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The Internet of Things (IoT) Topic is quite prominent for a few years now. There is still a lot of buzz out there in the press, in discussions, at analyst studies etc. The current IoT usage is mainly focused on wearable fitness devices, smart thermostats, sensors for cars, medical monitoring systems etc. But when you talk to analysts you will find out that there is even bigger market potential when it comes to IoT. This could especially have an impact on semiconductor companies which are anyway facing currently a problem with shrinking margins in the smartphone business. So there is a big Opportunity for semiconductor companies in the IoT Business which they should consider now, while the IoT market is still developing.

But this is also a challenge for semiconductor companies, because they have to move away from pure silicon players due to the fact that the silicon piece is just a small component in the IoT business. Semiconductor companies need to broaden their portfolio and offer comprehensive solutions which include e.g. security, software, integration services etc. They need to move away from a pure component supplier to a solution provider. Comparable to other customer which SAP is serving in the High Tech business like Lexmark which was in past a pure seller of printers and now changed its business model and offers now printing solutions.

If a semiconductor company decides to enter the IoT business it has to think about in which IoT sector they would like to engage. The most prominent IoT spaces are currently:

  • Wearable devices like fitness accessories

  • Smart home applications

  • Industrial automation like remote service and predictive maintenance

  • Connected cars

  • Smart cities

The IoT Business offers new market Opportunities but brings also some challenges with it. One of the biggest challenges in the IoT sector is probably the security aspect. Just think about the autonomous driving cars where hackers hacked the online car system. The security requirements in the area of IoT may be different form the IoT area. E.g. for wearable devices the security requirements are much lower compared to connected machines or connected cars. In order to deliver really secure IoT applications the whole IoT stack has to be secured including cloud, servers and devices. This is the point, where semiconductor companies could come into the game by providing end-to-end security solutions. Either they have the necessary knowledge already in-house or via M&A or via partnerships in order to provide such security solutions.

Another big challenge in the IoT Business is, that the IoT Market is quite fragmented. IoT devices have a broad range of varying requirements e.g. for power data, data-processing speed, form factor, price etc. Smart water meters for instance need to run for years independent of power supply and need a high range of connectivity, but data rates can be quite low. Whereas IoT devices used in the industrial automation sector require a direct connection to a power supply and high data rates but the connectivity range is lower than for smart meter.

The result out of such varying specifications result in high R&D costs for chips. So semiconductor companies need to bundle chips with similar requirements according to their verticals and produce them in some kind of a platform approach.

Semiconductor companies which want to play in the IoT Business need to revisit their existing business model and make the according adaptations. So first of all it is important to find the right IoT space for them. For instance if a semiconductor company has already good relationships with consumer electronic companies it makes sense for them to focus on wearables or smart home devices and deliver silicon, software and device design. Another example would be if a semiconductor company has already a good footprint in the area of high reliability integrated circuits and security the IoT area of medical applications would be a good fit.

By moving from a poor silicon vendor to a solution based provider semiconductor companies need also to adapt their pricing model. They need to move away from a one-time based pricing to a lifetime-based pricing via a subscription model.

Finally there is also a need for semiconductor companies to adapt their GTM approach. Previously semiconductor companies where concentrated on a limited number of larger accounts and focused on direct sales. For the IoT the market is much more fragmented due to much more accounts including smaller accounts with quite heterogeneous requirements. Therefore the channel partner are getting much more important for the GTM strategy.

Source: McKinsey Internet of things, “Opportunity and challenges for semiconductor companies”, 2015