Amid Slowing Growth, Consumer Chipmakers Must Improve Service

Increasing competition, decreasing customer pool demands better customer orientation.

With China�s consumer electronics industry entering a mature phase characterized by slowing growth, semiconductor suppliers to this segment must improve their customer service in order to gain a competitive advantage over their rivals, according to iSuppli Corp.

With the notable exceptions of LCD-TVs and Set-Top Boxes (STBs), China�s exports of consumer electronics are set to decline in 2009. iSuppli predicts various consumer electronics products will suffer contractions in unit shipments from 10 to 30 percent in 2009 because of weak global economic conditions.

This is resulting in surplus production capacity and the intensification of price competition. As a result, manufacturers are coping with lower profit margins. While the consumer electronics markets are recovering after a weak start to the year, growth is not expected to return to previous levels.

In product segments that are shrinking, some consumer electronics makers are aggressively entering new markets or diversifying into new product sectors�but few appear to be profitable. Many manufacturers are trying to open domestic markets in order to compensate for weak demand from export markets, but they cannot establish sales channels in the short term. Some of the risks in the new markets include limited market size, longer design times, and new sales channels.

With China�s consumer electronics market headed toward maturity, competition will increase among semiconductor suppliers to build market share during this market downturn. Suppliers will have to fend off rivals while going after the same pool of end customers and contend with lower growth rates in some markets. Suppliers and their partners will not only need to provide excellent products but will also have to improve the level of service they provide.

While higher-integration chips with advanced technologies were the most important factor for major suppliers to win business in the past, superior technology will be just one consideration in the future for participants to remain competitive. Suppliers and manufacturers alike will also have to deal with the exigencies of a more diversified market and be capable of handling quick-changing market conditions.

With their economies of scale, large manufacturers are well positioned to maintain their dominance of the markets and to increase or expand their gross profit margins. While manufacturers will generally encounter challenges when the markets shrink, those flexible enough in their operations will be able to diversify in order to reduce risks, finding the correct balance between large-scale production and flexibility. For all participants, new features and diversified products need to be created to attract consumers.

Unfortunately, imbalances in the semiconductor supply chain will continue in the second half of 2009 and the first half of 2010. Some shortages in the spot semiconductor markets are expected to take place, and suppliers will encounter difficulties in increasing sales. Overall, suppliers remain conservative about reopening factories that had been closed between the fourth quarter of 2008 and the first quarter of 2009.

No longer will manufacturers purchase components based on spec files alone, but time-to-market and new, diversified products from suppliers will be just as important. Suppliers will have to improve their internal support system to assist the promotion of core products and to expand service networks to satisfy the requirements of manufacturers, especially in the emerging or niche markets. A more effective service network can fulfill diversified demand from customers as well as generate more business, and key customers can contribute to long-term and stable purchase orders even during this market downturn to benefit suppliers.