Give us your perspective on the current state of the semiconductor business.

We are just starting to emerge from the worst semiconductor downturn in history. What’s interesting is the recovery process. I believe the next upturn will start to take hold later this year. Like previous cycles in this business, we will see a dramatic growth phase in the industry; the fundamentals of the business are sound. But we’re seeing some important differences in this recovery.

How So?

I believe this recovery will see a dramatic increase in flexible business models and customer-centric thinking. The current semiconductor business, and especially the application specific integrated circuit, or ASIC segment where eSilicon participates, is due for a shift in the way the customer is served. The successful companies in the coming recovery will be those that understand this shift and respond accordingly.

Before we explore the shift you refer to, please educate our readers about the ASIC segment of semiconductors.

Application specific integrated circuits, or ASICs, are semiconductor devices that are custom built for a single customer requirement. The industry began in the 1980’s as a result of some important innovations in manufacturing technology and design automation. Before the ASIC industry, custom chip development was an extremely expensive and time-consuming process. Only the largest companies could afford to build custom chips.

The ASIC industry changed all that. Through a series of automated design techniques and the use of standard building blocks, custom chips could be produced in dramatically less time and at lower cost. The ASIC industry has fundamentally changed the world of electronics. This industry has created the pervasive use of custom circuits in many of today’s consumer products, for example. Today’s ASIC industry represents approximately 10 percent of the worldwide semiconductor consumption.

What forces will change the ASIC business?

I believe there are four key trends in customer thinking that signal a shift in the business.

First, today’s successful chip and system companies want more flexibility in the way they design and procure ICs. In some instances, customers want to maintain tight control over all aspects of chip design and layout. In other instances, customers want to outsource the entire design process to achieve minimum time to market. These trends require a chip supplier that can support a variety of engagement models, based on the needs of the customer. Today’s ASIC suppliers have a fundamental problem here. Since their business is built on a large, expensive infrastructure, most ASIC suppliers have a rigid engagement model that doesn’t support rapid change based on customer needs. Most of the leading ASIC suppliers own and operate their own wafer manufacturing facilities. These facilities cost billions of dollars to build and depreciate at millions of dollars per day. When you have a heavily burdened balance sheet like that, it’s critical that you bring in business that exactly matches the company’s requirements for margin and cash flow. This typically results in a rather rigid stance in how the customer may engage with the ASIC supplier.

The second trend is that designers are relying on third party building blocks to create complex chips more quickly. There is a growing intellectual property (IP) industry that supports this need. Here again, customers have a problem when dealing with traditional ASIC suppliers. Since these organizations have built their own internal IP, it’s difficult to justify pass-through licensing of third party IP. Again, the investment made must be recouped.

The third trend is around wafer manufacturing technology. Both chip and system design companies need to access the most appropriate and cost-effective IC fabrication technology to ensure their designs perform appropriately and are priced competitively. Today, the most advanced, and most cost effective wafer fabrication is available from third party organizations, such as TSMC, UMC, and Chartered Semiconductor. These companies offer wafer manufacturing on an outsourced basis.

Because it is their only technology focus, the economic and technical performance of these companies is superior to almost every one of the captive wafer manufacturing facilities found in today’s ASIC suppliers. Owning a wafer manufacturing facility can be a liability for ASIC suppliers in two meaningful ways: lack of flexibility and lack of cost effective, cutting edge capability.

The final trend is the need for clear visibility into the design and manufacturing process. Because electronic systems have become so complex, the need for accurate information regarding design and production schedules has become critical to success. Today’s ASIC suppliers are not well equipped to provide the kind of timely information customers need. Legacy business systems have created a black hole when it comes to timely information.

How will the semiconductor business, and the ASIC segment in particular, respond to these new customer needs?

Addressing customer needs in the coming recovery will take, above all else, a willingness to re-align business models to leverage existing trends.

There is already a strong outsourcing trend at play in the semiconductor business. The key to creating flexibility in the business model requires an ASIC supplier to join the outsourcing trend. By doing this, the large depreciation expense associated with building a wafer fabrication facility, or an extensive portfolio of silicon intellectual property, doesn’t exist. This allows the ASIC supplier the freedom to create multiple engagement models to address customer needs.

To address visibility into the design and manufacturing process, we need to leverage another industry trend. There is a clear movement for all entities in the design and manufacturing process of semiconductors to use the broadband Internet to automate their business. Design groups use collaborative Web-based tools to coordinate design teams, manufacturing organizations use Web-based logistics and tracking systems, and so on.

There is a missing application in all this, however. That application is a system to collect and coordinate all this information in one place, so the end customer can view the entire process without the need to access and learn many new environments. By harvesting the information that’s already available in a coherent and easy to use manner, customers can be treated to unprecedented levels of visibility and predictability.

How does eSilicon fit into the landscape you describe?

At eSilicon, we’re leveraging all of the prevailing market trends to create a fundamentally new kind of ASIC company. Our basic philosophy is to outsource any part of the design and manufacturing process which we consider to be a commodity…that is, something readily available from well-established suppliers. Consequently, eSilicon outsources wafer manufacturing, packaging, assembly and testing of ASIC chips.

We focus our company’s resources on building differentiating capability that is not available on a commodity level. This leads us to build strong design, project management, advanced design methods, manufacturing operations skills and IC product engineering talent, among other things. Basically, we develop as core competencies the pieces that are missing from commodity suppliers.

Finally, we leverage the Internet to link eSilicon with our customers and suppliers. We’ve developed an innovative way to integrate all the design and manufacturing information associated with a customer project. This results in a "no surprises" experience for our customers that is totally unique in the industry. It’s not designing chips over the Internet, it’s managing the information associated with chip design and manufacturing over the Internet.

We began our session with a discussion of the current semiconductor slump, and what the recovery will look like. Please conclude with your view of the recovery.

Exciting times are ahead. Any one who’s been in the semiconductor business for a while knows the cyclic nature of the industry. Our current downturn is the worst we’ve ever seen. It creates the opportunity for a dramatic rebound in the months and years ahead.

As I’ve said, the next recovery will see a shift in thinking at many levels. The outsourcing trend will continue to gain momentum. Those that embrace it will prosper, those that do not will fail.

Through strategic alignment with two fundamental trends, outsourcing and pervasive use of the broadband Internet, eSilicon has created a new type of chip company…one that is flexible, customer focused and cost effective. I am confident that all successful ASIC vendors will move to this model in the future. eSilicon is forging the way, and I’m proud to be leading the team. You can debate whether eSilicon will be the leading ASIC supplier in the coming years, but you cannot debate our model. This is how business will be done.

Thank you for sharing your insights, Jack.

-Stefan Reyniak