Warren Savage On: The Naught Decade

Warren Savage

Tuesday 12 January 2010 10:20

About a year ago, as the world was hurtling into depression, I remarked that our semiconductor industry was entering a rabbit hole and like Alice in Through the Looking Glass we might find it hard to imagine what's on the other side. As we enter this new decade I believe we are emerging from the rabbit hole, and indeed we find our new reality "curiouser and curiouser"!

It's been an astonishingly bad decade. As we entered it in late 1999 the entire world was drunk with dot-com irrationalism and fretting about Y2K. Those days now seem surreal as our memories are scarred by the dot-com crash, 9-11, the Enron scandal, US dollar collapse, war in Iraq, housing collapse, banking collapse, and stock market collapse. And that's just in America!

In the middle of all this are the two largest recessions in the history of the 50-year old semiconductor that bracket the beginning and end of the decade. A rough ride to say the least.

This is Part 1 of a series looking backward towards the "naught" decade of 2000-2009. I think history will aptly record it to be a uniquely transitional period between the 20th and 21st century tech eras.

Disaggregation set semiconductor on a race to the bottom

Beginning in the 90's and gaining momentum into the 00's the old guard in the semiconductor industry bet "all in" on disaggregation as the strategy to offer increasingly complex devices at cheaper and cheaper prices. By shuttering its own manufacturing capabilities and CAD departments it came to rely on external companies for mission-critical design and manufacturing capabilities in exchange for an improved variable cost structure in which to compete against a new guard of fabless competitors.

While this resulted in an attractive variable cost structure that would temporarily improve their balance sheets, the lack of differentiation changed the game to be one of competing largely on price. The problem with using the same shovels as your competitors is that by definition the holes they dig look very similar. It was just a matter of time until the game changed for semiconductor suppliers from "my hole is better" to "my hole is cheaper". That change in the market created a downward pricing pressure on the entire semiconductor supply chain to enable even cheaper holes.

The good news is that it seems that we are likely at the proverbial bottom. While there is still more industry consolidation possible, the transition to a fully disaggregated semiconductor industry is complete. As a result we should expect to see green sprouts of growth and profitability from new products and companies that have been built on this new reality.

But the pain is not over for the supply chain, as I note in my next point.

Hungry EDA companies resorted to cannibalism

While semiconductor companies are now largely recovering from this transition, EDA has yet to come to grips with a shrinking market and extraordinarily price conscious customers that have now fully embraced the benefits of a disaggregated and commoditized supply chain. There has not been significant innovation (on the order of synthesis and simulation) for the last 20 years. Certainly, incremental improvements have been made but nothing on the order of developments that can trigger the sort of restructuring of industries we saw start in the 1990's.

As the semiconductor industry got bogged down in the 2000's we saw EDA companies deal with the slashed budgets by resorting to the equivalent of cannibalism. Instead of competing head to head with competitors on an individual tool basis, they began striking "all-you-can-eat" deals with customers allowing them unlimited access to all of their tools for a certain period of time. For a substantial discount, the customer got all the tools they needed and the company got the customer's entire EDA budget.

While understandable from a business practice standpoint, it is extraordinarily harmful to the long-term health of the industry as it cuts off the air supply to small companies with good technology who find a customer landscape where the budgets are fully allocated. Furthermore, it is a race to the bottom for the large players as they find themselves fishing in the same shrinking pond with some very wise fishermen (and fish!) who know how the game is played.

EDA needs to learn some new tricks and develop some new value propositions if it hopes to escape the same fate of its customers in the last decade.

Part 2 will follow the week of January 18th and discuss the effects of the changes in the last decade on private equity, venture capital, and the off-shoring movement.

Warren Savage, President and CEO of IPextreme, is a well-known and published authority in the field of semiconductor intellectual property.

He has a long history of pushing the envelope of design methodology from his work in fault tolerant computing at Tandem Computers in the 1980's and driving reliable design methodologies into commercial practice at Synopsys for its DesignWare IP product in the 1990s. Much of his thinking became embodied in the seminal book on IP reuse, the Reuse Methodology Manual.

Previous columns

(Nov 07) Warren Savage On: Making the Case for InventedHere

(Dec 07) Warren Savage On: Swiss Cheese Solutions

(Jan 08) Warren Savage On: Collaboration Needed forSuccess

(Feb 08) Warren Savage On: Knowing Your No

(Mar 08) Warren Savage On: The NextBig Thing

(Apr 08) Warren Savage On: Gumming Upthe Works?

(May 08) Warren Savage On: Waiting forGodot

(Jun 08) Warren Savage On: Our VirtualFuture

(Jul 08) Warren Savage On: BeingPlugged In

(Aug 08) Warren Savage On: The DogDays of Summer

(Sep 08)Warren Savage On: Samurais,Sedans, and Semiconductors