The chip business has been impacted by short term events like market volatility, write-offs and price wars said Derek Lidow, president and CEO of iSuppli (El Segundo, Calf.), in a statement. "However, the long-term trend indicates that the semiconductor industry—which historically has been good at capturing profits in the electronics value chain—seems to have lost its money-making touch."

Lidow says the semiconductor industry's profit as a percentage of revenue has eroded steadily over the past four years, with quarterly net profits falling into the single digit range in 2008, down from 17 to 19 percent in 2004.

Diminishing profits have re-segmented the semiconductor industry into two groups, the "haves" and "have-nots," according to Lidow.

"There now are only two major distributions in the industry: a few outstanding performers and the rest," Lidow said.

While 19 chip vendors grew by more than 100 percent from 2001 to 2004, only nine did so between 2004 and 2007, Lidow added. "This shows semiconductor companies can no longer break out of the pack by taking market share away from weaker rivals," he said.

In order to break out of current market dynamics and outperform the industry, chip companies need to adopt new strategies, Lidow said. One proven strategy is capture value from customers by designing more of the total system with system-level chips built around proprietary intellectual roperty (IP), while another is to milk established "cash cow" products like trailing-edge devices with steady pricing and a dwindling number of competitors, Lidow said.

Companies with deep pockets—like Samsung Electronics Co. Ltd., Intel Corp. and Taiwan Semiconductor Manufacturing Co. Ltd.—can continue to use their resources to massively outspend rivals to maintain dominance in competitive markets, Lidow said.

Chip companies must also take advantage of third-party outsourcing, according to Lidow. "Those semiconductor companies that are unable to achieve top-quality and performance in all processes, either through outsourcing or by using internal resources, will be punished in the marketplace," he said.

Portending more industry consolidation, Lidow said "very daring semiconductor managers" can also grow their companies through a well-developed acquisition strategy. "With semiconductor processing becoming increasingly commoditized, such an endeavor is becoming practical," he said.

 The attached chart shows historical, quarterly operating profit margins for the global semiconductor industry.