According to market research firm iSuppli Corp., the consumer electronics market continues to hold tremendous growth potential as it rebounds from the recession, but semiconductor vendors operating in this fragmented space will confront major profitability and competitive challenges in the coming years.

Well on the way to recovery, revenue for the consumer electronics equipment market in 2010 is projected to reach $259.0 billion, all but erasing the decline of the previous year when revenue fell by more than 3 percent. And in an ongoing sign of strength, revenue will continue to rise in the coming years, increasing by 6.7 percent in 2011 and by 7 percent in 2012. Expansion will slow to 1.2 percent in 2013, after which the market is projected to contract by 0.6 percent in 2014.

Consumer-electronics-related semiconductor revenue will rise to $57.2 billion in 2010, up 27.7 percent from $44.8 billion in 2009. This represents a dramatic reversal from 2009, when revenue declined by 15.7 percent. Revenue will continue to rise during the coming years to reach $69.4 billion in 2014.

“The increase in consumer electronics revenue is currently fueled by high-value and high-volume products such as LCD-TVs and Blu-ray players,” said Jordan Selburn, principal analyst for consumer platforms at iSuppli. “At the heart of such popular consumer electronic devices are leading-edge chips and other semiconductors that provide core functionality. In the wake of the economic slump, the battle among companies to supply such semiconductor chips to the makers of consumer electronic devices has escalated. A design win in a high-value consumer electronics product could make $100 million or more during the life of the device.”

Companies that focus on manufacturing Application-Specific Standard Products (ASSPs) or Application-Specific Integrated Circuits (ASICs)—two major classes of semiconductor chips—stand to reap the greatest benefits from the growing consumer market, given that these types of devices are neither easily manufactured nor readily replaced.

On the other hand, the cost to develop leading-edge application-specific chips continues to rise, ranging from $10 million to $20 million. Only the biggest and most successful companies will be able to afford such high development costs, effectively squeezing out the smaller companies or the second- and third-tier players. For their part, the smaller companies will be faced with the option of designing with an older semiconductor manufacturing technology likely to have higher production costs—or getting out of the market altogether, iSuppli believes.

Because of this, iSuppli expects to see significant consolidation of the consumer application-specific market over the next half-decade—if not sooner.

Furthermore, the fragmented nature of the consumer semiconductor market translates into more intense competition overall among all players in the space. Only one vendor, Toshiba Corp., has a greater than 10 percent market share; and only one other company, Sony Corp., has a market share exceeding 5 percent. Together, the top 10 companies command just an aggregate share of 48.4 percent.

iSuppli believes that to continue to succeed in the consumer electronics semiconductor market, companies must balance their design and manufacturing costs.

For high-volume consumer chips, the elevated cost for designing at advanced nodes can be offset by lower production costs. However, only companies that win in high-volume sockets will be able to make such a justification.

In contrast, second- and third-tier suppliers may find themselves priced out of advanced silicon technology—and shut out of the next generation of consumer electronic systems as a result. Learn more about the latest developments in the core silicon semiconductor market with Selburn’s report, entitled ‘Consumer Semiconductor Vendors Survive a Rocky 2009’.