it will lower the cost of delivery. Finally, there is expected to be a growing need among consumers for immediacy or real-time information from smartphones and other electronic devices, which semiconductor manufacturers need to address. For example, consumers increasingly want to know right away whether there are particular services, restaurants or retail establishments in certain locations, and they expect their mobile devices to provide this type of information. This same real-time information phenomenon will affect corporate environments such as data centers. For example, managers will want to know immediately via sensors how certain servers or other systems are performing, how much energy they are consuming and other information related to cost and performance. This represents a huge opportunity as well as a shift that is sweeping the semiconductor space, in terms of how chips are going to be designed, Jayabal says. Over the next five years, this immediacy problem will need to be solved, and it will probably drive chipset sales in a big way. Although these trends will affect the developed economies first, Jayabal predicts that they will also become factors in several of the developing regions as they move quickly through generations of products and capabilities. 4 DECEMBER 2012

5 ABOUT WIPRO TECHNOLOGIES Wipro Technologies, the global IT business of Wipro Limited (NYSE:WIT) is a leading information technology, consulting and outsourcing company that delivers solutions to enable its clients do business better. Wipro Technologies delivers winning business outcomes through its deep industry experience and a 360-degree view of Business through Technology helping clients create successful and adaptive businesses. A company recognized globally for its comprehensive portfolio of services, a practitioner s approach to delivering innovation and an organizationwide commitment to sustainability, Wipro Technologies has 135,000 employees and clients across 54 countries. For more information, please visit For more information, please visit 5 Copyright Wipro Technologies 2012