strategic management. writing it 3
TRANSCRIPT
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Alexandru-Catalin Patrascu
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DR Wolfgang Messner
Group 6
EXECUTIVE SUMMARY 2
INTRODUCTION 3
THE INDUSTRY PERFORMANCE 3
DAVID VS GOLIATH 4
MONEY FOR THE NEW HORIZON 6
THE STRATEGY 7
Figure 1. ARM business model8
WHERE NOW? 9
BIBLIOGRAPHY 10
APPENDIX11
Figure 1. Details relating to mobile application processors to ship or sample
during 2012 11
Figure 2. ARM holdings PLC: Summary of Finance 12
Figure 3. ARM revenue sources 13
Figure 4. Gartner-Hype-Cycle 14
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Executive summary
The economic downturn had an impact on the semiconductor industry but the
latest estimates are showing signs of recovery. While Intel is controlling this industry,
the microprocessor, the semiconductor end market with a $ 313 billion market and
strongest demand is controlled by ARM, a small British firm with a different business
strategy than Intel.
The latest details about the Intels mobile processor have ignited ideas among
users and stakeholders. Is this ARMs end?
No. Comparing Medfield, Intels first SoC with ARMs based application
processors (see appendix, figure 1) fails on every comparison. Intel has a long way
ahead to catch up with ARMs microprocessors. The British company will maintaindominant market share in smart phones and tablets because of a superior tradeoff
between performance and power consumption.
In a David vs Goliath battle, ARM has the resources and innovation to surpass
Intel globally. The ARM strength is not the technology but the ecosystem, which
gives a competitive advantage over its rivals. A federation approach of a business
model with hundreds of producers, designers, tools that leads to an innovative
ecosystem is a success factor for the industry.
Can a company with a manufacturing need really scale a business through an
ecosystem?
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Risks to ARM Holdings include the cyclical nature of the semiconductor
industry, competition from Intel and MIPS, quarter-to-quarter license revenue
volatility, and a heavy reliance on consumer/enterprise spending to grow royalty units.
At the lunch of Medfield mobile processor information on 8th of February 2012
Intel made it clear that is moving into ARMs domain. The announcement affected
ARMs share price on the stock market and people start speculating on the companys
future position in the microprocessor industry.
Section one of this report will look into the semiconductor industry performance
and the future estimates. David vs Goliath section illustrates the ARM s contextual
situation and analyses the competitive stance of the company in report to Intel, the
main competitor while section 3 and 4 explains the strategic and financial resources
and the value chain of ARM. Last section provides a conclusion and a personal
opinion of ARMs strategy.
The industry performance
While the European debt uncertainty seemed to wane heavily on consumerspending during last year, the semiconductor industry giants are hopeful the worst is
behind us and the US economy is not heading into its second recession in four years.
The industrys performance depends upon customer demand. The three pillars of
semiconductor consumption include:
Consumer spending on electronics goods, Enterprise IT hardware spending, Carrier capital spending plans (wireless and wire line).
Each of these pillars is nearly equally weighted. The incremental weakening in
the PC, low and mid-end handset markets and no signs of recovery in consumer
electronics markets such as TV weakened in second half of 2010. The only
semiconductor end markets that are strong are the smartphone, tablet and
automotive/industrial markets, thus the microprocessors.
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Disruption in supply of components due to the Japanese earthquake and
Thailands floods had a major impact in the second and third quarter of 2011 for
semiconductor companies, increasing the uncertainty of the industry.
However, Bloomberg estimates a 5 % grow in the chip industry for the financial
year of 2012 while industry data points indicate chip industry orders have started to
re-accelerate during the past 2 moths. Assuming the global economy is not derailed
during 2012, and assuming buyers of semiconductors replenish chip inventories,
upside may exist to the 2012 chip industry growth forecast. The biggest risk would be
a double dip in the economy and end demand. Share loss in smartphone and tablets
markets could also result in downside these estimates.
But the grim risks seem unlikely for Benchmark Company. The think tank
lowered the semiconductor sector rating from overweight to market weight which
is an indication that revenue forecasts have become conservative enough, the demand
for electronic goods would hold up in light of the economic downturn and that days of
chip inventory held in the supply chain have reached an acceptable level.
Also there are signs of innovation polices in Europe that could support an open
innovation eco-system for particular industries, making information freely availableto companies and act as catalyst for their development. It might be that some
technologies or markets are more beneficial and likely to succeed with this type of
organization than others.
David vs Goliath
The release of the latest electronic tablet by Apple, the Ipad 3 with the A5X
chip had brought yet more attention to ARM holdings. The chip is based on a quad-
core architecture licensed from ARM and it is part of a new wave of processors that
the British company wants to reassure its position in the microprocessor industry. In
stake is a $313 billion market (Economist, 2012) .The battle with its rival Intel goes
on microprocessors, the semiconductor end market with the strongest demand.
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Intel and ARM are different in size and approach. While the British company
had in 2011 revenue of $588 million and pre-tax profit of $172 million the American
had for the first nine months of last year around $40.1 billion in revenue and $13.2
billion in pre-tax profit (Economist, 2012). Yet, ARM still has the global edge within
the mobile phones and tablets market and things are about to change.
On January9, 2012 Intel released various performance and power benchmarks
for its Medfield mobile processor. Intel announced design wins for Medfield with
Lenovo and Motorola Mobility. Since these announcements, ARMs shares have
underperformed the SOX by 1,200bp (Financial Time, 2012).
At the surface, Intels Medfield benchmarks may look comparable to older
generations of ARM-based application processors. However, by the time Medfield is
ready to ship in 2012, comparable generation of ARM Cortex-A9/A15 multi-core
processors will offer superior performance and power usage metrics relative to Intel.
Based on superior performance and power use tradeoffs for ARM-based mobile
application processors many experts in believe Intel has not finally got it right with
Medfield (Benchmark, 2012).
Medfield is Intel's first real SoC (system-on-a-chip) or system processor, whereall components are found inside the same package. The advantage with this over
previous Intel solutions is mainly lower energy consumption, but also smaller imprint,
which is just as important in the hunt for thinner and slimmer smart phones. This is a
way of saying to ARM: We are getting closer.
What Intel failed to do was to compare ARM-based application processors that
will ship to the market at the same time as Medfield. (See appendix, figure 1). Most of
the ARM-based application processors that will soon hit the market are:
Manufactured on a process node equal to or smaller than Medfields 32nm node. Use multiple Cortex A9 to A15 cores in order to deliver improved performance or
lower power consumption to crunch smaller tasks.
Deliver clock speeds (MHz) equal to or greater than Medfield. Deliver lower power consumption versus Medfield.
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However ARM is relatively disconcertedby Intels recently announcement of
Tri-gate transistor technology. Semiconductor industry analyst Dan Hutcheson from
VLSI research in an interview to BBC News said that the new process would secure
Intels market dominance. He also added 3D architecture would not only benefit
Intel's desktop processors, but the chips it manufactures for mobile devices (BBC,
2011). Remains to be seen whether Intel can leverage its almost 4 year lead in 3D
transistors to gain share in tablets/smartphones.
On the other hand, if ARM starts to gain substantial share in new-targeted
markets such as PC/servers would achieve the kind of scale that Intel enjoys. ARMs
presence is increasingly being felt in new end markets such as mobile computing
(tablets and notebooks), servers and microcontrollers (MCUs). In addition, ARM is
gaining momentum in graphics processing and physical IP. No specific targets on PC
and server market share were announced. However, ARM indicated that it expects
respectable shares in these markets by 2020.
Mr. Chu the ARMs director of consumer client computingargues that the
advantage of ARM ecosystem moving into the PC ecosystem is its bringing in new
entrants, new competition, low power consumption, always-on always connected
mindset and the competition associated with it. Youre bringing all of that into a space
thats been highly uncompetitive fora while (Mashable, 2012)
Money for the new horizon
The new target for ARM would be costly. Specific knowledge, fast moving
industry and the cost for R&D would capture a big chunk of the companys revenue.
Arguments that are strong enough to prevent other companies to enter this industry.
AMD and Intel are fierce rivals in a mature PC/servers chip industry but the
ecosystem is a competitive advantage for Britons.
Figure 2 of the appendix provides a 3-year summary and a 2-year J. P. Morgan
forecast ofARMs finance. As seen, the company position is and would be more than
stable to start the pursuit of rival competitors in the targeted industries.
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ARM has five distinct sources of revenue (see appendix figure 3). The main
source was the Process Division (ARM PD) royalties representing 46% of the
companys 2011 financial year. For the period covering 2010-2015, J.P. Morgan
expects ARM PD royalty units to post a 20% compound annual growth rate, and by
2015, ARM PD royalty revenue should represent more than half the companys total
revenue explaining the forecast (Morgan, 2012). Based on royalty units by segments
reported by the company, 45-50% or more of ARMs royalty units are from end
markets that are weak currently (J P Morgan).
The new Windows 8 will be ported to the ARM processor architecture would
help accelerate mobile computing share gains for ARM beginning from the second
half of 2012 when they expect around 150 billion ARM units to be shipped between
2011 and 2020. Also, ARM should gain significant market share in the highly
fragmented MCU market following a wave of licensing momentum for the Cortex M-
class cores (Bloomberg, 2012).
Investors according to Bloomberg are fixated on the ability of the ARM
community (ARM + licensees) to maintain dominant share in the smart phone and
tablet market as well as the ARM communitys ability to penetrate the PC market
with the pending launch of Windows 8 which is ported to ARM for the first time.
Recent developments in the mobile and PC processor market have stimulated a battle
between the Intel camp and the ARM camp which seems to go in favor of the British
company.
The strategy
Many analysts points at the business model and architecture itself as a
competitive advantage for ARM and not its technology. The value chain design and
the architecture make ARM different from other competitors.
The British company is a Fabless chipmaker (Economist, 2012). ARM makes
the design and market them but outsource to a third party to make the manufacturing.
Has high potential grow and they are not burdened by the overhead associated with
manufacture or fabrication (Bloomberg, 2012).
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Depending of the technology and the type of license, the prices for a chip
license vary around several millions. After the third party makes the chip, ARM
receives royalties for each chip sold by the manufacturing semiconductor company.
Usually it takes around 3-4 years and can last 20 years. Figure 1 illustrates the process.
Figure 1. ARM business model
Source: ARM.com (2012)
ARM highlighted its flexible licensing options ranging from architecture license
for companies who wish to design their own ARM compliant processors to single-use
licenses for smaller/new companies targeting a specific high-volume market. ARM
estimates that a top-10 semiconductor company saves 60-70% costs by licensing
processors from ARM vs. developing internally.
This lead to a federation approach of a business model with hundreds of
producers, designers, tools, etc., while Intel looks more like a feudal kingdom
involving very few outside (InnovationManagement, 2012). The big difference
between Intel and ARMs revenue and size of trading is Intels control over design
and manufacturing. They bring the chips faster and almost faultless to the market than
the ARM and have 100% control over the know-how and revenues.
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Where now?
Analyzing Apples triumph and Nokias fall reveals that the business model
located around an innovation ecosystem is a success factor for global information and
communication industry. The current ARM success proves that innovation based on
ecosystem is a potent strategy for companies in semiconductor industry. It also
provides expanding options. Tackling Intels supremacy in PC/servers orgoing to
serves and microcontrollers and graphics and physical IP would be a winning card.
Looking at Gartner-Hype-Cycle (figure 4, appendix) seems right to move into
other sectors. Ahead, ARM has a potential enormous market. If the current ARM
microprocessor market is limited to the number of persons on the planet the other
markets provides an endless source of revenue.
ARM will maintain dominant market share in smart phones and tablets because of a
superior tradeoff between clock speed (performance) and power consumption, a
tradeoff usually measured in DMIPS/watt. However, as demonstrated by recent
announcements, Intel could land a few smart phone and tablet design wins simply due
to the companys marketing muscle.
Andersen a senior adviser to the Nordic Innovation Center argues that
European companies have traditionally failed to achieve the kind of scale that Intel
enjoys (Forbes, 2012). Well, the direction and the speed that ARM goes ahead make
me believe that this company would be an exception. If in the past Intel enjoyed the
Windows alliance, ARMs ecosystem and strategic alliance with Apple the largest
company in the world by market capitalization (Economist, 2012) may have what it
takes to emulate Intel.
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Appendix
Figure 1
Details relating to mobile application processors to ship or sample during 2012
Source: Benchmark (2012) Lowering semiconductor sector weighting for
overweight to market weight
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Figure 2- ARM holdings PLC: Summary of Finance
Morgan, J.P (2012) European Semiconductor
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Figure 3. ARM revenue sources.
Source: Benchmark (2012) Lowering semiconductor sector weighting for
overweight to market weight
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Figure 4 Gartner-Hype-Cycle