Power on the Brink

Linnea Brush
Senior Research Analyst

January 9, 2006

The PowerPulse website is running a series of feature articles by the Darnell Group research analysts on our “power predictions” for 2006. My article hints at something dire but doesn’t really go into detail. Now I will, and it will probably come up (in various forms) throughout the year.

This is not really a New Year’s prediction; it is more a trend that has led to an inflection point. In 2006, power supply companies are going to be faced with some very hard questions that will push them in uncomfortable directions. The motivating factor, as always, is money.

In my 2006 predictions article, I discuss that the revenue gap between dedicated power supply companies and power semiconductor companies appears to be widening. Both types of manufacturers experienced revenue “peaks” around 2000-2001, with the subsequent economic downturn bringing drops in revenue. Many companies then began a slow recovery that is still continuing. The difference is that, in some cases, power semiconductor revenue has climbed above its previous peak by about 20%, while power supply revenue has flatlined at about 40% below its peak.

This would not be so bad if it were a blip, but it does not appear to be. We tracked the sales revenue of three major North American dedicated power supply companies who had not made major acquisitions over the past year or so. These were compared with four semiconductor companies who focus primarily on power semiconductors. They were tracked from 1997 through projected earnings for 2005. The pattern is very interesting.

From 1997 through 2002, the two industries follow almost identical patterns of growth, peak, and decline. Power supply companies had higher relative sales until 2001, compared with semiconductor companies, but both groups were basically tracking each other. Then, in 2003, things changed.

Both power supply companies and power semiconductor companies experienced sales growth in 2003, but the semiconductor companies experienced an increase of over 20%, while the power supply companies saw just a 4% increase. Not only that, the semiconductor sales growth continued into 2005, while power supply company sales growth basically flattened out. And that begs the question of what will happen this year.

The analysis also doesn’t look at worldwide sales, particularly Asian manufacturers. Companies like Delta and Lite-On are experiencing strong sales growth, mostly due to high-volume production and cutthroat pricing. This is the semiconductor model, as well, so it is likely that these companies would follow a similar sales revenue curve.

Also, the past few years have seen a number of innovative (and successful) start-ups that have achieved success precisely because they have broken old business models. These companies have developed new products that have found a niche in the market, sometimes at prices above the industry standard. It can be done. The difference is a willingness to take risks and to be adaptable.

So I wouldn’t say that the power supply industry is dying. Perhaps I should say that the old power supply business models are dying. The evolving shift from dc-dc modules to discrete solutions is part of this, and there is no evidence that this shift is going to stop. But even with that, the real threat to North American and European power supply companies is from pricing models.

Dc-dc converters used to be able to command price premiums simply for what they did. They continued to provide features that enabled new communications and computer technologies, but those same technologies now demand power solutions better served by the semiconductor industry. And instead of power supply companies getting into the semiconductor business, semiconductor companies are getting into the power supply business.

Power supply companies are on the brink. In 2006, they will be looking at where their business has gone and whether they can get it back. This doesn’t mean they have to be another Delta or another power semiconductor company. It does mean jumping off the old business model platform and onto a more innovative one. Is this even a choice?

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