Why are engineering service providers acquiring semiconductor engineering firms?

In the last couple of years, almost every major engineering service provider (with the exception of a couple of ESPs) acquired semiconductor engineering service providers. Here is the partial list of semiconductor engineering acquisitions.

Semiconductor engineering was a niche segment. In fact, many engineering service providers exited this segment because of low volume and high complexity. Now many service providers are entering, reentering, or augmenting their semiconductor engineering practice,

 But Why?

 Five points.

• Growing importance of semiconductors in smart products: As products are getting smarter, the semiconductor content in products is increasing. For example, the average semiconductor content/ car is expected to increase from the current $350 to $1000+ in the near future because of electrification, connected, and autonomous features.
• Chip to Cloud story: Engineering service providers want to play in the whole stack from chip to product, software, and all the way up to the cloud. Not being present in this whole stack means giving an opening to competition. That's the reason all major service providers want to have the complete set of offerings.
• Untapped market and growth potential:  Semiconductor engineering has one of the lowest outsourcing intensities (ratio of outsourcing to total R&D spend) among all industries. The optimistic way to look at this is that there is more growth potential in semiconductor engineering.
• Global semiconductor skill shortage: Semiconductor industry is facing an acute skill shortage as last decade's best talent went to the software industry and played a part in creating many unicorns. In the skill shortage scenario, outsourcing is likely to increase.
• Disruption and investment in semiconductors: Pandemic and increase in demand created a chip shortage. Because of geopolitics and localization strategies, many countries and regions, including India, are prioritizing semiconductor manufacturing investment. The semiconductor manufacturing global footprint in a few years will be very different from the current scenario. Whenever there is disruption and shift, new opportunities emerge, which will be the case for semiconductor engineering also.

Bottom Line: Semiconductor industry is going through change, and in this change, engineering service providers are sensing opportunities. It is very difficult to develop semiconductor capabilities organically, so service providers are augmenting their semiconductor capabilities inorganically. I see many more engineering service providers getting into semiconductors, and therefore semiconductor acquisition spree is likely to continue. The acquisition is one part, but growing the semiconductor business is tough, as any semiconductor engineering veteran will tell you. It requires strategy, investment, and, most importantly, patience. Hopefully, now all engineering service providers collectively will be able to increase semiconductor engineering o