gsa mckinsey iot

Implications of Internet of Things for the semiconductor industry Industry Survey December 2014

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A GSA/McKinsey collaboration was launched in July 2014 to develop a global perspective on the Internet of Things (IoT)

SOURCE: Gartner; IDC; ABI Research

… A key growth opportunity

▪  The number of connected IoT devices is expected to reach 20-30bn by 2020

▪  A semiconductor growth opportunity for servers/network equipment for “Internet” and components for deployed “things” exists

… A new strategic challenge

▪  IoT devices often have specific technical requirements regarding low power consumption, integration, cost point, connectivity, and sensors

▪  The highly vertical character of the IoT (many small niches) requires a new approach on how to address the market

▪  The IoT is starting to happen but is still early in its development (e.g., unclear standards, no “killer application” yet)

Joint GSA/McKinsey effort to develop a perspective on implications of IoT for the semiconductor industry

▪  Understand drivers and roadblocks for IoT adoption

▪  Define opportunities, challenges, and levers to overcome challenges for semi-conductor players

Unpaid collaboration

SteerCo of 12 GSA member executives oversees effort

A final report summarizing the findings will be published in H1 2015

For semiconductors, the IoT is…

GSA/McKinsey collaboration

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▪  Online survey sent out to GSA contacts at the VP level and up in semiconductor companies

▪  Survey was open from November 24 to December 7, 2014

▪  229 executives participated in the survey

▪  Participants span all industry segments, all regions, and all company sizes

GSA/McKinsey IoT survey

We surveyed 229 executives: they see IoT as a critical growth opportunity and security/privacy issues as the biggest challenge going forward

SOURCE: GSA/McKinsey

▪  Executives confirm that IoT is a growth opportunity

–  60% of participants see IoT as one of the top 3 growth drivers of the semiconductor industry

–  Inflection point for growth is expected in 3-5 years with wearables and smart home as “front-runner” verticals

▪  A focused view on today’s challenges for IoT adoption exists

–  Lack of security/privacy is considered to be the most critical challenge

–  Low customer demand, lack of common standards, and selection of right addressable market also seen as important challenges

–  Semiconductor community is optimistic that technological challenges can be solved

Key findings

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Company type

Survey participants cover the full semiconductor value chain and a wide range of company sizes

SOURCE: McKinsey and GSA IoT survey (n=229, executives from semiconductor companies, VP level and up)

PARTICIPANT PROFILES

20

26

13

41

1068712

45

12

25 m – 100 m

100 m – 1 bn

> 1 bn

Company size

Total, %

< 25m

1%

5%

5%

1%

2%

1%

2%

2%

5%

14%

4%

22%

1%

2%

7%

2%

2%

3%

1%

4%

1%

0%

0%

5%

1%

1%

1%

5%

Foundry OSAT Fabless IDM Other1 IP EDA Total, %

1 “Other” includes 7 participants with a focus on software, 4 listed as service companies, 4 as semiconductor equipment companies, and 2 as device OEM companies

> 10% 5 - 9% 0 - 4%

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Survey participants are all high profile, 35% are C-level, and 21% are CEOs


PARTICIPANT PROFILES

President, VP

80 (35)

37 (16)

C-level

Other

112 (49)

CFO

COO

21 (9)

5 (2)

CTO

6 (3)

CEO 48 (21)

80C-level total 229Total

Breakdown of all participants Share of total participants, percent of total

Breakdown of C-level participants Share of total participants, percent of total

5 5

Participants of the survey are not limited to specific IoT functional blocks or targeting specific end markets of IoT


WHICH IoT BUILDING BLOCKS DOES YOUR COMPANY OFFER? WHICH IoT END MARKETS DOES YOUR COMPANY TARGET?

IoT building blocks offered participants Target IoT market

Share of total participants, percent Share of total participants, percent

9

6

Security

Memory

13

Microprocessors/ microcontrollers

15

Services

Connectivity

10

20

Software

14 Sensors/MEMS

13

IP

Automotive

13

Medical

Smart home

Industrial

16

15

Wearables/ mobile devices

17

19

20

Smart cities/ utilities

6 6

80% of the participants agree with the “narrow” definition of IoT that was chosen for this collaboration


IoT IS DEFINED AS “A NETWORK OF DEVICES THAT SENSE AND COMMUNICATE VIA THE INTERNET”

The IoT is defined as “a network of devices that sense and communicate via the Internet”

Yes, but smartphones, laptops, and PCs are also IoT “things”

Yes, but IoT “things” should also do some local computation 27

Yes, but IoT “things” could also communicate using non-IP networks 29

Agree, IoT is a network of devices that sense and communicate via the Internet

24

18

2 No, I have another definition (Please explain)

Narrow IoT definition

Wide IoT definition

Share of total participants, percent

7 7

Approximately 2/3 of the executives believe IoT is a top 3 growth driver for semiconductors and inflection point will happen in the next 5 years


HOW IMPORTANT IS IoT AS A GROWTH DRIVER OF INCREMENTAL REVENUES? RATE FROM 1-5 (5 IS IMPORTANT)/WHEN WILL THE IoT GROWTH “INFLECTION POINT” HAPPEN?

Importance rating of IoT as a growth driver of revenues Expected timing for IoT inflection point

Share of total participants, percent Share of total participants, percent

I expect limited incremental growth from the IoT

2

Just one of many factors of growth for the industry

33

One of the top 3 incremental growth drivers for the industry

48

The number 1 incremental growth driver for the industry

17

11

In 3 - 5 years from now

I don't expect a disruption, but steady (geometric) growth

In 1 - 2 years from now

21

> 5 years from now

Now

53

14

1

8 8

Fabless and foundry are the most highly engaged with IoT, although there are different levels of participation within industries


HOW IS YOUR COMPANY ENGAGED IN IoT?

Level of engagement with IoT, by industry segment

Share of participants by industry sub segment, percent

Foundry

IP

EDA

OSAT

Fabless

IDM

Fully building IoT solutions from scratch

Only migrating existing solutions using current technologies

023

5324

26262919

103750

3

3113% 25% 31%

545

2030

1 2 3 4

2.6

2.5

2.5

2.5

2.0

2.3

2.4

Average score

1031536

Selected fabless players with strong focus on IoT

High use of existing solutions for IoT by IDMs, less IoT-specific developments

9 9

Although wearables/mobile devices and smart home will receive the most attention in 2015, all markets are expected to be equally important in 2020


WHAT ARE THE KEY END MARKETS FOR IoT (BY GROWTH) IN THE SHORT AND LONG TERM?

2.3

1.8

1.8

1.9

1.9

2.1

Automotive

Smart cities/ utilities

Wearables/ mobile devices

Medical

Industrial

Smart home

3.3

3.2

3.0

3.2

3.0

3.2

Low (1) High (4) Low (1) High (4)

Importance Importance

Can be interpreted as equal importance of markets in 2020 or ambiguity about expectations for the future

2015 IoT market rating Average rating

2020 IoT market rating Average rating

10 10

Security/privacy is the top challenge for the success of IoT while industry is optimistic about overcoming semiconductor technology challenges


WHAT ARE THE KEY CHALLENGES TO SUCCESS FOR IoT AND SEMICONDUCTOR PLAYERS? DISTRIBUTE 100 POINTS TO 7 OPTIONS

Key challenges to success in IoT1

Average score from all participants (out of a total of100 points)1

19.3

Value extraction challenges (margins too low, cost too high, value captured by others, ...)

14.8

16.4 Low customer demand (no killer apps)

Security/privacy issues

16.3 Lack of common standards

Semiconductor technology challenges (low power, integration, ...)

12.1

Addressable market challenges (too fragmented, unknown/new customers, ...)

15.5

Security and privacy is seen as key challenge to IoT growth

Industry is optimistic about semiconductor technology challenges

1 Participants have a total of 100 points to distribute to challenges based on severity/importance of challenge (more points = more important)

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Collaborating with other players in the value chain is seen as a key solution to fix security/privacy issues


SOLUTIONS FOR CHALLENGE: SECURITY/PRIVACY ISSUES

Solutions for IoT challenge: “security/privacy issues”

Rating by solution

1.9

2.4

2.4

2.5

3.2

Not important (1) Important (4)

Government/regulation needed

Collaboration – with other semiconductor players

M&A

Organic development of new capabilities

Collaboration – with other value chain players (e.g., with solution providers)

12 12

Solutions for IoT challenge: “low customer demand (no killer apps)”

Supporting innovative development is considered the most promising solution to “low customer demand”

Solutions for challenge: Low customer demand (no killer apps)


1.9

2.2

2.8

3.1

Important (4) Not important (1)

Just wait for “killer Application” to emerge

Targeted IoT sales and marketing activities (e.g., distributors, branding, ...)

R&D investment in more advanced technologies (e.g., low power, wireless charging, ...)

Actively support innovative 'killer app' development (e.g., for start-ups, via open source hardware or software)

Rating by solution

13 13

Solutions for IoT challenge : “lack of common standards”

Industry associations and powerful players to support standard through are seen as most promising solutions to overcome lack of standards

Solutions for challenge: Lack of common standards


3.0

2.3

1.6

2.7

3.3


Just wait and see which standard prevails

Regulation fixes standard

Collaboration with other semiconductor players

Powerful players establish own technology

Industry associations support standard definition

Rating by solution

14 14

Solutions for IoT challenge: “addressable market (fragmented, unknown, etc.)”

Collaborating and prioritization of product offering seen as key solutions for entering IoT market despite its complicated character

Solutions for challenge: Addressable market challenges (fragmented, unknown, etc.)


2.2

2.3

2.8

2.7

3.2

3.3


Targeted IoT sales and marketing activities (e.g., distributors, branding, ...)

Product offering – build customized platform

Product offering – prioritize key verticals/find the right niche

Collaboration – with other value chain players (e.g., with solution providers, ...)

M&A

Collaboration – with other semiconductor players

Rating by solution

15 15

Solutions for IoT challenge: “value extraction challenges”

Industry believes reducing costs and adding additional revenue are the best ways direction to fix value/margin challenges related to IoT growth

Solutions for challenge: Value extraction challenges


1.6

2.7

2.9

3.0

3.1


Increase margin – marketing (branding, new channels, ...)

Additional revenue – offer design/turnkey services

Actively try to reduce costs (use open source hardware/ software, reduce IP costs, ...)

Additional revenue – offer data/software services

Just wait for scaling/cost reduction to happen

Industry shows ambiguous opinions on how to fix value extraction challenges - rating of first 4 solutions is about 50% less than other challenges

Rating by solution

16 16

Solutions for IoT challenge: “technology challenges”

R&D investment and collaborations expected to drive solutions for technology challenges

Solutions for challenge: Technology challenges (low power, integration, ...)


2.9

2.2

1.6

3.3


Just wait for technology to improve

M&A

Collaborations – with other semiconductor players

R&D investment in more advanced technologies (e.g., 3D integration, ...)

Rating by solution

17 17

Contact information in case of additional questions

Mark Patel Principal

[email protected]

Sandro Grigolli EMEA Executive Director

[email protected]

gsa mckinsey iot

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