ratings.
- Key Trends Could Be Positive
Several key trends are progressing in the chip industry that could have positive effects on ratings for some companies in coming years (see table below). These include:
+ The shift of the industry towards consumer electronics, from enterprise-based computing applications;
+ Technology differences between computing and consumer semiconductors;
+ A deceleration of overall growth rates as the enterprise computing sector matures;
+ The ever-increasing cost of leading edge factories;
+ Electronics companies' requirements for global support; and
+ A transition towards asset-light or fabless models for many chip companies.
As noted below, most semiconductors used for computing applications likely will continue to be manufactured in large, expensive factories, owned by the chip design company, while most chips used for consumer applications could well be designed by fabless "design houses," but manufactured on their
behalf by major foundries in coming years. Fabless companies' free cash flows tend to be more stable than manufacturing-centric chip companies, and the growing trend towards fabless and fab-lite companies could contribute to selectively higher ratings over time.
At the same time, leveraged buyout (LBO) companies have shown increased willingness to undertake large acquisitions in the chip industry in the past year. That same superior free cash flow stability that fabless companies enjoy could lead to heightened LBO interest in the sector, and trigger credit
deterioration for the targets, whether through defensive measures or following completion of an LBO.
Credit implications for specific issuers will be assessed as any deals are announced.
A chip-industry shift toward consumer electronics, rather than enterprise-based
computing applications Most enterprise desktops and industrial benchtops have been PC-equipped for many years. As a result, those markets are no longer in strong growth modes, and are largely driven by multi-year scheduled replacement cycles. Replacement cycles can be stretched when companies feel financial pressures, as they "make do" with existing equipment until business conditions recover (unlike conditions during the industry's growth phase, when computerizing a business was a "must do"). Because enterprise PCs principally are used as portals to corporate databases (rather than for their standalone computing capability), performance enhancement rarely is the reason for business PC replacement. Enterprises may stretch their PC cycles to take advantage of new releases of Microsoft Windows or Office, significantly
because of enhancements to security and collaboration capabilities; but once the software is available, their natural conservatism means they prefer not to be early adopters of new technology.
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