The Internet of Things (IoT) has generated excitement for a few years now, with start-ups and established businesses placing bets on the industry’s growth. Some of the earliest investments have begun to pay off, with smart thermostats, wearable fitness devices, and other innovations becoming mainstream. With new IoT products under development or recently launched—ranging from medical-monitoring systems to sensors for cars—some analysts believe that the Internet of Things is poised for even greater gains.
Semiconductor companies, perhaps even more than other industry players, might benefit from the IoT’s expansion. With growth rates for the smartphone market leveling off, the Internet of Things could serve as an important new source of revenue. Given the size of the potential opportunity, McKinsey recently collaborated with the Global Semiconductor Alliance (GSA) to investigate the Internet of Things more closely, with a focus on risks that could derail progress. In addition to assembling a fact base, we surveyed and interviewed senior executives from the semiconductor sector and adjacent industries, as described in the sidebar, “Our methodology.”
Another important insight relates to the nature of semiconductor companies themselves. Their traditional focus on silicon, which allowed them to profit in many industries, may not be optimal for the Internet of Things because chips represent only a small portion of the value chain. Instead, semiconductor companies will be required to provide comprehensive solutions—for instance, those that involve security, software, or systems-integration services in addition to hardware. As with any major change, this move entails some risk. But it could help semiconductor companies transform from component suppliers to solution providers, allowing them to capture maximum benefits from the Internet of Things.
A new source of growth
The McKinsey Global Institute recently estimated that the Internet of Things could generate $4 trillion to $11 trillion in value globally in 2025. These large numbers reflect the IoT’s transformational potential in both consumer and business-to-business applications. Value creation will stem from the hardware, software, services, and integration activities provided by the technology companies that enable the Internet of Things.
Analysts also estimate that the current Internet of Things installed base—the number of connected devices—is in the range of 7 billion to 10 billion. This is expected to increase by about 15 to 20 percent annually over the next few years, reaching 26 billion to 30 billion by 2020.
In keeping with these projections, many executives we interviewed stated that the Internet of Things would significantly boost semiconductor revenues by stimulating demand for microcontrollers, sensors, connectivity, and memory. They also noted that the Internet of Things represented a growth opportunity for networks and servers, since all the new devices and services will require additional cloud infrastructure. Overall, the Internet of Things could help the semiconductor industry maintain or surpass the average annual revenue increase of 3 to 4 percent reported over the past decade. These results are particularly significant in light of slower growth in the smartphone market, which has served as the major driver for the past few years.
Our interviews did reveal some ambiguity about whether the Internet of Things would be the semiconductor industry’s top growth driver or just one of several important forces. In particular, interviewees questioned whether the Internet of Things will trigger demand for new products and services, or if there will just be an increased need for existing integrated circuits. Similarly, our survey showed that executives from GSA member companies had mixed feelings about the IoT’s potential, with 48 percent stating that it would be one of the top three growth drivers for the semiconductor industry and only 17 percent ranking it first.
Despite the size of the IoT opportunity, some semiconductor companies have hesitated to make significant investments in this sector. The greatest issue is that products within the Internet of Things tend to appeal to a niche market and generate relatively low sales volumes. With individual products delivering a relatively low return on investment, some semiconductor companies have limited their R&D expenditures for IoT-specific chips, preferring instead to adapt existing products. For instance, wireless system-on-chip players may offer repurposed wireless processors and chip sets for the Internet of Things, while microcontroller players often bundle lower-end processors and connectivity-chip sets to compete for the same opportunity.
As the IoT market matures and increases in scale, semiconductor companies may decide to pursue new approaches more aggressively. Before moving ahead, however, they should first determine which verticals and applications are growing strongly and assess when their markets will be large enough to justify significant investment. While semiconductor companies could potentially capture growth in many IoT verticals, six of the most promising markets—those where we chose to focus our research—include the following:
- wearable devices such as fitness accessories
- smart-home applications like automated lighting and heating
- medical electronics
- industrial automation, including tasks like remote servicing and predictive maintenance
- connected cars
- smart cities, with applications to assist with traffic control and other tasks within the public sector
The challenge ahead
Like many other high-tech innovations, the Internet of Things is garnering intense interest in the press, with reports of connected cars and smart watches making headlines. Although we do not want to diminish the IoT’s potential, our research suggests that the following six issues could derail its growth:
- inadequate security and privacy protections for user data
- difficulty building customer demand in the absence of a single “killer application”
- a lack of consistent standards
- the proliferation of niche products, resulting in a fragmented market and an unprofitable environment for creating application-specific chips
- the need to extract more value from each application by providing comprehensive solutions, rather than focusing solely on silicon
- technological limitations that affect the IoT’s functionality
These problems are not insurmountable, particularly if semiconductor companies are willing to take an active role in solving them.
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