Examining the High Tech Industry Value Chain

The High Tech (HT) Industry's value chain - from concept to completion - is intricate and fascinating. Just think about the smartphone in your hand; its final assembly might have taken under a week. However, the process involving the manufacturing of the internal components consumes the most time. Let's break down the HT value chain, stage by stage.

• Semiconductors: This is the initial step involving chip design and manufacturing. On average, this process might take about 12 to 26 weeks.

• Components: After the semiconductors are ready, the next step involves manufacturing and assembling the larger components. This step generally requires 4 to 8 weeks.
• Contract Manufacturers: These firms typically handle final product assembly and testing. The duration can vary greatly, but on average, this step might take 2 to 4 weeks.
• OEMs: Original Equipment Manufacturers package and prepare the products for users. This is where the branding, the value-added options are installed and, sometimes, final testing. This takes on average 1 to 3 weeks.
• Software: This is what gives personality to your device. Here, the hardware gets integrated with the software to perform all those amazing tasks you can't live without. This can take anywhere from a few weeks to several years depending on the scope, the complexity, and testing and certification requirements of the software.

Let's turn our attention to the semiconductor and component stage.

It's characterized by three key trends:

1. Talent Competition

   Priorities/Effects :
   • Attracting Top Talent: Companies must focus on enticing the best minds with competitive packages and opportunities for growth.
   • Upskilling the Existing Workforce: Training current employees to keep up with the evolving landscape of the industry.

2. Reshoring Manufacturing

   Priorities/Effects:
   • Investing in Local Facilities: Significant capital may need to be allocated to develop or revamp domestic production capabilities.
   • Supply Chain Optimization: Creating a robust supply chain that mitigates risks, such as geopolitical tensions or global pandemics.
   • Regulatory Compliance: Aligning manufacturing practices with local regulations and standards.

3. Industry 4.0

   Priorities/Effects:
   • Technological Adoption: Implementation of advanced technologies like IoT, AI, and robotics within the manufacturing process.
   • Data Integration: Applying big data analytics to optimize operations, forecast demands, and enhance product quality.
   • Security Measures: Ensuring cybersecurity measures to protect intellectual property and sensitive data.

Let’s look at components and contract manufacturers here.

We're seeing trends like:

1. Reverticalization

   Priorities/Effects :
   • In-House Manufacturing: Building or acquiring manufacturing capabilities to ensure control over quality and supply.
   • Strategic Partnerships: Collaborating with suppliers to strengthen relationships and align goals.
   • Investment in R&D: Increased focus on research and development to foster innovation internally.

2. Business Model Evolution (CapEx to OpEx)

   Priorities/Effects:
   • Flexible Financing: Adapting financial strategies to allow for more fluid investment in ongoing operations.
   • Agile Operation Models: Creating operational processes that can quickly adapt to market changes.
   • Cost Optimization: Continuously monitoring and analyzing operational expenses to find areas for cost savings without sacrificing quality.

3. ESG Impact

   Priorities/Effects:
   • Sustainability Initiatives: Implementing sustainable practices in manufacturing and sourcing.
   • Community Engagement: Actively participating in social responsibility programs that align with brand values.
   • Transparency and Reporting: Providing clear and accessible reporting on ESG performance to stakeholders.

Now, let's focus on the last portion: Software.

The trends are:

1. AI Influence

   Priorities/Effects :
   • Investment in AI Talent: Developing or acquiring the necessary expertise in AI and machine learning.
   • Automation Strategies: Implementing automation in coding and other processes to enhance efficiency.
   • Ethical Considerations: Ensuring responsible use of AI, with a focus on transparency, fairness, and compliance with regulations.

2. Cultural Transformation

   Priorities/Effects:
   • Remote Work Infrastructure: Investing in tools and policies to support a flexible and remote workforce.
   • Employee Well-being: Focusing on employee mental and physical health in a remote work environment.
   • Adaptive Leadership:: Emphasizing leadership strategies that support a distributed and evolving workforce.

3. API-First Approach

   Priorities/Effects:
   • API Development Standards: Establishing clear guidelines and best practices for API development.
   • Integration Focus: Ensuring that APIs can seamlessly integrate with other systems and platforms.
   • Monitoring and Security: Implementing robust monitoring and security measures to maintain the integrity and performance of APIs.

So that's the high tech value chain.

From the time-consuming creation of semiconductors to the fast-paced assembly and integration of software, these are the key trends and priorities that are shaping the industry.

We'll finish by looking at the business models for each sub segment to see how all these pieces fit together in the bigger picture.

High Tech Industry Segment Business Models

When we talk about business models, what we're saying is how do these companies grow their business?Business processes, on the other hand, describe how the business operates to support their business models.

Let's look at how each of these segments grow their business and how they apply their ecosystem.

1. Semiconductors are designing, manufacturing, and selling semiconductor chips and integrated circuits. The companies might have their own fabs, characterized by significant capital expenditures, or may outsource to foundries who are providing manufacturing services (fabrication, testing, and packaging). Revenue is generated through Product Sales through chip sales, foundry services – providing foundry services and IP licensing, for example, ARM sells chips designs. Semiconductor companies have been in the business of licensing their IP for decades. What's interesting here is that the typical cost to develop advanced technology nodes now exceeds $250 million. This leaves very few companies who can afford to develop at those technology levels. This will result in more licensing revenue than in years past, further expanding revenue and margins for those who are developing leading edge technologies. Also, their customers are often their competitors, which is a growing element of the ecosystem.

2. Component Manufacturers are designing, manufacturing, and delivering high-quality components. They are differentiating through cost-efficiency and high-quality output. Revenue is generated by selling their components, providing value added services like engineering or contract manufacturing services. Their customers are often the contract manufacturers and the OEMs. They often rely on semiconductor companies, plastic suppliers, and metal commodities for the supply base.

3. Electronic Manufacturing Services (EMS) are providing end-to-end solutions for electronic manufacturing including design, manufacturing, and supply chain management, quality control, logistics. They differentiate through their capability of handling high volume as well as specialized production. And have the ability to flexibly accommodate changes, while ensuring efficiency and high quality in a cost-efficient way. Revenue is generated through fees charged for their services. Value-added services like refurbishment, reverse logistic or end-of-life management might be offered in addition.

4. Original Equipment Manufacturer are designing, manufacturing and selling products, nowadays often with physical and cyberphysical elements. Revenue is generated through product sales, as well as after-sales support like warranty, maintenance and repair services. Driven by cloudification, customer preferences, and additional revenue potentials - OEMs are moving to offer their products as a service (XaaS) in subscription, consumption and outcome-based models. Where customers no longer own the assets and only pay for the usage. OEMs also provide value-added services like data monetization or building digital marketplaces around their offering.

5. Software Providers are creating, selling, and supporting software products and services. Revenue is generated by selling licenses and subscriptions for their software products in various pricing models. Cloud-based services (SaaS) are the main model in the industry. Support, customization and Integration services are additional revenue source.