Rick great piece as always. First off, I'll say Sanghi has been a rain cloud for some time, but his success as a CEO is unquestioned. I think he's correct in saying there will be more mergers among established semiconductor companies. Companies in general get to a point where they have so much culture and history that they lose the ability to take risks. This is not just in the semiconductor business.
Will there be a very interesting world of semiconductor development in the coming years? Absolutely! Think about it: One data point right now is systems companies in the cloud and consumer electronics spaces are building their own semiconductor design teams because they can (and must) optimize silicon for their own vast and enormous businesses.
At the other end of the spectrum, there are startups. After I bumped into Sanghi at the ACE Awards Tuesday night I then bumped into Andreas Olofsson, CEO of Adapteva. You've written extensively about him and his company and its Kickstarter funding story.
Sitting in between are EDA and IP companies, whose businesses need to change. They're acting on it because everyone knows we need silicon and systems innovation and everyone knows engineering teams need to be more productive. We abstract more, shift value propositions from one sector to the next as the industry matures.
Microchip CEO Steve Sanghi said "The days of forward-pricing chips based on expected advances in process technology are over. The industry has to change its practices -- you have to make money today, because no one will let you make it tomorrow."
Intel recently announced job cuts of over 5,000 employees and closed Fab 42 in Chandler, AZ for the foreseeable future. Intel stated the reason was they could not respond to the customer's requirements for tablets and low-power systems on a chip (SoC). In a recent job posting Google said "Our computational challenges are so big, complex and unique we just can't purchase off-the-shelf hardware. We've got to make it ourselves." Really.
I think it is a sad day when chip companies are mothballing fabs, laying off employees and eeiking out miniscule rasies to their design engineers while their potential customers are designing their own chips. I disagree with Steve Sanghi's comment when he says "The go-go days of double-digit revenue growth are over as the chip business settles into a middle age measured by mid-single-digit annual growth." Why can't Intel, Microchip and all the other chip makers respond quickly, creatively and cost effectively to the changing demands of the chip market? Is it because they are still using the chip design tools and processes of the past?
Gabe Moretti commented in his article The Approaching Discontinuity, "The world of EDA is about to change. The subtle signs are there for all to see, and the coming reality is so different to be scary to some. Thus better not to talk about it. The changes will include how ICs are designed, developed, and verified. They will involve designers, tools developers, and manufacturers, and force an integration that the EDA industry has not experienced so far."
So why aren't EDA companies building better tools? Everyone in the industry knows this is needed, but where are the solutions? Do the entrenched EDA tool suppliers simply think they don't need to change? Are the chip design teams and CAD groups so focused on saving their jobs today that they don't see how this will damage the bottom line tomorrow? When Google announces it is going to circumvent the entire industry and do it themselves, shouldn't chip makers hear a voice in their head saying "Danger Will Robinson. Danger!"?
Without pressure on EDA companies to start building software the chip designers need to stay competitive sales will continue to erode and more layoffs will ensue. If the chip companies are going to survive they are going to have to make big changes immediately including dragging their current EDA suppliers kicking and screaming into the 21st century . . . or find one who is already there.
I had several conversations with chip, EDA and IP people at EE Live and the one thing I got out of it is very few know what is going on in the market. There are EDA guys that have built great tools, but they rely on marketing practices that died 20 years ago, so no one really know what they have (including them). The semi guys are squeezing their tool and material suppliers to cut costs and, at the same, time, killing technology advances that could do the cost-cutting job for them, and the IP guys are chasing after each others customers and ignoring potential new markets for thier ideas.
I think Sanghi is probably right about the future, but it doesn't have to be that way.
It's not design. As you have mentioned his quote in your para 1 "....based on expected advances in process technology are over...." Process Technology is the keyword here. His views are perfectly in line with other articles appearing these days about Moore's law coming to an end. Double-digit growth can not be sustained indefinitely.
After many years in the industry watching customers try to do their own design and coming back asking us to do it for them, I think Google will probably fail at their quest to build their own. They will probably under estimate the cost and under resource the effort. Just throw a few software guys together and have them design the chip we need. Seems like a good idea to get what we want. Problem is that they will have to make and learn from all the mistakes that the large semi companies have been through over the years. The delays and costs will eventually kill the effort.
<<Just throw a few software guys together and have them design the chip we need>>
Your prognosis is not how it is being done. Those system companies hire the same design engineers previously employed in the semiconductor companies that are now laying off engineers, they buy their wafers from TSMC, buy their tools from Cadence, and license their ARM cores just like the semiconductor companies do. There is no secret sauce anymore. It's all available off the street. Don't kid yourself.
Sanghi says that the model is broken. Here is an example why.
A 19 year-old person can go on the internet, buy a bunch of 50 cent parts overnight, build a prototype system with Bluetooth, Wifi, Arm processors, etc. and test the product interest on Kickstarter. If he's lucky, he'll sell $50,000 worth of product, pull in another $300,000 from keen investors who monitor those sites, and build a sustaining business in less than two years selling a few million dollars in hardware. And the semiconductor companies that enable this--the ones that get 50 cents--well they get a whopping $10,000 only if and only when the young person's company makes a few million.
The economics of this broken model don't make sense. Intensive research and development with multiple PhDs on the staff, sophisticated multi-million dollar tools, and complex supply chains have little value anymore. It is all reduced to 50 cent parts.
Now that it is back to basics for the old-school semiconductor companies, selling pieces parts, one $70,000 purchase order at a time, it's time to rethink how those 50 cent parts are sold. The idea that the price of a semiconductor device should be based upon the cost of goods is out-dated. What's the cost of goods sold for software downloaded on the internet? Music downloaded? Who knows. Who cares. But somehow Wall Street establishes billion dollar valuations for those IP companies without worrying about COGS. But in the semiconductor space it is all about gross margin; the multiple on cost of goods sold--a business model that died in the middle of the dot-com revolution.