Chris Edwards: November 2008 Archives

In 2001, James Surowiekci wrote a short piece in the New Yorker on how some of today's biggest companies launched in recessions and made it big. Some of them – GM and Sun Microsystems – aren't looking too hot going into this one but, on balance, the list covers some of the biggest hitters of the US economy.

It contained a important lesson for the semiconductor business:

During a boom, it's easier to raise money and easier to sell products. You'd think that would be a good thing if you were trying to start a business. The problem is that everyone else thinks so, too; when the economy is hot, everyone's an entrepreneur. The more companies there are, the less likely it is that one of them will be able to sustain a lasting competitive advantage, no matter how flush the marketplace is. Starting a business is like investing in stock: you want to buy low and sell high. Launching a company in the middle of a boom is the equivalent of buying JDS Uniphase at a hundred and fifty dollars a share. It could go higher, but the smart bet says it won't.

It's been my argument for some time that the number of companies operating in the semiconductor industry, which includes electronic design automation (EDA), that access to money has been pretty easy, particularly for startups. This allowed situations to develop where you had 20 companies vying for a lead position in WiFi, Bluetooth and other markets.

This helped sucked the potential for returns from the venture-capital industry. Talking to foundry TSMC's customers earlier this year, August Capital partner Andy Rappaport showed graphs that, basically, said too much VC money has been chasing too few good ideas. Most of the money flowed into crowded sectors where the probably of individual success was low.

The problem for the semiconductor industry is that the most crowded sectors tend to be those with the highest volume, with one notable exception: PC processors. There, Intel's near monopoly status and willingness to keep it that way has meant companies attracted to the space rarely survive.

Elsewhere, incumbents have been willing to drop prices to maintain high market share in the hope that the smaller players will drop out. Just ahead of the current recession, we saw that process begin in mobile-phone SoCs. Francis Sideco of iSuppli has argued for a while that, to stay in that game, you need annual revenues of $1bn to stay in the game. And, long-term, if you are not in the top three or four, you don't really have a business.

Companies such as NXP Semiconductors realised this and got out, diverting the R&D money to less sexy but probably more profitable areas such as microcontrollers, a market without many VC-funded startups at all. The only sensible buyer for Freescale Semiconductors' own cellphone-silicon business is a larger player or one with the cash and willingness to do a rollup to get into the big league.

We are now going to see the same situation play out in other markets as the VC drought forecast by Sequoia Capital kicks in and other, more established companies decide to get out of long-term loss-making businesses.

In the short term, we are going to see a lot of people put out of work. However, the semiconductor sector that emerges could be in the strongest position since the early 1990s, a period of slow growth but one where prices firmed so well that chipmakers became investors' favourites. It went sour in the overinvestment-glut cycle of 1995-96 but that is something for tomorrow's chipmakers to watch for.

The startups who are able to make it with little to no additional VC funding for the next two to three years could be in a very strong position indeed, as long as they don't try to face down the cash-rich.

(Via Rex Hammock's weblog via Samir Husni's Mr Magazine.)

If you don't like stuff about obscure standards in system-level modelling, look away now.

A round-robin email from Simon Davidmann of Imperas and the self-styled Open Virtual Platforms (OVP) group arrived earlier today saying they have added support for version 2.0 of the Transaction Level Modelling standard (TLM), published by the Open SystemC Initiative (OSCI). No, I'm not proud of myself for getting three obscure acronyms into the one sentence.

OVP launched onto the scene just as the work on TLM2 was drawing to a close. The idea behind both is to build fast simulations of hardware designs so that you can debug them. Not only that, you can debug software programs that run on top of that hardware. It's taken since 1994 to get to the point where the electronics industry, or at least the chip-design part, accepts this is a viable way of designing hardware, but it is happening.

Imperas claimed OVP could be much faster than TLM2 and, although it was not meant to be a complete replacement for TLM2, the emphasis within their camp was that you would, for the most part, not need OSCI's stuff. The people behind OVP have, apparently, realised that this was not a viable position and have now decided to add "native TLM2 support to OVP".

If you want to get an OVP processor model that has TLM2 interfaces, you can drop a line to the people at OVPWorld. The OVP claim is that you can get hundreds of MIPS out of their models. As most processor models are written in C and then given a TLM2 interface, I've never been clear why OVP's approach should work out any faster but the system architects out there can try it out.

There is a forum at the OVP website, so I imagine you will be able to ask questions about the OVP-TLM2 interface stuff there.

The last time I heard the phrase "unprecedented lack of visibility" was in the bloodbath of 2001. The phrase made a prominent return in the Semiconductor Industry Association's 2009 forecast presentation held just ahead of the group's annual dinner in California. George Scalise, president of the SIA introduced the term again to describe what is happening to the chip business right now.

Is it 2001 all over again? The SIA is forecasting for 2009 a decline of 5.6 per cent. In effect, this takes semiconductor sales back three years to 2006. The slump of 2001 had a similar effect, removing the gains of 1999 and 2000 and taking the value of the industry back to around 1998 which was itself a pretty ropey year.

The difference is that the industry's sales shrank more than 30 per cent in 2001 compared to 2000. The fall this time looks far less precipitous. And the situation is different. At the end of 2000, the chipmakers found out their customers had built up enormous stockpiles of inventory and would not need any kit for quite a while. And, with the collapse of the bubble, their customers were not going to be needing much in the way of electronics either.

This time around, there is no inventory overhang other than the finished goods that consumers have suddenly realised they can't afford to buy. Based on other analysts' figures, the SIA reckon the cellphone and PC markets will shrink by around 5-6 per cent each next year. As these markets account for more than half of chip sales, it's no surprise that the SIA expects to see a drop of around 5 per cent in the semiconductor market.

Life for the chipmakers could actually be worse because pricing has the potential to spiral out of control. Chip prices have been on a downward slope since the end of 1995, punctuated only by tight wafer capacity in years like 2000 or 2004. Although the value of the semiconductor market fell 30 per cent in 2001, the amount of silicon shipped only dropped by 16 per cent. You can see that in the graph below of output and quarterly semiconductor revenues. When demand drops, so does the average selling price of ICs. So, the drop-off could be higher than the SIA's current estimates.


The argument against a big fall in prices is that capacity is much tighter than it was in 2001. The excess of capacity, shown below by process, right now in the most advanced nodes is almost certainly due to the ongoing chaos in the memory business. On the face of it, the situation does not look good right now: the industry is heading for a fall in demand in a situation where capacity was already loosening prior to the third quarter. The figures are from SICAS, the capacity reporting arm of World Semiconductor Trade Statistics, which has figures up to the middle of the year. It takes time to collate the information from so many different fabs, so don't expect Q3 stats for a while.


Because the amount of spare capacity has outstripped what was, up to now, pretty steady growth in unit demand, prices have fallen. Now that unit demand itself is dropping off, the question is what happens to pricing. In previous cycles, shortages and price rises preceded a fall in demand, which led to bigger declines in price.

This time, the chipmakers are reacting much more quickly than they have in the past. They have a much better handle on inventory levels and companies such as Microchip have ordered two- or three-week production holidays to stop their own inventory piling up. Others will probably only take silicon to finished wafers and then store them under nitrogen so they can be packaged relatively quickly if demand turns up for particular product lines. This was a trick used successfully by many of the analogue-silicon suppliers in 2001 to control inventory but still be able to handle sudden surges in demand within a quarter. Without finished wafers, it takes you almost the whole quarter to make anything.

The upshot is that there should not be massive amounts of silicon in the distribution channel to push down prices. The biggest factor, whether richer vendors will make a push for market share using price, is difficult to predict right now. My feeling is that no-one is keen to throw good money away right. There is little point in buying market share when you are not sure your own customers will make it through the next year or two.

In terms of supply and demand, the big producers have already slashed their capital expenditure and they don't plan to spend more in 2009. As demand turns up, production capacity could get tight very quickly. This is a prospect raised by analysts such as Malcolm Penn at Future Horizons and Bill McClean at IC Insights. Originally, they saw 2009 as the year that happens. The recession postpones that event by at least a year.

The result is that falls in price will probably add a few more percent to the SIA predicted decline in market value. But, if enough of the chipmakers keep their heads, the price decline can be kept to a minimum. However, this is difficult to reconcile with the behaviour of the memory companies over the past few years.

Microchip has been forced to call off its purchase of Atmel. On Semiconductor, which was going to take Atmel's memory, RF and analogue operation off Microchip's hands has pulled out of the deal citing "the unforeseen deterioration in the semiconductor market since we announced our proposal as well as the unprecedented weakness in the financial markets".

On Semi had to borrow to pay the $1bn in cash needed to buy the Atmel businesses it wanted. The rule seems to be right that if you need to get a loan to buy a company in the electronics business right now, you might as well forget about it. It was tough enough in the summer, as Cadence Design Systems found out. In an environment where even IC unit shipments are falling, as SEMI indicated for the third quarter of the year, you need to be really, really sure you want to make that purchase.

Microchip's problem is that 8bit microcontroller sales in general have flatlined in the past few years. The only way to get any movement in sales is to grow market share, which is tough in the 8bit business at the best of times and very tricky in a recession. Microchip benefited from Freescale (then Motorola) fumbling the ball in the late 1990s and ultimately knocked the Texas-based company off the number-one slot in 8bit microcontrollers in 2006. Freescale, however, is larger than Microchip in the wider market for microcontrollers thanks to a longstanding presence in both 16 and 32bit architectures.

One of the few architectures in 8bit to be less than 20 years old, AVR has built up a solid fan base among embedded-systems engineers. The company wanted a core done properly and got Nordic Semiconductor to design one for it that did not suffer the problems of earlier processors. Among other things, the AVR microcontroller drives the capacitive touch sensing technology that Atmel wants to sell to handset makers keen on making their own iPhone-like devices.

Before the semiconductor business ran into a wall in the Autumn, AVR sales grew as much as 25 per cent from 2007 to 2008. Atmel logged just over $100m in AVR sales alone in the third quarter and took in $144m if other products, such as the 32bit ARM-based devices, are included. Microchip's total microcontroller sales for that quarter were just over $217m. Freescale saw its microcontroller sales slip more than 10 per cent to $408m in the third quarter. With Atmel's help, Microchip would be in a position to catch and ultimately overtake Freescale, although Renesas Technology would remain the world's biggest microcontroller maker.

Without Atmel, Microchip has to rely on comparatively new architectures in its portfolio. In the 32bit space, the company has a major challenge: selling a new architecture based on a design by MIPS against not only Renesas but an aggressive line-up of companies with ARM cores, many of whom have agreed on a binary compatibility system that will make it easy for customers to not only switch products but vendors. Microchip came close to buying an ARM licence but, for whatever reason, decided to go it alone with the MIPS option. And the company faces a headwind trying to sell its higher-end 8bit micros against Atmel's.

It was, and remains, a deal that Microchip really wants to do.

Analyst firm IC Insights has put together a ranking for the chipmakers that covers the first three quarters of this year. There are no real surprises at the top: Samsung continues to gain on Intel despite the collapse of the flash memory prices but not many companies have switched places.

It's at the bottom of the top ten where history is being made. For two consecutive quarters and for the first nine months of the year overall, a fabless vendor has sat in the top ten. Qualcomm has surged into ninth place in the rankings, displacing Sony. The company managed it for a quarter last year, according to iSuppli figures. But, this year, Qualcomm's position has become more entrenched. In a business that has traditionally been dominated by integrated device manufacturers (IDM), this is a big change. According to IC Insights, there are now three fabless chipmakers in the top 20: Qualcomm; Broadcom at 19 and nVidia at 20. Pretty soon, we will be counting AMD among their number.

IC Insights has warned Qualcomm may not stay in that position for the full year as the company has forecast a big drop in Q4 sales. But there is a good chance that the mobile-phone chipmaker will be close to the top ten if not actually in it. And, as the fabless business surges on, we can expect TSMC to overtake Toshiba and probably ultimately challenge Texas Instruments for the number-three position - IC Insights is unusual in putting foundries in these rankings - no matter what the wider economy does.

Cadence cuts

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Yesterday afternoon, Cadence Design Systems said it plans to cut 12 per cent of its workforce - around 600 positions - and cancel deals with its consultants and contractors. Although the press release and 8K announcing the moves talks of focusing on particular areas, early indications are that the cuts have affected a broad swathe of departments.

The timing of the cutbacks suggests that this, unfortunately, is the first of two or more waves of job losses. As I understand it, this week is the last opportunity for Cadence to make the cuts and see the results fall in its final quarter of 2008. The company said it would complete the restructuring in the second half of 2009. It may be that later rounds will see certain groups being closed or sold off.

"In creating the restructuring plan, we emphasised those market segments where Cadence enjoys a leadership position, such as mixed-signal design, advanced verification and low-power design," Charlie Huang, who is acting as co-CEO for the moment, said in the statement.

The suggestion is that the era of the do-it-all Cadence has passed - the company will now step away from areas where it has failed to build up more than a minority position. The question is how deeply the company will ultimately cut. It's hard to see DFT and DFM remaining. What happens to PCB where the company has a solid if not remarkable share but has lost momentum? IC layout is not mentioned by name but that probably falls into what Huang referred to as low-power design.

Although these moves are clearly bad for a workforce that has seen its leaders stumble from one mess to another, there is a silver lining. If Cadence is not going to do it all, it signals a possible end to the suicidal all-you-can-eat deals its former management forged. If EDA companies go back to competing on the best tool for the job, it's probably the best way they can start to bring back the financial value they lost over the past few years.

I was talking to a Mentor executive yesterday before I heard that the layoffs had been announced and argued that EDA companies will probably stop issuing press releases about mega-deals with customers because the analysts will come to regard them as warning signs rather than good news.