The Future of the MEMS Market

You probably use them every day and don’t realize it and most likely never heard their name or know how they work. They’re in the iPhone (NASDAQ: AAPL), Wii (NTDOY.PK), and Fords (NYSE: F). The list of companies that make them are common household names - Analog Devices (NYSE: ADI), Freescale Semiconductor (NYSE: FSL), Hewlett-Packard (NYSE: HPQ), and Texas Instruments (NYSE: TXN).

MEMS, or MicroElectroMechanical Systems, are a class of semiconductor chips that also contain mechanical or moving parts. They function as accelerometers in cars for airbag deployment in collisions, in the iPhone to manipulate screen orientation, and in the Wii game system as a motion-sensitive controller. They work as silicon pressure sensors to monitor car tire pressures.

A week ago on Seeking Alpha, I pointed out that MEMS was one of five bright spots in the high-tech market in 2009, but the consumer sector is one area impacted by the recession and downturn in consumer confidence. MEMS silicon microphones makes up part of that sector, replacing traditional electret microphones in some applications, particularly cellphones.

The MEMS silicon microphone market has become a hotbed of activity, spurred by record-breaking growth in consumer electronics products such as hearing aids, cellular phones, cordless phones, headsets, and headphones. Initial entrants that included Knowles Acoustics (Dover Electronics (NYSE: DOV))), Akustika, and Sonion (Denmark) has grown to include Analog Devices, Wolfson Microelectronics (UK), Freescale, STMicroelectronics (NYSE: STM), Infineon (NYSE: IFX) and Omron (Germany).

China suppliers entered the market in recent years and include Shangdong Goer Acoustics Technology Co. Ltd, Suzhou MEMSensing Microsystems Co. Ltd., and AAC Acoustic Technologies (Shenzhen) Co. Ltd.

Sadly, our research in this sector, which we have been tracking since 2003, has shown that the high flying silicon market hit a tailwind in 2007 and 2008 and will nosedive in 2009. MEMS microphone technology has grown from less than 1% of the 1.2 billion microphones sold worldwide in 2003 to 2.1% in 2004, 6.1% in 2005, and 12.9% in 2006. Then came 2007, when 250 million units were sold, primarily for mobile phones, but also for hearing aids, computers, and various consumer applications. Nearly 82% of shipments in 2007 were for cell phones; the remaining nearly 18% in consumer applications such as digital cameras, MP3 players, and PDAs. In 2007, we also witnessed the incorporation of 2 million MEMS microphones into notebook computers. In 2008, 291 million MEMS microphones will be sold.

Strong growth in Bluetooth played another key factor in the slowdown in silicon microphone incorporation in cell phones and converged devices. Bluetooth headsets don’t need the smaller footprint of the MEMs microphones, whereas cell phones are jam packed with electronics for talk, music, and GPS. The low cost of Bluetooth headsets requires a low bill of materials, and standard non-MEMS microphones can be priced as low as 10% of the cost of MEMs microphones.

Forward to 2009 and we forecast a 5% downturn in the cellphone market, from 1,216 million units in 2008 to 1,156 million units in 2009. The smartphone market, which includes the iPhone, will grow 21% from 196 million units in 2008 to 238 million units in 2009. This sector is the key growth area for the MEMS microphone.

What does this mean for the MEMS microphone vendors? A lot of companies chasing market leader Knowles Acoustics for a smaller piece of the revenue pie.

Disclosure: no positions