Morgan Stanley
  • Research
  • Sep 9, 2016

Mighty Micro-Engines of the Internet of Things

More companies are designing products that are part of the IoT, using tiny low-cost sensors to enable connectivity and control—giving a much-needed boost to the semiconductor industry.

Our already hyperlinked world is about to get even more connected.

Microcontrollers (MCUs), the tiny sensors that enable connectivity and control in all the “things” around us, have now become so inexpensive—at around $1 apiece—that they can be incorporated in just about everything, from industrial machinery and home appliances to wearable devices and even clothing.

In a recent survey of more than 100 key decision-makers who represented automotive, consumer electronics and industrial manufacturing companies, Morgan Stanley Research found that more than 90% of them are baking connectivity technologies into their designs.* This marks a coming inflection point for the Internet of Things (IoT), the next generation of personal computing, which will connect objects and enable them to communicate and interact with each other, users and their environment.

While consumers and companies ultimately stand to reap the benefits of this new technology, in the near term, the semiconductor industry could be one of the biggest winners. Every 10% increase in connectivity using microcontrollers could add roughly $1 billion to the chip-making industry, or around 30 basis points to growth, says Craig Hettenbach, who covers the sector for Morgan Stanley. “The IoT represents a significant growth driver for the microcontroller market, which at $16 billion in annual sales represents around 5% of the overall semiconductor industry," he says.

Drivers of Semiconductor Growth, 1960-2030e

Sources: Company data, Morgan Stanley Research

Reinvigorating a Mature Market

It couldn’t come at a better moment. Semiconductors have been at the heart of the tech revolution for decades. The sector’s main growth engine, the microprocessor—aka, the central processing unit, or CPU—is still the brains in personal computers, smartphones and other mobile devices. But, as the marketplace for each of these products has matured, overall sector growth has slowed to low single digits, Hettenbach says.

MCUs have also been around for decades. Where CPUs (which can still cost as much as $200 apiece) can perform complex, variable calculations, MCUs are simple engines designed for specific tasks in relatively unglamorous devices, such as remote controls, thermostats, and security systems. Embedded in a product, these tiny chips can efficiently sense, process, and control operations at low cost, while adding intelligence, superior control, and a user-friendly interface. Over the years, chipmakers have been making them smaller, more energy efficient, less expensive, and geared for a mobile and wireless world.

More Than 90% of Key Decision-Makers Want to Add Connectivity With MCU Products

Sources: AlphaWise Survey, Morgan Stanley Research

In other words, they are perfectly adaptable to the needs of the IoT. Even though individual MCUs are inexpensive, the volume required for all of the various permutations of the IoT—some of which we  have yet to imagine, as more entrepreneurial engineers and designers experiment with the possibilities—will drive incremental growth for chipmakers within 12-18 months, the time expected for these products to come to market.

Bit Players

Within the MCU market, however, some players may be better positioned than others to benefit, based on developing trends. The MCUs  come in 8-, 16- and 32-bit specifications. The higher the bit rate, the more information it can process in a single instruction. In recent years, 32-bit MCUs, which are more powerful and sell at a higher price, have comprised a larger share of the MCU market, a trend that is only expected to increase, as manufacturers introduce more IoT-enabled products requiring more powerful, faster performance. In the survey, 44% of respondents said that IoT is resulting in greater use of 32-bit MCUs.

Another critical concern for designers and manufacturers: cybersecurity. With many users worried about hackers, identity theft and safety when it comes to connecting their homes, big appliances, cars and other everyday personal gear to the Web, the MCUs that run the IoT will receive a lot of scrutiny. Semiconductor makers that offer built-in security features with their chips or more secure ways of integrating with other security measures are likely to have an edge in the marketplace, Hettenbach says.

Something many may forget when thinking digital is all the rage: Ancillary analog functions that go hand in hand with IoT products to facilitate interaction with a wide range of our analog world. Think convertors, amplifiers and power management, among many other key activities that haven’t been predominantly digitalized. Chipmakers who have broad portfolios of MCU and analog products may get a leg up with designers and be in the position to cross-sell both products.

All About the Details

All of these variations exemplify the complexity of engineering and the economics driving the IoT. The promise of connecting nearly everything to everything and everyone else has proven to be far more elusive than imagined, as many such big shifts tend to be. “As with any new technology, the hype phase typically precedes fundamental impact years in advance,” Hettenbach says. “The IoT has been no different.”

Now, however, many of the technologies that underlie a more robust adoption and build-out of the IoT are here. Faster and more reliable wireless connections, cloud-computing to handle all of that Big Data, and extremely low-energy, yet powerful semiconductors are all key to the successful roll out of IoT-enabled products. The ubiquity of mobile devices and growing adoption of wearable tech have also powered more creative software explorations and applications that are essential for the IoT. Access to inexpensive chipsets that can be incorporated into more affordable IoT products for mass consumers is just what manufacturers have been waiting for.

When can we expect to see the fruits of the current cycle? By the second half of 2017, the things being designed now are likely to start hitting stores. By 2018, Hettenbach expects a more mature market, which could offer investors even stronger opportunities. In Morgan Stanley's most bullish scenario, connectivity using 8-bit and 32-bit MCUs could grow by as much as 15% and 30%, respectively, in 2018. That would translate to about $3 billion in incremental connectivity sales and as many as 90 basis points in semiconductor sector growth, Hettenbach says.

On average, however, Hettenbach estimates revenue for individual MCU makers to increase by 50 basis points in 2017 and earnings per share by 110 basis points. For 2018, "given a backdrop of low-single-digit growth for semiconductors, we expect IoT to add two percentage points of growth for companies with high MCU exposure."

For Morgan Stanley Research on the on the global semiconductor market, ask your Morgan Stanley representative or Financial Advisor for the full report, "Global Insight: Survey Shows Internet of Things Moving From Hype To Reality" (Aug. 9, 2016). Plus, more Ideas.

*AlphaWise surveyed 117 respondents, whose organizations are original equipment manufacturers or system integrators, all of whom stated they are the decision maker or have influence regarding microcontrollers in their companies. Of these respondents, 38% were from companies with more than 1,000 employees, while 29% and 23% had less than 100 employees and 100-499 employees, respectively. Around 29% of respondents were system architects and/or engineers, while 21% and 15% were software engineers and project managers, respectively.