Written by Lisa Ann Cairns, Ph.D.
The next strategic phase for the semiconductor and electronics industry reveals opportunities for true global expansion combined with a soon-to-be explosive wearable tech market and expanding IoT demand. Strategic opportunities in emerging markets are ripening for low-priced, LTE capable smartphones just as the developed markets are reaching saturation points.
In recent years, the hottest devices in the semiconductor and electronics industry have been the smartphone, followed by the tablet PC. These devices took off fast and furiously, and were adopted by high-end, developed market consumers at a pace that hadn't been witnessed since the takeoff of personal computing and the laptop PC. However, developing markets are growing saturated with these devices, which, according to the Wall Street Journal and Citi Research, have product lifecycles of roughly five to seven years for tablets and smartphones, respectively. Unfortunately for device manufacturers, replacement cycles are less robust than new purchase growth, meaning that the double-digit growth and phenomenal sales experienced so far are going to enter a plateauing phase for this market sector, particularly among those early adopters, the high-end, developed market consumer.
Device strategies emerge for new consumers
With device purchase rate slowing, we are already seeing some dampening on the component side, as well. For example, although memory inventories have been stable and healthy, some industry analysts are seeing mild sluggishness and caution possible supply-demand deterioration in 2Q14 with Hynix's resumption of output, according to Credit Suisse's March 17, 2014 report, "Technology Sector: Asia feedback" (p.15).
Another component-level challenge for the high-end smartphone and SWD sector is the increase in costs of architectures smaller than the current 20nm and 28nm nodes in volume production. While component engineers are moving to the 1x node levels, the rising cost of developing and manufacturing at these nodes significantly raises the barriers to entry and directly impacts the ability to realize higher return on investment (ROI). Given the significant increase in cost at 1xnm nodes, and given that demand has now turned to lower-priced smartphones (sub US$200) as well as the lower baseline pricing (sub US$100) for wearable health and fitness devices, design engineers and device OEMs are looking to maximize existing, more mature architectures.
Presently, the industry is seeing competitive pricing for components that are targeted for low-cost LTE smartphones, such as the latest moves by Qualcomm with the Snapdragon 400 processor in the newly-released Kestrel LTE compatible, low-cost (US$160) smartphone in the United Kingdom, as reported by ComputerWorld. The focus on more aggressive component pricing to lower device costs is promoting a second-view to revisiting mature components' pricing and opportunities to design low-cost, LTE smartphones to meet demand in both developed and, especially, in emerging markets. This change in focus from pushing for the next cutting-edge component innovation to instead focusing on cost-reduction and targeted feature incorporation, opens the door for a needed next phase in smart wireless device innovation. This anticipated next phase of device design should prove rewarding to consumers and manufacturers alike, leveraging existing designs and components as a model for focusing on important features and capabilities, while also focusing on opportunities for improving ROI from these new, strategic smart devices.
With new strategies in mind for meeting the central feature demands of smartphones and tablets, while attending to costs to reach into new consumer markets, the opportunity for including wearable tech devices in these plans is not just a great fit but also an important, growing device category. The solid growth forecasts for wearable technology devices, particularly in health and fitness, are compelling. Importantly, since wearable tech does, currently, rely on connectivity with a smart wireless device, it can be understood as an add-on device or even application-based device, enhancing individuals' experiences with their devices by connecting them and transferring data among those devices. In other words, the appeal of wearable tech is its ability to not just collect new and potentially useful data, but also to seamlessly connect devices and transfer data about individuals across devices – that is, to move more closely towards ubiquitous computing or the Internet of Things (IoT). Designing new devices with both consumer fashion and "wearability" in mind, as well as controlling costs (much as seen with the current next-generation smartphones), is a challenge, but one that fits well in the current design-for-cost-and-function environment that we are in.
Successful design and adoption of wearable devices will come with a sizable reward. According to recent Gartner research, "The Internet of Things (IoT) is forecast to reach 26 billion installed units by 2020, up from 0.9 billion just five years ago, and will impact the information available to supply chain leaders and how the supply chain operates, depending on industry." In other words, not only will the growth of IoT provide opportunities for component and device manufacturers, with the chance to innovate new wearable devices and applications for integrating "Things," but these opportunities will also affect the global supply chain in ways not yet realized, based on the transfer of new data and the new demands that consumers and supply chain partners will come to have.
One linchpin demand that truly ties together component, device, and application (understood both as use case and as software) on the micro-scale, while also tying together the economic and geographic opportunities for the next phase of smartphone growth, is high(er)-speed data transfer, namely LTE.
Data transfer is not necessarily the first demand feature that comes to mind when we think about the catalyst for the next hot growth phase. However, more than device design, component architecture, or any other feature (hardware or software), the ability to access and use new applications for data transfer via smartphones was identified by Credit Suisse as the highest intent for new smartphone purchases in leading research from roughly 16,000 respondents across nine emerging market countries.
To be clear, as the Credit Suisse research presented at the Asian Investment Conference 2014 by Richard Kersley, Managing Director, Head of Global Equity Research Product, clearly shows, "countries with low smartphone penetration are closely tied with low internet access rates [indicating that] [g]reater infrastructure investment will drive future growth in handset demand [lead by a] [s]tructural shift to online portals for e-commerce, with China a prime example, aided by increased smartphone penetration."
The Credit Suisse research shows that emerging market countries, such as China, which is set to complete a 4G rollout during 3Q14, are leading penetration rates (ibid. p. 24) and will continue to lead in the purchase of lower-cost smartphones as replacement devices for their existing mobile phones, or will adopt these as a first device. The respondents to the survey indicated that the majority intend to purchase a smartphone for access to desired applications, pointing directly to the demand for high-speed data transfer and internet access through smartphones as driving features for device purchase. Credit Suisse notes in the analysis that emerging market countries are confronting the demand for improved network infrastructure to handle faster cellular data speeds, namely LTE:
While consumers will adopt 3G technology before LTE becomes mainstream in emerging countries, countries like Brazil have begun deployments, with recent auctions pushing up spending. In the longer term, the GSM Association (GSMA) states that by 2017, nearly 50% of all LTE connections will be in Asia. (ibid., p. 27)
What this means is that not only is there a significant opportunity for OEMs to provide low-cost, LTE compatible smartphones to emerging market consumers (especially in Asia), but there is, similarly, an opportunity for network infrastructure providers and associated network device manufacturers. Furthermore, with the introduction of high-speed data transfer capabilities, the door simultaneously opens for the wearable device market and for IoT, more generally.
Wearable devices not only present an additional opportunity for emerging market consumers as new devices, but those that are targeted around health and fitness and sportswear stand in particular favor among these consumers. For example, Electronics Industry Digest led its Edition 147 (26 March 2014) with the following forecast for wearable devices:
Global wearable device sales will surge tenfold from 15 million units in 2013 to 154 million by 2018, so [sic] Strategy Analytics. Smartwatches, smartglasses and fitness bands, from major brands like Samsung and Nike, will be the big three device categories driving wearables growth for the next five years. These are the main areas where manufacturers, retailers and mobile operators will focus their wearable investments. Companies like Samsung and Qualcomm are targeting the smartwatch category; Google is prioritizing the smartglasses segment, while Nike is focusing on fitness bands.
Sportswear, particularly Western brand-named manufacturers, consistently hold the highest position for intended spending targets across the Credit Suisse respondents, even more so than smartphone discretionary spending. Combining the strong appeal of Western-brand sportswear with smartphone application capabilities through wearable devices could be a particularly sweet spot among emerging market consumers who intend to use discretionary income on Western-branded sportswear as well as smart devices.
As we discussed, while smartphone device exhaustion is nearing for developed markets, and while there are serious questions around the lack of innovation and differentiation among these devices today, the opportunities for market diversification reaching out to the emerging consumer present compelling strategic opportunities for device OEMs. As Gartner recently reported:
Mobile phones, the largest segment of the overall device market, are expected to reach 1.9 billion units in 2014, a 4.9 percent increase from 2013. The growth in 2014 is projected to come from the lower end of the premium phone market and the higher end of the basic phone market. "While the lack of compelling hardware innovation marginally extended replacement cycles in 2013, we've witnessed an upgrade path in the emerging markets. Latin America, the Middle East and Africa, Asia/Pacific and Eastern Europe have all upgraded their phones, which will help to compensate for mature market weakness in the near term," said Annette Zimmermann, principal research analyst at Gartner.ÂÂÂÂ
How many BRIICS in the road?
Emerging markets as the next opportunity for growth may sound a little familiar. Brazil, Russia, India and China (BRIC) held the lure of the global economy during the early part of this decade.ÂÂÂÂÂÂÂ Their then-growing economic independence from developed nations was understood as a positive signal for new, fast-paced growth that could make up for the recession declines in the US and EU, especially. However, almost as quickly as hopes were pinned on the BRIC nations, those hopes faded as economies stalled and the sustainability of high growth forecasts was questioned and then faltered.
On the face of things, the current global political and economic news does not really seem to hold positive lures for investment and growth in BRIC and other emerging markets. Political unrest domestically and internationally still permeates many emerging market nations, such as in parts of the Middle East (e.g., the Arab Spring events and continued unrest), Turkey, Russia (notably the recent annexation of Crimea), and the recent run on some rural banks in China. GDP growth is far from the once 7-9% estimates, but, to be fair, the developed markets are lagging as well, and the idea that such a high level of GDP growth was sustainable (let alone realistic) is questionable.
Taken as a whole, though, the global, economic picture is one of more positives than negatives. To be sure, the recent foreign exchange issues have hurt global trade, and such swings are likely to continue as the global economy slowly lurches forward (and backwards at times). But what analysts see is really a sober profile for emerging markets where sustainability and infrastructure, domestic growth engines, have begun. As a result, we see the real growth of the middle class consumer in the emerging market nations, and these important new consumers are the future demand drivers for not only the semiconductor and electronics industry, but also for many other industries. These new consumers are younger, have more discretionary income, and have interests and consumptive desires that face outwards to Western brands for some items (such as sportswear), while also holding favor with domestic or regional brands, as the Credit Suisse analyses clearly demonstrate.
Who are these new emerging market consumers? The original BRIC nations are still currently in this roster, although Russia's ability to maintain its position is being called into question based on the divergent trends internally separating higher- and lower-income consumers, and the resulting divergent views of financial improvement likelihood and opportunities, among other key areas. On the other hand, Indonesia has proven to be a strong emerging market nation to watch, and there is increasing talk of revising BRIC to BIIC. South Africa also continues to hold potential opportunities as the S in BRICS, but, again, there are questions of the increasing divide between high- and low-income residents, which, like, Russia, may push this nation out of the BRIC nomenclature. There are, however, many other nations that are pushing into the emerging market category, like Singapore, Mexico, and Turkey, to name top contenders.
In short, the list of nations to consider among the truly emergent markets is, for the most part, growing, and represents a realistic portrait of sustainable growth, domestic investment in (necessary) infrastructure, and cultivating opportunities and improved wage and living conditions for citizens. The Electronics Industry Digest recently summarized the current global economic news quite fairly (Edition 147 – March 26, 2014, p.1):
The International Monetary Fund IMF January outlook calls for World GDP growth of 3.7 percent in 2014, up from 3.0 percent in 2013. Acceleration is driven by developed economies, with the U.S. expected to accelerate to 2.8 percent in 2014 versus 1.9 percent in 2013. The Euro Area should recover from a 0.4 percent decline in 2013 to 1.0 percent growth in 2014. The strongest growth continues to be in emerging and developing economies, growing 5.1 percent in 2014, up from 4.7 percent in 2013. Although China is forecast to decelerate slightly from 7.7 percent to 7.5 percent, most other developing economies are projected to show accelerating GDP growth in 2014.
Next phase opportunities for growth
The next phase for the semiconductor and electronics industry may not currently exhibit exciting new differentiations in the hot smartphone and tablet PC market, but the opening of opportunities for true global expansion, combined with a soon-to-be explosive wearable tech market, are solid – if the right device pricing can be met. Currently, component days of inventory (DOI) are within good levels, book-to-bill ratios are positive and steady, and the opportunity to see ROI from existing architectures and component designs (now configured for the disruptive device market of wearables and new IoT media) hold further promise for profitable growth.
The devices that show the greatest opportunity for rapid adoption, and which are truly in demand, are smartphones for emerging markets and lower-priced developed market consumers in the sub-US$200 or preferably sub-US$100 levels. To reach those prices while providing 4G LTE capabilities and the basic applications, internet connectivity, and data transfers that put low-cost smartphones at the top of emerging consumers' discretionary purchases means focusing on how to maximize value in component architectures. Similarly, for wearable tech to realize its market opportunities, pricing again must fall in the sub-US$100 range and provide seamless connectivity and data integration through applications via smartphones.
Challenges exist for the next phase of device adoption and expansion, but these challenges are not overwhelming for our industry. Economic stability and sustainable growth is rooted across regions, and the emerging consumer and new middle class is seen as finally coming of age and with positive outlooks for spending new discretionary income with targets on devices (smartphones) that provide access to the apps they are interested in and sportswear that meets the needs of active lifestyles (and likely wearable tracking devices to maximize the new smartphone apps, as well).