ON Semiconductor completes acquisition of Fairchild, will the power semiconductor market be reshuffled?

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ON Semiconductor recently announced that it has completed the acquisition of Fairchild Semiconductor; this $2.4 billion transaction allows ON Semiconductor to further expand its power semiconductor market footprint, especially power transistors and diodes.

The merger is the latest in a wave of consolidation in the IC industry, reflecting a widespread view across the industry that the semiconductor business is one in which big companies have an advantage, can develop technology faster and have mass production capabilities, both of which are key to success in a market that is already seen as slowing.

The IC industry has been undergoing consolidation for several years, encouraged by ultra-low capital prices. Because of the frequent acquisitions of multi-billion dollar companies by multi-billion dollar companies (such as Avago's acquisition of Broadcom for $37 billion and SoftBank's acquisition of ARM for $32 billion), everyone has become accustomed to such acquisitions.

On Semi's acquisition of Fairchild focused on the interests and value of power management IC suppliers; Renesas' acquisition of Intersil (transaction valued at $3.2 billion) and Analog Devices' $14.8 billion acquisition of Linear Technology were all based on similar considerations.

Microcontroller (MCU) and processor manufacturers are also interested in analog and power/supply technologies, such as Microchip, which acquired Micrel, and Mediatek, which acquired Richtek; these manufacturers use acquisitions to add power management technology to advanced MCU or processor components.

For a processor maker that builds 5-billion-transistor devices on a 14-nanometer process, asking customers to look elsewhere for power solutions is hardly a good idea (Qualcomm has created another multibillion-dollar business by providing power management ICs for its own Snapdragon processors).

To dominate the power semiconductor field, it depends on two technologies: power management components (such as voltage regulators) and power transistors. According to statistics from market research firm IHS Markit, Infineon is the sales leader of discrete semiconductor components (power transistors, diodes, etc.), with a global market share of 21% in 2015 (before the merger, Fairchild's global market share in discrete power semiconductor components was 5.7%, and ON Semi's was 3.3%).

After acquiring Fairchild, ON Semi is expected to become the second largest supplier in the power semiconductor component market after Infineon.
The merger with Fairchild will deepen and balance ON Semi's power management component product lineup; according to a statement by Keith Jackson, president and CEO of ON Semi, ON Semi has a rich low-power semiconductor component product line, while Fairchild's products focus on higher-power applications. He also said that although both companies are strong in discrete components, there is little product overlap.

ON Semi's new target markets are application areas where the company has already made a lot of achievements, including automotive applications (such as MOSFET power system driver components, car cameras and components required for safety systems, etc.), which contributed 33% of its revenue in 2015, industrial application products (including motor driver ICs, transistors, etc.), which contributed 24% of its revenue in 2015, and communication-related components, which contributed 18% of its revenue in 2015.

ON Semi's computing-related products accounted for only 12% of its revenue in 2015 - a bit strange, because the company is still a leading supplier of power components (such as Vcore regulators) required for desktop PCs and notebooks. In response, David Somo, ON Semi's vice president of corporate strategy and marketing, said that the main reason for the decline in revenue in the computing market is the decline in the overall PC market.

However, ON Semi also expects that with the launch of new PCs using Intel's Skylake series processors, a new round of revenue growth is expected in the PC application market in the near future. ON Semi's Vcore regulator was acquired from ADI ten years ago, and its high-performance technology has allowed the company to dominate the PC power supply market; the company also provides power MOSFETs, and the DrMOS series products licensed from Fairchild technology have allowed ON Semi to occupy a place in the server application market.

After the merger with Fairchild, ON Semi plans to reorganize its organization and divide its business into three "Solutions Groups (SG), namely Power Solutions (PSG), Application-Specific Analog Solutions (ASG), and Imaging Solutions (ISG); PSG includes power switch components, signal conditioning circuits, protection diodes, and voltage reference components.

In addition, ASG includes special application analog products that support automotive, industrial, communications, medical and military aerospace, and ISG includes CMOS/CCD image sensors, proximity detectors, and image signal processors that support automotive, medical, aerospace, etc. One of the
keys to success in the power semiconductor market is the technical ability to reduce dynamic losses when switching power supplies (that is, to improve energy transmission efficiency); by matching the switching speed of the DC-DC converter and the switching speed of the MOSFET power transistor it drives.

This has nothing to do with reducing the on-resistance (RDSON), because reducing the on-resistance will increase the gate capacitance of the transistor, making them more difficult to drive; in addition, the MOSFET will become sluggish under high current loads. At the merger press conference, ON Semi's Jackson pointed out that 650V gallium nitride (GaN) devices and 1,200V silicon carbide (SiC) devices will be future development projects of the new company.

ON Semi will play a big role in the automotive electrification application market in the future

As the analog and power semiconductor markets slow, all manufacturers hope to expand revenue and increase profits; however, applications such as smartphones, tablet devices and notebook computers are no longer the drivers of revenue growth, as Chinese mobile phone companies including Huawei and ZTE are looking for ways to reduce costs, squeezing the profits of related power component suppliers.

Industrial control and the Internet of Things (IoT) are new growth drivers. The demand for analog components in these applications is different from the traditional ones. The most popular transistors have become IGBTs or bipolar junction components, and they are connected to the 480VAC home appliance motor control power line, usually reaching 600V or 650V. ON Semi believes that because the company can provide the necessary components for this demand, its growth performance will be better than the overall analog/power semiconductor market.

However, the current analog IC and discrete component market growth rate is only in the single digit (only 2% in 2015). How will On Semi increase its profits? The company said that after the merger of the two companies, it will achieve cost savings of $225 million in the first year, which comes from the elimination of redundant staff (especially business and administrative departments) and the improvement of 8-inch wafer fab capacity utilization. It is estimated that the gross profit margin can reach 40~45%. Jackson said that the products with the highest gross profit will come from the medical and communication application markets, followed by the automotive and consumer markets. Moore Elite

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