‘Ecosystem of the semiconductor industry already at stake’

The five largest companies in the Dutch semiconductor industry ('the Big 5') serve a global market and their innovative power is impressive. One-third of all Dutch R&D investments are attributed to this sector. However, these five companies do not operate in isolation. Steven Pattheeuws. partner at PwC and industry leader for technology, media, and telecom (TMT), summarizes the Dutch situation in simple terms: ‘In addition to the large international semiconductor players headquartered in the Netherlands, the 'Big 5', the sector in the Netherlands is connected with around three hundred suppliers that help make the success of the 'Big 5' possible.’

Joost Eyck, manager in the TMT team focusing on technology and semiconductors, provides the numbers: ‘The three hundred companies beyond the “Big 5” contribute to 41 per cent of the sector's turnover and account for 59 per cent of the employment. They've seen significant growth in recent years but require support to sustain it in the near future.’ 

Recently, Pattheeuws and Eyck released the report ‘Semicon in NL’, outlining the sector, its challenges and potential solutions. They interviewed forty decision-makers from businesses, government and research institutions, combining the insights they provided with their own analyses.

In the report, PwC Strategy& emphasises the diminishing ‘halo’, the ecosystem's radiance. Eyck: ‘By halo, we mean the expertise and innovation of semiconductor companies that extends to other sectors requiring high-end technology – think of the medical sector, defence, energy, automotive, agriculture, telecoms and aerospace.’ 

Until 2019, semiconductor suppliers generated 2.5 times more revenue outside the semiconductor sector than within. In recent years, the halo has decreased to 1.6 times. Eyck: ‘These companies are missing out on business due to growth limitations in the Netherlands. In conversations with us, they explained: if we have to choose due to space or capacity constraints, we prioritise semiconductors.’ PwC predicts that without intervention, suppliers will generate less than half of their revenue outside semiconductors by 2028.

Why is this diminishing halo such a concern? Pattheeuws explains: ‘Firstly, it leads to an erosion of the Dutch economy and a loss of our technological leadership. We're ceding national market share in all those related sectors that rely on high-end technology. Countries like France and America are eager to claim that share from us.

‘Secondly, it's problematic for individual companies to become increasingly dependent on a few customers in one sector. It leaves them more vulnerable during economic downturns. This individual vulnerability, in turn, affects the stability of the robust ecosystem we currently enjoy. The diversity, painstakingly built up over years, is rapidly transforming into a monoculture. An appealing one, no doubt, but more fragile and economically less robust.’

Earlier this year, the outgoing cabinet decided, under the banner of Project Beethoven, to invest billions in the Eindhoven region to retain the major chip companies there. In the National Technology Strategy of outgoing Minister Adriaansens of Economic Affairs and Climate, semiconductor technology is cited as one of the ten strategic technologies prioritised by the government. Is that not enough? 

Eyck: ‘While it's crucial to listen to and support the major players, the challenges won't magically vanish for the smaller players in the ecosystem. The majority of these three hundred companies are small − over sixty per cent have a turnover of less than ten million euros. They don't simply have access to the minister. Moreover, the trickle-down effect is also limited.’

Pattheeuws was taken aback by what he heard in the numerous conversations conducted by PwC for the publication: ‘When entrepreneurs express doubts about their ability and willingness to participate in the next wave of growth, something is seriously amiss.’ He identifies the two main challenges where governments can offer direct assistance: energy and space. ‘If this sector is considered strategic, these companies should be given priority access to the energy grid. And when it comes to physical space, negotiations with municipalities and provinces often drag on. It doesn’t always come down to reluctance, but if a municipality promises space for a company's expansion on a new industrial estate in two years, then it's simply too slow. Strategic sector? Ensure a long-term vision, proactively create space and prioritise grid access, especially for smaller enterprises.’

How certain is it that a new wave of growth is imminent for this sector? Eyck points out that the end market for chips is evolving faster than overall economic growth. ‘Chips are the foundation of the digitalisation of our lives, the oil of the twenty-first century. Solar panels, artificial intelligence, electric cars, and Internet of Things applications cannot function without this sector.’ 

Pattheeuws mentions that during the last growth period, 42 per cent of suppliers doubled their turnover in five years. ‘These entrepreneurs have had to stretch themselves to meet demand but couldn't mature sustainably. Hence the doubts about their readiness for another growth period. Many companies are simply not prepared for that yet.’

What can these companies do themselves to prepare for growth? In the publication 'Semicon in NL’, PwC identifies six areas needing reinforcement. Eyck: ‘Standardisation, for example, to achieve economies of scale. This requires taking a step back and redesigning work processes, especially now while things are relatively calm.  Another area is the utilisation of technology. One might assume that this would be well-established in this high-tech sector, but smaller players still have much to gain. They haven't had the opportunity to set up capacity for data analysis or fully implement automation techniques.’ 

Clearly, there is plenty to be done, both for governments and for companies themselves in the semiconductor industry. In the publication ‘Semicon in NL’, PwC outlines even more action points, including those for startups and investors, research institutions and industry associations. ‘For a sector that has grown so rapidly, a call for support may seem unusual,’ concludes Pattheeuws. ‘But the growth of recent years has exposed the limitations of many smaller players. The rich ecosystem of the semiconductor industry is already at risk. Let's work together to ensure the full potential of this remarkable industry is realised.’