Over the past week we heard good news from Xilinx and Altera, both raising their revenue targets for Q4CY09 (Q3FY10 and Q4FY09 respectively). Both of the FPGA giants are doing fine, and are poised to grow twice as fast as the semiconductor industry. The semiconductors companies are doing well too, with TI upping its Q4CY09 guidance, National leading the forecast in industrial demand, UMC and TSMC reporting a year-to-year sales increase of 52% in November, and the overall chip sales growing 14% year-to-year in October.
It is good to learn that the customers of the EDA industry are doing better –if they do badly, EDA will do too. But will that seemingly economic improvement of the semiconductor industry translate into better days for EDA? Nothing is less certain. The recent quarterly reports of Synopsys, Mentor, Cadence, and Magma, although slightly above guidance, show a bleak outlook. Most of the book-to-bill ratios decreased, and they all carefully announcing a lean year ahead.
I recently ran into some acquaintance working for a leading semiconductor company (in the top 15), who told me that they are reaching out to services companies to get more values out of them. The numbers speak for themselves: they will put $12 millions down for an evaluation project that will encompass the full backend part of the design cycle –about 8 months project. That is only for an evaluation! When was the last time any EDA company was given that amount of cash for a real-life trial?
More numbers? Let us only look at the VLSI service companies in India, i.e., in no specific order: HCL Technologies, KPIT Cummins Infosystems Ltd, MindTree Ltd, Sasken Communication Technologies, Tata Consultancy Services, Wipro Technologies. According to the India Semiconductor Association, VLSI design service revenues in India could hit $1.13 billion in 2009, while hardware and board design could reach $560 million and embedded design and services about $7.29 billion. Yes, that’s nearly $9 billion overall, nearly twice the EDA market, and China is not even in the picture yet. Despite the dramatic downturn in 2009, some of these services companies did quite well, and most expect an uptick with a recovery in the semi industry next year.
The truth is that EDA companies have been providing software solutions that are more and more seen as commodities. The license renewal rate is dropping and its volume is decreasing. In a flat, if not slowly shrinking market, the EDA firms have to eat their competitors’ share if they want to grow or just survive. They drop their prices and fork free AE support to sweet the deal for the customer. The vast majority of the designs can be done with last year’s generation suite, thus there is no urgency to buy new design tools. Then semiconductor companies might indeed be better off with a dedicated service company, which provides hands-on design expertise, and will be judged on results, i.e., the final tapeout. This is a win-win situation: the customer can fully rely on the service company, and since this business model commands a much higher fee than for a software license, the service company can expand and further invest to be an intimate part of their customers’ flows.
EDA has better look around and see what is happening. Semiconductors companies will more and more rely on service companies, tailored to their needs. Chip design and verification looks more and more like an IP assembly that requires an expertise that EDA tools do no longer deliver. The value-added is in that expertise, not in the tools that are becoming more and more push-process.
It is true that VLSI service companies buy tools to EDA companies, but the service companies factorize the license usage between several customers, which means that overall, less licenses are needed. Today, TCS can easily rent any EDA tool from the big 3 by the week or by the month. Imagine tomorrow Synopsys, Cadence, and Mentor dealing only with the top 6 hardware design service companies, themselves servicing the top 20-30 in the semi industry: EDA will loose a lot of leverage in the sale negotiation process. If Magma ends up as a cheap provider of IC implementation solutions, all developed in India, it will lower the bar even more.
EDA has to evolve quickly if it does not want to be sidelined as just an enabler. The EDA industry must be part of the design expertise, and work closely with its customers, even if it means its solution is no longer generic. And yes, as I said in the past, the value-added is in the system-level software, and this is where resides the growth of hardware designs. So the EDA industry must go into chip software design and verification if it wants to be relevant in five years from now.