In what could propel a new business model in the semiconductor industry, fabless IC start-up Entridia Corp. has formed a unique outsourcing arrangement with graphics-chip supplier S3 Inc.
Entridia, which this week will introduce its first product, a router-on-a-chip, is relying on S3 for virtually every aspect of manufacturing, similar to the arrangements between systems OEMs and contract electron-ics manufacturers.
The deal comes at a time when the capacity crunch is creating problems for chip manufacturers, particularly smaller fabless IC-design houses that are unable to obtain enough wafers to meet demand. Entridia is taking the outsourcing route to circumvent the time-to-market and supply-chain obstacles facing chip start-ups.
Under the terms of the deal, S3 will assume control of Entridia's entire supply-chain management operation, including its wafer-foundry and IC test and assembly relations, purchase-order arrangements, shipping, and related logistical functions.
In the complex arrangement, S3 will not sell or market Entridia's products. Instead, Entridia will send its chip designs and wafer orders to S3, which will then act on behalf of the start-up by directly placing Entridia's wafer orders with foundry partner Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), Hsinchu, Taiwan.
S3, Santa Clara, Calif., will also be in charge of shipping the finished wafers to packaging specialist Amkor Technology Inc. for test and assembly. It will then ship the final products to Entridia's customers, according to Terry Holdt, president and chief executive of Entridia, Irvine, Calif.
Entridia's relationship with S3 is tied to Holdt. A former president and chief executive of S3, Holdt came out of retirement earlier this year to run Entridia, which was founded in 1997. Entridia last week received $10 million in funding from Conexant Systems Inc. in exchange for an undisclosed equity stake.
The S3 deal gives Entridia a guaranteed supply of wafers at a less-expensive rate than if the start-up had gone directly to TSMC or another foundry, he said.
"In effect, S3 will provide a virtual operations role for our company," he added.
Like any other foundry arrangement, Entridia will pay S3 for the amount of wafers it orders, plus a nonrecurring engineering charge. Other financial terms were not disclosed.
Other chip makers, many of which are hurting for capacity, may resort to a similar strategy and piggy-back off a larger company to gain leverage among leading-edge foundry concerns, analysts said.
In fact, S3 is mulling a plan to forge outsourcing deals with other companies. S3 has relationships with three major foundries: Singapore's Chartered Semiconductor Manufacturing Pte. Ltd., TSMC, and Taiwan's United Microelectronics Corp.
"We're thinking about putting this model in place at a much larger scale in the future,'' an S3 spokesman said. "If the arrangement with Entridia is successful, we will expand."
While the S3/Entridia arrangement remains unproven at this stage, the deal ignited a debate among analysts, foundry companies, and chip makers about the feasibility of the model.
S3 may be willing to give up a portion of its foundry capacity to third parties, but it is unlikely that the company will make any money out of the deal, according to Dan Scovel, an analyst with Fahnestock & Co. Inc., New York.
At the same time, other chip makers with strong foundry ties may be reluctant to give up some capacity, especially during the current wafer crunch, according to Scovel. "On the surface, [the S3-Entrida deal] is an unusual arrangement," he said. "But can you make a business model out of it? My opinion is no."
Others were slightly more bullish about the business model.
"This would be interesting for a company like us," said Thomas Medrek, vice president of marketing at Maker Communications Inc., a Framingham, Mass., supplier of ATM chips and network processors.
Still, Maker is not endorsing this business model yet. "Large communications-equipment OEMs like Lucent Technologies and Nortel may get a bit uncomfortable in dealing with a two-tier foundry arrangement," Medrek said.
The foundries are taking a wait-and-see approach. "It's a new model," said Magnus Ryde, president of TSMC's U.S. subsidiary in San Jose. "We're looking at it very closely."
Entridia's router-on-a-chip, dubbed Wisper (for Wire-Speed Edge-Router), provides several Internet Protocol (IP) routing functions, such as packet-processing, table lookup, classification, scheduling, and switching, all on the same chip.
Wisper replaces several expensive ASICs in a router that perform data-packet processing functions in software, according to Paramesh Gopi, vice president of marketing at Entridia. However, the traditional ASIC/software approach is creating a major bandwidth bottleneck on the network, he added.
Previously, the bottleneck resided at the core of the network. But with the emergence of high-speed backbones, coupled with the Internet, voice and data traffic is beginning to clutter the edge of the network as well.
This, in turn, is paving the way for a new wave of communications chips, including router-on-a-chip products. Designed for use in edge routers in 2.5-Gbit/s bandwidth applications, Entridia's Wisper is said to boost system performance to 10 million packets per second. The chip has links to support several LAN/WAN protocols such as E1/T1, E3/T3, DSL, Ethernet, and packet-over-SONET.
The 2.5-V chip, which is a highly integrated, 10-million-transistor device, incorporates a protocol engine, an eight-port physical-layer IC, a lookup table, memory, and other components.
Housed in a 520-pin SBGA package, the chip is priced at $350 in quantities of 1,000. It will begin shipping in the first quarter of 2000.