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How chip makers can regain control of their value chain

How chip makers can regain control of their value chain

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By eeNews Europe



As a result, OEMs demand even lower prices for better performance, leading to tension between providing faster chips and the failure of margins or revenues to reflect return on the necessary investment. The problem for semiconductor manufacturers is that the performance gains of Moore’s Law are not keeping up with the economics. The cost of materials and R&D continue to rise.

On the other hand nervous chip makers would rather have the revenue with poor margin than risk having nothing at all. The result is that most semiconductor manufacturers leave £29.7 million on the table for every £590 million in sales.

A common scenario is that a customer says it will buy a million chips at 42p per chip. The chip maker agrees to this discount up front but by the end of the year, the customer has still only purchased 100,000 chips yet received the discount. Had the deal been negotiated for the actual volume, the cost per chip would have been 89p.

The key is not to let price be lower than it needs to be. By connecting price concessions to what OEMs are actually consuming rather than unmet volume, chip makers can better control revenue erosion. Chip makers should consider the following best practices when seeking to align concessions with consumption by using rebates or step pricing.

Changes will be required

To begin with there needs to be a mindset shift at the executive level. Company execs need to decide that they can decelerate revenue erosion and deliberately connect price to real volume consumption and not mythical price pressures. The CEO must be 100 per cent on board.

The chip maker also needs real-time insight into data sets across channels that allows for clear understanding of what their partners and customers are doing for the top line. The biggest objection is often that companies don’t have the tools and processes in place to manage rebates and step pricing.

This transition impacts sales, sales operations, order management and finance, which need to negotiate and structure deals in a new manner. The chip maker may need to realign sales compensation to stop sales people from being indifferent to how the deal is done. For instance, those sales people that move customers to a rebate or step pricing deal may receive their standard commission plus 2%.


Be Selective where you start

It’s wise to avoid starting with the really big parts of the business. Instead start with new business. Any new deal valued at less than £297,000 per year could automatically be put on step pricing.

Agreements with contract manufacturers are also primed for transformation. Pricing abuse can run rampant among contract manufacturers who may tell the chip maker they are building for one end customer that gets better pricing, when they are actually building for another.

Rebates enable chip makers to mask the end customer pricing away from the middlemen so that they cannot play the system. Chip makers that have tested rebates and step pricing strategies to stem revenue erosion have seen an average five percent yield improvement on deals. It’s hard to argue against the arithmetic because, at the end of the day, semiconductor manufacturers cannot continue bearing the brunt of dropping prices.

 

About the author:

Chanan Greenberg is senior director, strategic markets, at Model N – www.modeln.com

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