Deal Negotiation: How Chip Makers Can Regain Control of Their Margins

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FLYINGSCOT
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Supply Network Guru
too true
FLYINGSCOT   5/19/2014 11:01:19 AM
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Your article really hits home as it always feels like the big OEMs have us semicons over a barrel when it gets to negotiating pricing.  What also helps is not to go after "me too" parts so that the levergae of the cusotmer is less.

Hailey Lynne McKeefry
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Fear
Hailey Lynne McKeefry   5/19/2014 8:44:06 PM
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The idea of fear resonates for me. Businesses run by fear often make poor decisions. One saying "That which we fear we create."

AzmatMalik
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Production Synthesizer
A call to arms
AzmatMalik   5/20/2014 11:21:35 AM
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The age old mantra in the semiconductor industry has been 'we'll make it up in volume'. But when we are shipping a few bucks with each chip making it up in volume piles up high rather quickly. There has to be a bit of market power to pull off the suggested actions; if the price is too high in the early stages volume may never pick up to result in reduced costs, and improved margins. One approach that I have toyed with is to have OEMs place a certain amount in escrow, sort of an LoC, that is then an assurance to the seller that if the volumes are not met the higher net price is indeed met, a reverse rebate. Another idea is to have OEMs have a capital stake in the semiconductor plant, not very practical though.

Chanan Greenberg
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Re: too true
Chanan Greenberg   5/20/2014 3:00:55 PM
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While I agree that it is "easier" to hold the line with proprietary products I have seen ample examples of companies with "commodity" product lines improve their results through the use of rebates and step pricing with their more established customers. At the end of the day distributors, contract manufactuers and the OEMs cannot make products without chips. "Taking away the business" only makes them hostages of a smaller number of suppliers. So, as long as they get a discount and are simply asked to earn it, it should not drive too much lost business

Chanan Greenberg
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Re: A call to arms
Chanan Greenberg   5/20/2014 3:03:40 PM
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I coult not agree more. Any experemintation with creative deal structures is better than just giving up. The ones proposed are interesting though I have not seen much of it happen. The advantage of rebates and step pricing is, we are not inventing the wheel, just expanding the use of an established mechanism.

AzmatMalik
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Production Synthesizer
Re: A call to arms
AzmatMalik   5/20/2014 3:39:42 PM
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My proposal is for a 'reverse' rebate. Pay the volume ordered [or cumulative volume ordered] and the excess ASP over the forecast volume price goes into a holding-escrow account.

Chanan Greenberg
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Re: A call to arms
Chanan Greenberg   5/20/2014 4:05:30 PM
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Got it.

Hailey Lynne McKeefry
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Re: A call to arms
Hailey Lynne McKeefry   5/20/2014 5:47:26 PM
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@Azmat, interesting ideas. How did your customers take to the reverse rebate? Did you find you had success with it with a certain type of customer?

AzmatMalik
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Production Synthesizer
Re: A call to arms
AzmatMalik   5/20/2014 7:24:52 PM
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The mid-size were easier to work with; we had to wait a couple of annual cycles to get the 'template' set up.

Hailey Lynne McKeefry
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Re: A call to arms
Hailey Lynne McKeefry   5/20/2014 7:35:45 PM
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@AzmatMalik, that's not suprising, I guess. The smaller organizations would likely be more nimble and also have less leverage with suppliers. It sounds like patience is a virtue when trying to create these new systems.

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