CEO Outlook: Chip Design 2017

Political uncertainty, tempered optimism, continued consolidation, and concerns about capacity.

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After two consecutive flat to slightly down years, the semiconductor industry is poised for growth in 2017.

Cowan this month predicted 4.7% growth in semiconductor sales in 2017, while World Semiconductor Trade Statistics (WSTS) put that figure at 3.3%. And last month, International Business Strategies (IBS) pegged the number at 4.6%, according to statistics compiled by the Global Semiconductor Alliance (GSA).

The projections are relatively modest in comparison to some of the individual market segments that rely on semiconductors, and particularly in contrast with all the buzz about automotive and IoT. But the numbers also may be misleading. Wally Rhines, chairman and CEO of Mentor Graphics, said that ever since large systems companies began buying wafers to develop their own chips, they are no longer considered in the sales totals.

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“These numbers are growing faster than people realize,” Rhines said. “The real numbers are not being recorded. If you look at the semiconductor equivalent sales of the top 10 cell phone companies, those have grown 3.5%, but no one is counting those. Application processors do not show up because those companies don’t buy chips. They buy wafers, and the intra-sale of those is not recorded. That is only going to grow, too, as systems companies like Google, Facebook and Amazon get into IC design. In 2017, you will see more systems companies in IC design, which will accelerate design and development.”

Add that factor to the existing reports, which point to an increase, and there is a cautious optimism about an overall uptick across the broad chip market. Demand is rising, and this is reflected in capital spending for manufacturing equipment. Gartner predicts that spending will increase 7.4% in 2017 to $69.3 billion, compared with a 0.3% decline in 2016 versus 2015.

Memory sales account for some of the increase in overall volume and sales, but there are more subtle shifts underway across the market. Wafer-level packaging and assembly equipment, for example, is expected to rise 9.9% in 2017 and 11.4% in 2018, according to Gartner. This is a signal that new packaging approaches are gaining ground, a shift that began on a mass-market scale with Apple’s fan-out package in the iPhone 7.

The automotive sector and various slices of the Internet of Things, from edge-node sensors to server chips for cloud-based datacenters, are just beginning to show up in the market, as well.

“Automotive in 2017 will be very interesting,” predicts Simon Segars, ARM’s CEO. “There has been a historic disconnect between the rate of innovation in semiconductors and adoption by car companies. Tesla has been the exception. But semiconductors are going more mainstream in automotive. There are now lots of R&D labs in Silicon Valley, and you will start to see the impact of that in 2017. This is a big thing for lots of chipmakers. The number of sensors is going way up.”

Geopolitical changes
One big question mark is the impact of a growing trend toward political isolationism on international business. The semiconductor industry has developed one of the most finely tuned supply chains in the history of business, but the ability to continue cutting costs—the main reason that a smart phone sold today has more processing power than a Cray supercomputer did several decades ago for a fraction of the cost—is based upon access to cheap materials, highly segmented labor forces that vary greatly from one country to the next, and the ability to import and export all of this without high tariffs. The general consensus is that trade wars would be disastrous for electronics in general, and semiconductors in particular.

“The whole international geopolitical relationship is going through a dislocation,” said Aart de Geus, chairman and co-CEO of Synopsys. “The question is whether it will break international business relationships. We are a completely international industry. Some companies in other industries have headquarters in other countries, but electronics is global. This is an industry that has made smart everything possible, and that will be essential for dealing with big worldwide problems, such as climate and disease and other systemic problems.”

There is some optimism that President-elect Donald Trump will think business first, trade restrictions second. Despite tough-talking presidential campaign rhetoric, his meeting with top tech company leaders earlier this month signaled a willingness to work with them. Add to that a cabinet filled with successful business executives and many business leaders are optimistic there will be openness to global trade.

“Donald Trump is a businessman, and overall that is viewed positively in China,” said Lip-Bu Tan, president and CEO of Cadence. “China also will continue its push to be self-sufficient. It has developed its own ecosystem and supply chain. But the thing to watch is the relationship between the United States and China.”

That includes what happens with China’s proposed acquisitions of U.S.-based companies, many of which have been blocked by The Committee on Foreign Investment in the United States. The secretive organization is an arm of the U.S. Treasury Department. It reports directly to the president and is not required to provide details of its activities under the Freedom of Information Act, as are most government agencies.

Charlie Cheng, CEO of Kilopass, agrees with Tan’s assessment. “Most officials in China view Trump as a businessman, which means he will negotiate a deal with them. China has always rooted for Trump because he is a businessman, and for a businessman there is always a right price.”

Time will tell whether this view is correct. At this point, facts are scarce and information is frequently contradictory, vague or incomplete. But it’s also important to note that none of this is happening in isolation. There are populist efforts underway in multiple countries that do not favor free trade, the most visible being Great Britain’s exit from the European Union, known as Brexit.

Consolidation
Some of this could affect industry consolidation, but the general belief is that consolidation will continue—at least until interest rates increases render big acquisitions uneconomical. That may still be years off, though.

“The continuing consolidation in the semiconductor sector will create both concerns and opportunities in 2017,” said Jack Harding, president and CEO of eSilicon. “Concerns will come from customers who feel their chip supplier is getting bigger, less flexible and more competitive in their end markets. That same trend will create a hole in the market for companies that are flexible and focused on the chip market vs. end user markets. Many of the end users caught in these changing times will be consumers of finFET-class designs. The extreme complexity of these chips further limits choice. So, concerns for many, opportunities for a few.”

Harding isn’t alone in that assessment. “We’re all worried about continued consolidation,” said Sundari Mitra, co-founder and CEO of NetSpeed Systems. “The number of design starts is the same, but the number of companies is shrinking. On top of that, if you look at emerging markets, people are making do with existing application processors for smart phones.”

One of the big issues with consolidation is the leverage that fewer big players can wield over their suppliers.

“The top five semiconductor companies account for 41% of the worldwide business,” said Dan Glotter, CEO of Optimal+. “Intel, Qualcomm, Broadcom, Hynix and TI represent almost half the industry. This is all about companies needing negotiating power, not just for the sake of consolidation. And this is just the beginning of this trend, not the end.”

Future growth opportunities
Still, there are enough new market opportunities shaping up alongside all of these business changes and political uncertainty to add a healthy dose of optimism into the mix.

“The self-driving car opportunity is much bigger than just cars,” said Charlie Janac, chairman and CEO of Arteris. “It’s drones, trucks, military vehicles, vehicle-to-infrastructure technology, automated parking. Looked at together, this is one of the biggest opportunities ever for the semiconductor industry. We’re seeing continued growth and innovation in the mobility market, too. The folding display from Samsung is just one example.”

The consensus among top tech executives is that if technology is allowed to continue along current trajectories, growth will be explosive.

“We’ve made unbelievable progress,” said Synopsys’ de Geus. “There is evidence that digital intelligence has grown palpably. There is big data learning, there are new technologies for communication, and the intersection of silicon and software is progressing at a rapid clip. In the next decade, you will see big changes in medicine, transportation and housing.”

NetSpeed’s Mitra echoes that view. “Drones, robotics, and more application-centric processors are coming,” she said. “They’re using the same cores, but there is a lot of optimization for specific use cases.”

Add to that machine learning, deep learning, virtual/augmented/mixed reality, and the overall growth picture for semiconductors appears to be healthier than it has been for several years.

“The new game in town is certainly machine learning,” said Raik Brinkmann, president and CEO of OneSpin Solutions. “Using this technology, EDA has the opportunity to make tools more intelligent, perform better, and easier to use. The big challenge comes with EDA users designing SoCs for machine learning acceleration, such as devices supporting deep learning on the edge. These devices have huge performance, low power and memory bandwidth requirements, posing a potential challenge for the whole EDA tool chain.”

Other concerns
In the midst of all of this change and uncertainty, there are other worries that sometimes fall under the radar.

One involves talent. “We need more innovation,” said Cadence’s Tan. “We need to be able to attract the right people to do that.”

That means attracting engineering students to the chip world, which has been difficult because companies such as Facebook, Google and Apple are competing for the same skill sets. It also means attracting more venture capital and investment for startups, which are slowly beginning to pop up in various segments.

A second involves capacity and investment in the right places. While not a market killer, misplaced capacity investments by foundries could delay how quickly companies can tap new market advantages such as the IoT.

“In the past couple years, it has been a zero-growth environment, so the foundries did not want to add capacity,” said Steve Sanghi, chairman and CEO of Microchip. “They have made investments at 40nm and 28nm, but no one is adding 130nm or 180nm capacity. That’s where microcontrollers need capacity. It’s the center of gravity for microcontrollers and for analog, and they’re both fighting for capacity.”

A third concern is continued investment in alternative ways of doing things, which frequently gets derailed whenever process scaling appears to be on track. But as it becomes more expensive to continue with device scaling, those kinds of investments will be essential. That includes everything from advanced packaging to other next-generation lithography choices besides extreme ultraviolet lithography, such as directed self-assembly, multi-beam e-beam and nanoimprint, as well as atomic-level etch and deposition.

“Finally, with the cost of doing ASICs at advanced nodes, we are seeing system designers starting to look at ways to glue a 40nm interface to a 7nm processing unit,” said Taher Madraswala, president of Open-Silicon. “A lot of this is being driven by HBM2, but it is finally happening.”

Conclusion
Market churn and confusion are especially problematic when sales are down. But as opportunities increase across the board, there is enough business in enough new places that many CEOs are not as concerned as during downturns.

This is obvious both in the overall semiconductor market, as well as in various sectors that are struggling to keep up with increasing complexity. “As formal and emulation continue to see more widespread adoption, a combination of formal, simulation and emulation will become the standard verification setup,” said OneSpin’s Brinkmann. “This also means that formal and emulation will keep eating away some of the simulation market share. This is a good opportunity for EDA companies focusing on this space to increase their revenue, while others, bound to simulation may lose.”

Or they may find new avenues for expansion. The general attitude is one of cautious market expansion, with an eye to what can go wrong and how to work around those issues. But for the most part, semiconductor sales are up and growing, and even the most pessimistic scenarios about business risks and political uncertainty will be buoyed by that growth.

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