Bucking one of the industry's more prevalent trends, IBM Corp. is strengthening ties between its Microelectronics and OEM divisions in a landmark push to grab merchant semiconductor market share.
The new mindset reveals a striking philosophical shift taking shape within the venerable electronics giant, which has had a decades-long tradition of jealously guarding its intellectual property.
Unveiling a new approach aligned along specific market segments, IBM late last year formed the Technology Group, a mix of system-level businesses responsible for channeling many of IBM's lucrative but unexploited technological assets into its Microelectronics Division.
As a group member, IBM Microelectronics will capitalize on its relationship with the Technology Group's network hardware, storage, embedded-systems, printer, and FPD divisions (and their respective R&D arms) to break into new third-party OEM markets.
"Back in the late '80s and early '90s, we were a captive supplier to IBM-essentially a foundry," said John E. Kelly III, IBM Micro's new general manager, in an interview with EBN. "The real challenge for us now is acquiring the IP to go after these individual market segments. We have the technology, but we need to assemble the IP, and to do that, we'll be drawing from IBM [Corp.] and working with our partners."
The move is unique in that IBM is reaffirming its commitment to what is commonly referred to as a vertically integrated corporate structure, one in which all elements of a finished product-from component design and manufacturing, to testing, packaging, and customer services-are handled in-house.
The concept, de rigueur for much of the 1980s and early 1990s, is falling out of fashion at many high-tech companies in the United States and Asia. Multinationals such as Hewlett-Packard, Motorola, Siemens, and Toshiba have all stepped up efforts to flatten out their organizations, either by selling core business units or by breaking up into smaller, more autonomous companies.
In theory, corporations that spin off divisional responsibilities-such as DRAM or discrete-component production-are better able to respond to the rapidly changing market. The rise of Taiwan's foundry industry has been driven by this horizontally oriented model, as component suppliers outsource chip production to meet shorter customer lead times and avoid the rising cost of dedicated semiconductor wafer fabs.
In the midst of this rush to divest, however, IBM is pulling its semiconductor and OEM groups even closer together in the belief that by offering customers a complete, end-to-end package, it can outperform its rivals' more loosely knit operations.
"It's going to be very difficult to build a system by going to a foundry in Taiwan, a tool-design guy on the West Coast, and some fabless guy in the Valley," Kelly said. "You're getting a piece of technology here and a piece of technology there."
The relationship between IBM Micro and the company's OEM divisions also signals IBM's willingness to let its chip unit sell leading-edge products to customers that may compete against Big Blue at the system level. Industry observers said IBM's move is progressive compared with many of its competitors, particularly vertically integrated Asian computer makers.
"In Japan, the closest example still producing systems today would be Fujitsu and NEC, ... and I think they're part of the old mold that IBM has broken away from," said Richard Doherty, an analyst with the Envisioneering Group Inc., Seaford, N.Y. "You don't see NEC and Fujitsu competing with their internal capability. That would be too radical."
By showcasing its best technology on the merchant market, IBM is already winning a wealth of new business in set-top boxes, cell phones, and network communications, according to Doherty. In keeping with recent past practice, IBM Micro has made a conscious effort to steer clear of the PC market and its declining margins. But by providing chips for Web servers, wireless handsets and GPS systems, network switches and routers, and consumer products such as games and printers, it expects to become a top-10 chip supplier. Today, IBM Micro ranks 13th.
"I think [IBM Micro's] position in the semiconductor market is assured for the next 24 months," Doherty said. "If they stopped answering the phones today, they would still grow based on the volume of orders they've already received."
Kelly said IBM, which as little as five years ago posted almost no merchant-market revenue, now sells about 60% of its products to third-party OEM customers-a ratio the company said will increase to as much as 80% in the next few years.
IBM Micro will train its new market focus on a small number of large accounts, and will not build a significant distribution network to address smaller OEMs. The aim, according to Kelly, is to provide a high degree of custom engineering and design services at the customer site, an intensive strategy that will naturally limit the company's OEM roster.
At the same time, IBM Micro will continue to soften its focus on commodity DRAM, which will decline to well below 20% of the company's product mix. In its place, IBM Micro will turn increasingly to embedded DRAM and processors, higher-margin parts such as ASICs and silicon germanium-based RF ICs, and emerging copper-based and silicon-on-insulator manufacturing processes.
"Many of the systems providers in these segments are looking for technology providers," Kelly said. "We think, as the technology progresses, as the difficulty of designing these things moves on, and as a number of customers [move to a CSSP/ASSP structure], there's a tremendous advantage for a vertically integrated company."
In one instance, IBM is playing its chip group off the Network Hardware Division, using the OEM unit's R&D strength and system-level expertise to commercialize data-packet processors, switch fabrics, media-access controller cores, and physical-layer chips. With such products as its upcoming Ranier network processor, IBM Micro hopes to become one of the market's top two semiconductor suppliers, according to Christine King, the division's vice president of wired communications.
"The big switch and router companies don't want to focus on building and developing their own platforms," Kelly said. "They'd rather have us do it as they move up into providing software and services. We can offer better pricing and better time-to-market. It's a tremendous opportunity if we have the right IP."