The semiconductor market is heading for a major bout of company collapses, according to Gartner.

The market research company says the industry has become inflated, with hundreds of vendors competing in a crowded marketplace. Within 10 years, 40 percent of today's vendors are likely to leave the industry, it claims.

Gartner analysts say they have identified five "megatrends" that will lead to significant changes in the industry. They include increasing device integration (Moore’s Law), an increasing scale and size of manufacturing, a shift from business to consumer markets, an increasing role of service providers, and new and disruptive technologies.

Increasing device integration is the first and most fundamental of these trends. According to Gartner, it gives tremendous benefits in terms of increased chip speed, lower power dissipation, greater functionality per chip, lower system cost and physically smaller-end equipment.

“Increasing costs and complexity of design, increased system content and greater flexibility means fewer vendors will have the capability to supply chips in the future,” says Jim Tully, chief of research for Gartner’s emerging technologies and semiconductor group. “The number of semiconductor vendors has risen steadily from about 120 vendors in the mid-1980s, to roughly 550 in 2003. Within 10 years, the industry will experience significant consolidation.”

The second trend, concerns the increasing costs and scale of semiconductor manufacturing. It says fabrication plants are becoming extremely expensive, and next generation “fabs” will inevitably become too expensive for most existing companies.

“To survive, large and costly fabs will need to achieve significant economies of scale, and they will require high volumes of chip production, preferably standard chips that can be produced in a standardised environment with large batch sizes. These standard chips will then be customised after manufacture for specific applications," Tully says. “This will result in fewer chip manufacturers in the future, but it will not result in higher chip prices, because the industry is capital-intensive and is highly competitive.”

Gartner says the third trend is the growing importance of consumer markets. It predicts that by 2013, more than 50 percent of chip sales will be for equipment markets targeted at consumers. One of the challenges for vendors is that the consumer market can be unpredictable (for reasons of fashion or fads), as it can be hard to identify what consumers will want.

“Consumer markets are normally high volume and the overall market size is large,” Tully says. “However, margins on consumer products are very low, and the value of individual product categories can be surprisingly small. The falling number of chips per application, because of integration, is playing its part in dampening the growth in these applications.”

In the past, says the research group, many semiconductor products were standalone, however the industry must prepare for the increasing role of service providers. Increasingly, it says, large numbers of equipment are being interconnected, both over the Internet and in LANs, which makes them accessible to companies offering upgrades, content and other services.

“These services can generate far more revenue than equipment sales revenue and will dominate many sectors,” Tully says. “Service providers are likely to assume an important and dominant role in electronics. In many cases, these providers are likely to brand the equipment, and to control the design and manufacturing of electronic equipment.”

Gartner also notes that new technologies have driven the semiconductor industry from the beginning, and new technologies will continue to drive the industry. It says that most of these have been incremental technology developments. However, disruptive technologies will have a significant and unpredictable effect on the industry. Examples cited include inkjet processes, light-emitting polymers, carbon nanotubes, molecular transistors and protein-DNA logic.