PC Sector Device Convergence: Why 'less is more' for semi forecasts

Tablets in cloundsTablets are demanding higher margin components, increasing overall revenue growth for the semi industry. Even based solely on BOM, tablets are best understood as the next 'portable PC,' driving a rapidly expanding PC cycle.

A question frequently triggered by the cycles of the electronics industry is whether the latest hot-selling device might actually damage entrenched players along the wider semiconductor supply chain.  That's certainly the case now as speculation over the short- and long-term impact of the latest class of devices, smart wireless devices (SWDs), has lead to frequent concerns of "device cannibalization."  The increased capabilities and widening adoption of smartphones coupled with last year's star device, the tablet, won great interest from consumers and enterprises alike, but also worry about the future of one of the cornerstone markets for our industry, the PC sector.

So, will sales of SWDs "cannibalize" the PC sector and negatively impact the semiconductor and electronics industries?  In other words, while some devices are converging, does that mean others will become redundant or obsolete, leading to a reduction of sales and then suppliers along the semi value chain?  In this article we will examine the device side of this question by considering the data for both component and device value and volume.  Values are a critical variable for determining the overall impact of device convergence as well as growth.  Higher valued components (and devices) tend to have higher margins, higher ASPs, and contribute to an overall higher bill of materials (BOM).  Therefore, if values are increasing for the components in the devices, then regardless of a convergence of devices, and overall unit volume decrease, industry revenues will be higher.  In the companion article in this issue of MarketWatch Quarterly, "Rising to the Challenge: Convergence and integration changing semi's supply chain", we will delve more deeply into the effects of device convergence on specific components and component classes. 

The expanding PC sector
As we know, the PC sector is central to both the semiconductor and electronics industries; a slowdown in the PC sector would adversely affect most of us along the supply chain.  So, are we seeing negative effects from device convergence due to the adoption of tablets, among other SWDs?  The simple answer is – no.  The reasons behind this unequivocal 'no' are where the interesting data come to play and guide the present positive forecasts for components, devices and sector opportunities.

The general concern around tablets' booming sales is that two device categories, smartphones and tablets, may be capturing the needs and desires of consumers (general and enterprise) to the point of possible exclusion of other devices (for example, PCs, notebooks, netbooks, portable gaming systems, pocket digital cameras (still and video), and other mobile information devices).  While a logical conclusion that these hot devices are cannibalizing other devices, there are important reasons (and data) pointing to why this is not what is happening now, nor in a forecasted future.  A better understanding of what is happening with the present device convergence is instead the old adage that 'less is more.'

One of the phenomena contributing to some of the misunderstandings is the different timing of cycles within the sector.  The pace of the tablet maturation cycle is faster than that of the rest of the PC sector.  What that means is that tablet components are increasing in number, complexity and value quickly.  Meanwhile the PC sector is following a slow but steady increase in penetration rates because of the more mature BOM, meaning relatively more stable component cycle changes.  The difference in pace of adoption of the end-devices, tablets versus other PC devices, is contributing to the worry of 'device cannibalization.'  It is really more of a rabbit versus turtle race, both will make it to the end of the race, just at different times and on different paths.

Part of the confusion may be rooted in the fact that tablets are morphing into a new part of the traditional PC market.  More specifically, as Credit Suisse reports regarding PC penetration and growth, "Heading into 2011, most expect PC units to grow approximately 8% […].  […] [G]lobal PC penetration is still less than 25%.  Typically, high teens to low 20% is the point on the penetration curve that unit growth accelerates […]."  (cf. Credit Suisse Equity Research: Semiconductors 2011 Outlook […] 11 January 2011, p.23) In other words, rather than being seen as a cannibalistic device threatening the PC sector, tablets should be understood as the main growth driver within the PC sector.  Yes, thus far tablets have primarily been grouped with smartphones, but with the component maturation and BOM changes occurring presently, this classification warrants reconsideration.  As underscored throughout the same Credit Suisse report, "Semiconductor content in the average configuration of a tablet by mid 2011 should be equal to the average configuration of a notebook." (ibid, p.24) 

A device by any other name…
With the semiconductor content of tablets set to rival that of notebooks, there is certainly a device convergence at hand.  Notebooks and tablets can be seen as competing, and it is forecasted that tablets will take over notebooks.  What is important here is that we should consider tablets as the next cycle replacement of notebooks rather than a cannibalistic device.  Granted, this may feel like a shell game to some, after all, by moving tablets into the PC sector the global growth forecast for the wider PC sector is significantly enhanced.  But is the inclusion of tablets in the PC sector warranted, or are tablets better classified along side of smartphones as part of the set of SWDs? 

Comparing the 2011 forecasted total semiconductor dollar content of the BOM for notebooks and tablets, Credit Suisse data reveal an average of US $173 per notebook compared to US $150 per tablet (cf. Credit Suisse Equity Research: Semiconductors 2011 Outlook […] 11 January 2011, p.25).  If the recent Mobile World Congress reviews and previews of new tablets set to be released in 2011 were not convincing enough of tablet component maturation, the Credit Suisse semi content of tablets supporting BOMs very similar to notebooks should confirm this fact.  Meanwhile, netbooks are not forecasted to fare as well (average total semiconductor dollar content is only US $80 per netbook for 2011); these devices are forecasted to continue to decline in sectors where they compete with tablets and notebooks, as there is little upside for those consumers (or for manufacturers when considering value and margins compared to more popular tablets).

Of particular note for the wider semiconductor supply chain's health, the increasing value of tablet BOMs in many cases are sporting higher margin components, meaning these devices are positively contributing to the overall revenue growth of the semiconductor industry.  With tablets being understood as the next 'portable PC' (aka notebook), if for no other reason than component content, the PC sector can be seen as in a rapidly expanding cycle.  Including tablets in the PC sector essentially cements the Credit Suisse growth forecast (in terms of penetration rates) of 15-20% CAGR for 2011.  However, even without this merger of tablets into the PC sector, when considering the still growing demand for first-time purchases of PCs (of any type) from the emerging global middle classes, the view of PCs continuing to show healthy growth is without question.

Emerging demand
This last point about geography and growth is critical; as recently voiced by the Danish industry analyst group, Strand Consult, and as reported here by EETimes, "[Mobile World Congress] MWC lineup has too much focus on the 300 million American and 300 million European mobile customers, and not enough on the 4.3 billion mobile customers in the rest of the world who use their mobile phones every day."  While this comment about MWC was geared toward the mobile phone sector, the same can be said of the PC sector when questioning potential tablet cannibalization and PC growth forecasts.  Tablets, and smartphones for that matter, are geared toward the western consumer (general and enterprise, alike). 

Tablets and notebooks cannot meet the price point needs for the emerging economies' markets (nor is that likely their intended market).  The '$100 laptop' is still the domain of the netbook (see the above semiconductor dollar content of US $80 for 2011).  With emerging economies continuing to rise in importance as the next geographic growth sector, PC penetration rates are further boosted.  The low priced PC devices, such as netbooks, are increasing in demand by the first-time, individual consumers from the emerging middle classes with new disposable incomes as well as enterprise consumers with expanding business needs fueled by the emerging middle classes.  As these new global middle classes and growing businesses expand, penetration rates for PCs as well as other electronics will continue to grow.  The forecast for this global demographic growth?  According to Credit Suisse, "we believe we are in the midst of accelerating global middle class.  From 2010 to 2015E[stimated], we are likely to add 50% more people into the global middle class than we did in the previous ten years."  (cf. Credit Suisse Equity Research: Semiconductors 2011 Outlook […] 11 January 2011, p. 15)  Furthermore, this significant growth rate of the global middle class consumer directly translates into technology purchases, as "15-20% of all technology goods are bought directly by the global consumer" (ibid., p. 16), and these emerging "middle class economies tend to evolve into more service oriented economies […] spend[ing] 10 times more on Information Technology than manufacturing economies." (ibid., p.16)

The final forecast for incremental semiconductor revenues from the emerging global middle class? US $102 billion from 2010-2015 (5.7% CAGR) and US $187 billion from 2015-2020 (7.6% CAGR) (cf. Credit Suisse, ibid., p. 16).  In other words, 'more is also more' for global semi forecasts based on the rapid growth of the new, global middle class and the demand for electronics devices.

In sum, continued growth for semi is really not in question, especially for the PC sector.  Device cannibalism will always linger as a question to be addressed, but when we consider penetration rates of sectors as well as devices and then recognize that we must consider the global context in which we operate, suddenly questions of penetration, growth, and market opportunities are still on the upswing.  Yet even though the mature economies have greater PC sector penetration rates than the emerging economies, there is still quite a healthy growth opportunity that will ensure positive momentum, especially in the short time frame of 2011-2015, regardless of the level of device convergence. 

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