Chipmaking: 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.)

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.