- Semiconductor industry has had profound impact on societies in many ways as

they are part of the majority of technical equipment, ranging from PCs, mobile
phones, to home appliance like washing machine and microwave ovens. Usage
of semiconductors in aircrafts, automobile and trains are consistently increasing.
Most technological innovations in terms of hardware are dependent upon
consistent upgrading of semiconductor devices. The current world would not be
the same without semiconductors and would surely be slower.

In Malaysia semiconductor industry plays a major role in making Malaysia an

industrialized country. The semiconductor industry contributes to about 41% per
cent of Malaysias total Electrical & Electronic sector output. There are
approximately 62 semiconductor companies currently operating in Malaysia. The
semiconductor industry contributed 68% of the total Electrical and Electronic
exports in May 2013. Malaysias export growth trends in semiconductors are
tremendously increase. Thus, semiconductor industry is of much importance to
the Malaysian economy. However, progress seems to be expensive as
manufacturing and product development based on latest technology requires a
large amount of investment. Continuous research and development is necessary
and capital to cater for such activities is accordingly high.

Malaysias role in the semiconductor industry goes back to the early 1970s when
the U.S. based chipmakers like Intel, National Semiconductor, Advanced Micro
Devices, Texas Instruments, ChipPac, Western Digital and Motorola established
off-shore Integrated Circuit (IC) assembly and test operations. These companies
were started in Malaysia to take advantage of the countrys cheap labor at that
time. Much of the investments are concentrated on the island of Penang, which is
popularly known as the Silicon Island of Southeast Asia. In recent years, most
of
the reputed companies in the chip business have a back-end manufacturing
operation in Malaysia. Eight out of eleven free trade zones in Malaysia are
monopolized by the semiconductor and electronics industry.

The semiconductor industry is high cyclical and often characterized by rapid and
constant change, rapid price erosion, product obsolescence, short product
lifecycles and huge fluctuations in demand and supply of the products. Major
factors that affect the industry are as highlighted below:

Cyclicality
Historically, the market of semiconductors is known to be volatile. Demand and
supply have cyclically fluctuated and caused pronounced fluctuations in margins
and prices. The cyclicality of the industry arises from a set of factors which
include fluctuations in the demand of end products that use semiconductors as
well as fluctuations in manufacturing capacity available for the production of
semiconductors.

Usually, semiconductor fabs take years to construct, plan and start operations.
Manufacturers have also in the past, made capital investments in equipment and
plant during market conditions that were favorable often, in response to
anticipated growth demand of semiconductors.

New entrants threat

During the early days of the industry, design engineers with great ideas would
often leave one company in order to start another. With growth of the industry
though, setting up chip fabrication industries requires billions of investment in
dollars. Entry costs therefore make it impossible or at times painful for all but the
big players to enjoy the advantage. Despite this fact, there are indications that
things might be changing again and that the companies will form alliances so as
to spread the costs of manufacturing.

Technological competition and development

The semiconductor market is marked by intensive rivalry between companies.

Chip makers are always under intense pressure to come up with a new product
that is cheaper, better and faster than what was redefined as state of the art.

This pressure extends to foundries, chip makers, distributors and design labs. In
essence, the pressure is felt by all connected to the businesses of ensuring the
chips are developed from R&D into high tech equipment. The end result is an
industry that is continually producing cutting edge technology while at the same
time riding business conditions that are volatile.

Substitutes availability

The semiconductor industry is under the threat of substitutes which is heavily

dependent on the segment. While there is intellectual property protection that
might put to a stop the threat of new substitute chips for a certain duration, within
a short duration, companies start producing similar products at low prices.
There is no question there are copycat suppliers in the market that are a major
problem for the companies that spend millions or even billions in the creation of a
more reliable and faster chip to recoup on R&D costs.

Buyers power

The industry is dominated by small number of large players as such buyers have
little to no bargaining power.