Chips off a new block

Semiconductors based on plastics rather than silicon pose a strategic challenge to incumbents.

ELLIOTT GRANT, PHILIP NOLAN, AND DICKON PINNER
The McKinsey Quarterly, 2002 Number 1

Consumers have long benefited from the profusion of ever more powerful and less expensive silicon semiconductors, the building blocks of all electronic devices. For the chip manufacturers, though, the story is less rosy. While the market price of their products has steadily fallen, the cost of building a new fabrication
facility to produce increasingly complex chips has soared—to $2 billion or more. Capital productivity has
plummeted as a result (Exhibit 1). And now, an industry already reeling from the general slowdown in high technology faces an even greater strategic challenge from emerging technologies.

Plastic transistors, also called organic thin-film transistors (OTFTs), may be that rarity: a truly disruptive technology in a mature, $226 billion industry. Semiconductor manufacturing at present involves hundreds of steps performed with incredible precision in a near vacuum. Foundries are usually huge and highly
efficient, but the process that takes place in them still generates heavy metals and toxic gases and
consumes billions of gallons of water. Moreover, it takes days to produce a single, albeit large, batch of conventional semiconductors. OTFTs, by contrast, can be produced in minutes using sophisticated ink-jet or rubber-stamp printing technology. They can be made singly, and with projected costs of less than a tenth of a cent apiece manufacturers will be able to recover those costs on far smaller lots.

Although OTFTs still underperform silicon, and will for some time, the gap between the two technologies is steadily closing (Exhibit 2). Plastic semiconductors could be used in a wave of new products, including disposable radio-frequency tags designed to replace bar-coded labels in baggage-handling or inventory-control systems—potentially a $4.2 billion market by 2004. Other uses include the driving electronics for digital paper (flexible, handheld displays for applications such as e-books), possibly a $1.3 billion
market by 2003, as well as flat-panel displays, which are used in cell phones, laptops, and personal digital assistants (PDAs), already, in all, a $24 billion market.

Incumbents are generally slow to respond to game-changing innovations, thus ceding, first, the fringes and, eventually, large chunks of these markets to nontraditional challengers.1 Companies such as Toshiba, Hitachi, and Rohm, which produce most of the world’s commodity chips, are vulnerable to this type of incursion. And
as OTFTs gain hold, there will be less need for the sort of capital-intensive foundries operated by contract manufacturer Taiwan Semiconductor Manufacturing Company (TSMC) and for the electronic-design and -automation houses (such as Mentor Graphics and Synopsys) whose products help simulate and test immensely complicated silicon chip prototypes. Likewise, manufacturers of multimillion-dollar chip-making equipment (Applied Materials, for example) may be threatened by this cheaper, "desktop"
technology. Plastics and chemical companies, such as Dow Chemical and DuPont, and printer
makers, such as Canon, Hewlett-Packard, and Seiko Epson, may command the lion’s share of the profits.

Sound far-fetched? Consider the OTFTs’ near cousins, the OLEDs. Organic light-emitting diodes, or plastic color displays, entered the market in mobile telephones (Motorola) and car audio displays (Pioneer) in 1999. While silicon-based liquid crystal displays dominate the market, OLEDs are brighter, crisper, easier to
view—even in bright light—and soon will be much cheaper to produce. Although these early devices are small and last only about 10,000 hours, compared with 60,000 hours for LCDs, large, robust displays are sure to follow. Advanced plastic color displays will replace conventional color LCD screens on mobile phones, PDAs, notebook computers, desktop monitors, near-eye displays (small, head-mounted displays for use in medical imaging and military aviation), and perhaps television sets. Indeed OLEDs could even replace fluorescent lights.

The technologies needed to commercialize OLEDs are beginning to emerge: screen-emission controls, packaging to keep out water and oxygen, and flexible back panels to match the flexibility of the OLEDs. When they do take off, OLEDs promise to appear in consumer products, signs, lamps, laser diodes for fiber-optic
communications—even in moving images on cans of drinks.

Manufacturers of large flat-panel displays are closer to making the leap to plastic than are today’s silicon chip incumbents. Osram, Philips, Pioneer, Ritek, Samsung, TDK, and other companies are pursuing licenses and alliances to gain rights to OLED technology. Other LCD producers, such as Sharp, Sony, and Toshiba, are investing both in OLEDs and in competing display technologies to ensure access to the eventual winner.2

Collectively, these companies have already invested more than $1 billion in OLED manufacturing capacity. Others are monitoring the market before committing investment dollars. In the meantime, DuPont has acquired Uniax for its polymer OLED technology, while Philips and a few similarly inclined companies are prepared to
exploit both the OLED and the OTFT technologies, potentially a powerful combination. The skills needed
to compete in organics are diverse, calling for partnerships across the semiconductor value chain—with chemical producers, printer manufacturers, chip designers and producers, and original-equipment manufacturers.

Organics will develop in three stages, spanning OTFT and OLED developments, and competitors will have choices to make during each of them (Exhibit 3). For instance, Lucent Technologies, which is currently under pressure to generate higher revenues, owns some quite promising OTFT patents and must decide how and when to exploit them. But Lucent and other incumbents are going up against start-ups, such as Plastic
Logic, that have already invested heavily in the OTFT technology. The winners, and indeed the finish line, are still emerging, but the potential impact on the semiconductor industry—and on end consumers of its products—is certainly clear.

Notes:

Elliott Grant, Phil Nolan, and Dickon Pinner are consultants in McKinsey’s
San Francisco office.

1See Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Boston: Harvard Business School Press, 1997.

2See Thomas E. Copeland and Philip T. Keenan, "How much is flexibility worth?" The McKinsey Quarterly, 1998 Number 2, pp. 38–49; and Keith J. Leslie and Max P. Michaels, "The real power of real options," The McKinsey Quarterly, 1997 Number 3, pp. 4–22.

Copyright © 1992-2002 McKinsey & Company, Inc.

chips off a new block chart_chof02_01.gif

chips off a new block chart_chof02_02.gif
 
chips off a new block chart_chof02_03.gif