These days the market is focused less on next-generation packages and more on next-year survival. One cause of this situation is the industry's technical focus. We continue to believe that a new package, or a new wireless product, or a new chip is the next big thing that will pull us back into good times. I think companies in our industry need to apply R&D to their business model. Many need to undertake programs to rebuild them with fresh sets of value propositions and delivery assumptions. The results need to be radically different. Why? Other than the business cycle issue, our industry is in a long-term profit squeeze. This squeeze is due to several factors: (1) maturing markets (2) everyone using the same business model (3) interconnect constantly being sucked into IC chips, which become cost effective through shrinks (4) commoditization of packages (5) impact of EMS companies pushing to eliminate first-level packaging (we're just starting to see this) and (6) impact of much larger, more controlling players, on both sides (IC & EMS companies). Each factor creates a substantial profit squeeze effect. Combined, the effect is enormous! Not Unique This situation is not unique to us. Com-panies that prosper in these situations are rarely the ones who grind away at business fundamentals. It's those who changed the fundamentals that prosper. Examples are Amazon.com and Starbucks, fabless IC companies, Dell, Paychex, Schwab and older ones like McDonald's. In our industry, capital equipment suppliers are the hardest hit. What should they do? Besides the profit squeeze, these suppliers suffer because they never reach economy-of-scale production internally. Additionally, due to macro-economic and supply swings, these companies badly need a highly variable expense model (no fixed costs). They don't lack profits in up markets-but they bleed in down markets. This bleed continues despite massive layoffs. Yet each cycle they repeat it. What kind of model is this?
Achieving economy-of-scale takes volume. Studying data outside our industry, in automotive, for example, discloses that more than 100K units/year is needed even to consider internal production. With any variability in demand, schedule or other factors, this number is pushed to around a million/year. In packaging, of course, the numbers are about 10x higher. The point is that our capital equipment produced in tens to thousands per year should be outsourced. Not just sub-assemblies-the entire machine. Resistance is high to such radical change. I hear, "no one can do what we do," or "We'll give away our secrets," or some other self-protective statement. So why aren't you making money? Why are the multiples paid by the stock market so low? To live through another cycle and prosper, companies need to achieve economies-of-scale, variable cost structures reduced redundancy of industry effort, and eliminate down-market bleeding. Major Changes to Fundamentals Needed This requires major changes be made to company fundamentals. This type of re-structuring is difficult, and often requires outside agents to make it happen. Internal teams are too self protective to make the kinds of changes needed. Are your profits lacking? Invest some R&D into your business model. Get some help. Look outside the industry and your company for fresh solutions. Design your business model and strategies for economic cycles. Cause a revolution in the way business is done! Have an opinion you'd like to share? Drop me a line. I'd like to hear from you!
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