IoT Attracts a Smart Skeptic

HALF MOON BAY, Calif. — As a McKinsey analyst, Christopher Thomas is paid to think out of the box. So in this time that is by all accounts the peak of the hype cycle for the Internet of Things, it's no surprise the co-leader of the firm's Asia semiconductor practice is something of an IoT skeptic.

“No analyst is saying IoT will not be huge, but we still have to take that with a grain of salt,” Thomas said at the Industry Strategy Symposium, where nearly every talk was peppered with upbeat references to the emerging Internet of Things. “What if the IoT is smaller or takes longer to arrive than expected?”

A very real challenge is that the IoT is not expected to generate short-term gains. Thomas cited a recent survey in which eight out of 10 C-level executives said they expect the IoT to account for less than 10% of revenue in 2017, and five out of 10 said it would represent less than 5% of revenue.

Another survey suggested the market for consumer IoT products may be narrow. The average annual income of a wearable device user today is a whopping $184,000. Users of smart home devices said their average annual income was $135,000 — miles above the global average household income of $7,000, he said.

All the talk about packing more silicon into tomorrow's connected cars may be missing a coming trend, he suggested. Today's cars are sprinkled with as many as 150 microcontrollers, but they are used inefficiently in distributed subsystems. “As designers restructure vehicles to be autonomous, they will become more efficient, and there will be a silicon integration play as they increase their programming content.”

The widespread hope for the IoT was just one of several assumptions he challenged in a talk that raised interesting questions about the future of smartphones, PCs, and China.

Next page: Smartphones slump, PC rebound?

The electronics industry is riding several trends that show signs they could shift. For example, smartphones and China could slump, while PCs and Japan could rebound.

“There's been a giant sucking sound in smartphones in the last few years of hardware engineers leaving the industry,” Thomas said. The sector is “adopting PC ecomonics — it's all about speed to market, pushing innovation up into the apps and down into the semiconductors.”

Gross margins in smartphones have dropped from as much as 30% to as little as 10%. “That means there's no money left to do R&D. That was the model of the PC industry where innovation was in the operating system and the processor and nowhere else,” said Thomas, who spent nearly 10 years at Intel, including three years helping manage its China business.

The smartphone situation highlights an old problem in electronics. “The problem we have is our inability to monetize anything beyond the chip. We are increasingly doing the software work for the industry and not getting paid for it.” He estimated the unrecognized software value at as much as $75 billion.

Though smartphones show signs of sputtering as a profit engine, PC sales could rebound — or fall off a cliff. “PCs still drive the largest amount of advanced wafers, so the potential for either renewed innovation or another big drop is immensely important.”

Likewise, many electronics strategies today rely on China's growing market and industry. But the country's annual economic growth has slowed to 7% and could eventually decline to more mature levels of about 2%. “All mega growth booms have ended. What happens when China slows, given all the bets made on it, and will that happen in two or five or 10 years?”

Thomas rolled out a list of shifting scenarios about topics including everything from Japan to Wall Street, and he asked electronics executives in the audience to consider their implications. “Sometime in the next 2-3 years, something very different or bad will happen to our industry, and how we respond is what will be key.”

To read the rest of this article, visit EBN sister site EETimes.

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