This is my last post related to the potential risks to Xilinx and Altera’s continued market dominance in programmable devices and growth into adjacent semiconductor industries in my 14 post piece on investment opportunities in semiconductor design. To summarize the other risks where

• Competition from other Platforms
• Existing Competitors and new entrants
• Competition from ASICs and reliance on the communications sector

The Semiconductor Industry is Cyclical

Due to the .com and telecom bubble PLD sales surpassed economical sense in 2000 and 2001. After bottoming in 2002 PLD sales have grown at a compound annual rate of about 15% and FPGA sales have grown roughly 20% annually. FPGA’s are now 75% of total PLD sales. In 2001, the PLD market peaked at $4.1B and in 2002 bottomed at $2.3B. Since 2002, both Altera and Xilinx have gained market share every year. The PLD market has only recently exceeded the peak experienced in 2001.

It looks like the economy is headed back into a recession, but unlike the 2001 recession, which was business capital spending induced, this recession looks like it will be driven by a drop in consumer spending. This will affect semiconductor sales, but it will not be nearly as dramatic as the drop in 2001. Although some firms may experience financing issues, companies are for the most part well capitalized.

The 2001 recession was caused by a glut in supply of technology products and an over investment in technology oriented startups. The 2008 recession has neither of these characteristics.

In 2001, companies like, Xilinx, Altera, Cisco, EMC, Sun Microsystems, etc sold (and often helped finance) products to startups and other customers in the technology sector whose unprofitable business models caused them to go bankrupt when the market turned down and venture capital investment dried up. These bankrupt or dramatically downsized companies dumped their newly purchased technology products on the market. So not only had demand decreased drastically; supply increased drastically; causing a glut in the market that took years to work through.

This time supply chains have been optimized for just in time product delivery and technology companies’ balance sheets have never been stronger; often in conjunction with record low sales to inventory ratios. While there may be some re-selling of technology equipment in emerging markets it should be minimal compared to what occurred in the telecom and .net bubble of 2001. In addition, within the semiconductor industry, PLD sales should fare better than most since they require less up front risks, such as time and costs.

With rational supply and persistent growth in data storage, networking, and the digitization of industrial components this recession will look much different than the technology led recession of 2001. Recessions also spur new cost cutting or risk reduction strategies. Companies that have solely relied on ASICS or generic PC architectures may explore the benefits of programmable logic.