Semiconductor input costs vs output prices -- managing the squeeze

Walden Rhines, Mentor Graphics
7/15/2010 9:12 AM EDT

Recently, the Wall Street Journal (pg 1 June 18, 2010) highlighted the pressure placed by increasing commodity costs and decreasing consumer prices on profit margins. This isn’t anything new to the semiconductor industry. 

Commodity costs for critical semiconductor materials, like photomasks or gold, have increased from time to time and yet the industry continues to reduce the cost per transistor by more than 30% per year. 

Right now, shortages abound, so it seems premature to worry about costs when customers are demanding far more units than can be manufactured.  But the supply/demand imbalance that currently dominates the industry will dissipate.  What happens then?

As always, the input costs must continue to contribute their share of the cost reduction for semiconductors or the long term “learning curve” will break down.  If gold fails to hold up its part of the cost reduction, other input materials must decrease in cost enough to offset it; or the industry will find ways to use less gold.  When a portion of the input costs can’t keep up, the semiconductor industry has cleverly found alternatives that can.

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