Comparison of profitability between international integrated device manufacturers and virtual integration firms

Abstract

Most studies of semiconductor firms focus on the outcomes of the historical challenges, technological development and knowledge management of Integrated Device Manufacturers (IDMs). Few studies have discussed the trend which has developed since the 1990s. Many US semiconductor firms outsource their chip production to Asian foundries and act the role of Virtual Integration (VI) firms. This study explores this new trend and discusses the reason why VI firms' profitability is ahead of the IDMs. Using analysis of panel data, the study shows that capacity utilisation, cost of goods sold/sales, inventory turnover rate and R&D intensity of the semiconductor industry in the USA serve as significant determiners of profitability for semiconductor firms. The research finds that VIs' (Fabless) profitability is ahead of that of IDMs' because VI firms have a higher inventory turnover rate and, thus, better operational efficiency. In addition, VI firms save on capacity investment by following the trend of customisation and focusing on product R&D. This study confirms the value of a 'virtually vertical integration' strategy implemented by an inter-enterprise virtual team. Since the outsourcing of wafer manufacturing is an inevitable trend, for US and European large IDMs, it will restrain investment in new wafer factories in favour of utilising the capacities of emerging wafer foundries in Asia.