How can semiconductor chip company can get profit if the chip price always plummet after a few months?

How can semiconductor chip company can get profit if the chip price always plummet after a few months and they have to invest to produce stronger and faster chips right away for the generations of chips?

I also wonder about flat-screen TV. if it cost $500 to make a TV, how can they after a year with price drop start to sell less than that. Labor, electricity and equiption coat are not likely to go down?

2 Answers

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  • 1 decade ago
    Favorite Answer

    Marketing 101

    The thing that causes the price of a newly introduced product to plummet is the introduction of a newer product with better features.

    It is possible to maintain the premium price unless and until the product becomes technically obsolete.

    That means that a manufacturer must do three things:

    1. Delay obsolescence as long as possible. Don't introduce the next generation product until either the market for the current generation has become saturated and a new product is needed to induce customers to replace the last product (this is a very popular trick with suppliers of technology-based products), or until the competition is about to introduce their newer, better, faster, sexier product.

    2. Set the introductory prices as high as you can get away with so as to maximize the revenue during the early days.

    3. Automate manufacturing to make production cost as low as possible.

    Semiconductor manufacturers have one other trick. When the new product comes along, they then sell a license to manufacture the old product to a competitor (usually, someone in Asia) who can make it at an even lower cost. That does two things. First, it maintains a viable presence of that older product in the market so that the newer product 'looks' better by comparison, thereby justifying the premium price for the new product. Second, it maintains a revenue stream for the older product that further enhances its life-cycle profitability.

  • LG
    Lv 7
    1 decade ago

    Sometimes they start selling it at a huge profit and then trim the profit margin later. Like the Intel core2 extreme selling for $1000. It probably costs like $5-10 to manufacture it. This actually works out pretty well as the initial large profit pays for the research and development(R&D) costs which can be millions of dollars. After the R&D is payed for then it's just covering the cost of manufacturing plus a little bit for profit.

    Some chips will get taken over by cheap overseas manufacturers and get dropped by their original manufacturers because they can't make any money anymore. It really depends on the type of chip, the market for it and how many competitors there are. For a chip with large volume(millions of units sold) and rapidly advancing technology, like CPU's and memory, this is certainly true. But something like a high end ADC(analog to digital converter) can introduce for a high price and keep selling at that same price for 10 years or more. These chips are difficult to design and don't sell much volume so there's not much incentive for competitors to get in the market and bring the price down.

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