Tuesday, May 31, 2005

Branding of Semiconductors

Semiconductors is not a consumer product - yet in the last decade we have seen several high profile branding of semiconductor chips. Intel and AMD are the leaders when it comes to branding semiconductors. Intel's success in Pentium branded processors and Centrino brand for mobile platform has shown the world of the possibility for branding in semiconductors in the consumer domain.

In the industrial domain, several brands of semiconductor chips exist. Altera, Xilinx, LSI etc have successfully branded their portfolio of chips. Here, firms have branded a class or family of semiconductors which have similar features. LSI has branded its structured ASIC as Rapidchip, Xilinx has branded their FPGA into two brands - Spartan & Virtex. Altera has several brands - Max, Cyclone, Stratix & Hardcopy. These are few examples of branding in semiconductors - there are lot more companies and lot more brands.
All this points to the fact that semiconductors are becoming comodity products and branding is being used as differentiator.

Branding is Expensive

Developing seminconductors is expensive - Developing a product will take several millions of dollars. A chip will easily need more than $30 million to design, develop, and test. Branding it will take an additional $5-10 million. All this adds up the part cost and make the final part expensive.

If the part is a commodity product(e.g., memories), then a competitor who choses not the brand his product can sell it cheaper than a branded product and win market share. This creates a situation where branding does not bring any competitive advantage - but causes a competitive disadvantage.

This leads us to the questions: When should a semiconductor chip be branded?

When to Brand

When to brand a product & when not to brand is a tough question. To answer this, one needs to know a lot about the product, the market for that product and the competition for that product. By this I mean, the company should know who the customers are, what the customers seek and why they buy that particular product. If its a consumer product, then branding will increase customer loyality as branding creates an awareness and brand recall - when executed properly. In semiconductor chips, branding decision has to be based on the following parameters:
  1. What is the product lifecycle?
  2. How long the product and the brand will be selling in the market.
    Is there a planned product roadmap?
  3. Are there derivative products or next generation products that can take advantage of the brand value.
  4. What is the price sensitivity for that product?
    Are the customers willing to pay extra for the branded product or does the demand drops in propotion to the rise in prices
  5. Who are the competitors for that product?
    Do competitors have a similar product - and can they sell it without branding and at a lower price.
  6. What is the impact of branding on the price of the final product?
    Can a premium be charged for a branded product.

The rational behind asking the above questions is the financial aspects or the business aspects. The product manager who oversees the branding & marketing of the product must conduct a rigrious financial analysis before embarking on a branding/brand building exercise.

Financial Analysis

R&D costs of a chip can be fairly high. For a 10mm x10mm sized chip built in 0.13um process, the development cost will be around 15-20 million dollars. This includes all R&D costs, test & charaterization costs, prototype development costs, firmware/software development costs etc. The per part manufacturing cost for the chip will be about $25. If the product has a lifecycle of 5 years and the gross margins are 50%, then the volume sales must be atleast 2 million units to recover the cost of development. Adding the cost of branding, then the branding costs has to be recovered by selling the product at a premium or by selling in increased volumes. If the cost of branding is $2 million, then an additional 400,000 units has to be sold to recover the cost of branding (assuming the selling price is not changed) or increase the selling price by $2.
Doing a detailed financial analysis will show how much the selling price should increase or what is the additional parts need to be sold to recover the cost of branding.

Closing thoughts

Branding will work in cases where branding helps to sell additional volumes or branding promotes a premium pricing - provided the volumes are high enough to amortize the cost of branding over the parts sold. Firms can take a great benefit of branding if the product has a well defined product road map with derivative products or next generation products which cater to the same market. (e.g., Pentium processors)

Branding will not work if the volume sales of the chip is very low or if its a generic product in a highly competitive market (SRAM/DRAM/FLASH memories) or in a highly price elastic market.

Branding of semiconductors can be explored in market segments where brand awareness will create additional sales or allow a premium pricing.
Alternative to branding of Products

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