Paul Miller Blog: Consolidation

This past May, Dean Takahashi posted a Blog on the wave of consolidation in the semiconductor industry and posed the question of “What comes next?” The answer was “more of the same” as growth is elusive in a relatively stagnant market. As I write this, the news has just broken that Renesas has made a bid to acquire Intersil. This news follows the Linear Technology acquisition by Analog Devices (and not forgetting Avnet buying Premier Farnell) and was the latest in a long string of M&A activity over the past 12-18 months. And M&A activity is just as prevalent in the mechanical design and manufacturing sectors as it is in the electronics space.

In the manufacturing markets, PWC states that the transition to industrial technology companies is one trend expected to impact manufacturing M&A in the year ahead, noting, “Innovations such as the Internet of Things, along with next-generation robotics, additive manufacturing and nanotechnology will begin to change how plants are structured, required employee skillsets, and how factories operate.” PWC goes on to state that M&A activity of niche players will pick up pace.

It’s not unusual in maturing markets—especially those where companies have a great deal of cash sitting on their balance sheets—that one route to growth is via consolidating your competitors. Indeed, the World Semiconductor Trade Statistics (WSTS) has been revising down the 2016 industry growth numbers on a consistent basis.

I believe that average industry growth in the low single digits is the new normal for the electronics industry and the manufacturing sector. However, that does not mean that some companies, technologies, and markets will not perform better. One such “market” is the Internet of Things. This “killer app” eclipses all those that have come before (military, PC, mobile phones, and the internet). Those companies in our industry that grasp the nettle have the potential to significantly outpace the market. The challenge is that the IoT is not “one market” or “one killer app.” Currently residing at the top of Gartner’s “hype cycle,” almost everything IoT-related is seen as at or near the “peak of inflated expectations.” This can create a “wait on the sidelines” approach.

Many markets across the world have been dealing with single-digit growth numbers for many years but, in most cases, there are a handful of companies who simply win big and capture market share from their competitors. One of the ways to achieve this is to acquire your competition. Another is to invest in two areas of your business to create some differentiation (thanks to http://www.strategy-business.com/):-

  1. Innovate to take advantage of “disequilibrium.”
    1. What do we do that’s unique that our customers value?
    2. Can our competitors match this capability we have?
    3. Are there any coming technological or regulatory shifts that could transform our market, and if so, do we have a well-thought-out plan for addressing them? This is where IoT comes in! Check out our new website ioti.com to get more insight beyond the hype into real-world IoT solutions.
  2. Invest in marketing and data analytics to spot trends and address them before others.

The electronics market is pretty good at investing in R&D and sales. Despite this, companies suffer from some of the lowest customer loyalty scores available in any industry. Investment in marketing is often way less than 2% of sales. (Some consumer goods companies are investing over 8% of sales into marketing.) Over time, M&A becomes increasingly expensive and growth is increasingly elusive. In the meantime, it might be worth looking at how companies grow in low-growth markets. Some time spent on capturing the IoT market share also can propel your company forward. How is your company doing?

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