Just Kidding

By Jack Harding

I can remember back to 1995 and the first time I heard Joe Costello at Cadence speak publicly about the “disaggregation of the supply chain.” Disaggregation? Was that even a word in Webster’s Dictionary? It didn’t matter because, like many other concepts championed by Joe, it was the word every journalist and analyst in the semiconductor space was using to describe the phenomenon of the vertically integrated companies (IDMs) buying goods and services from a rapidly expanding number of specialists that could perform the same internal function faster, better and cheaper.

In other words, Joe observed the force that has driven our ecosystem for the last 15 years—the totally disaggregated supply chain.

Now, this has been going on since the early ’70s and was well under way for assembly, EDA and wafers. But in 1995 it was different. The very notion of a company even attempting to stay vertical was deemed a folly survivable only by the giants: Intel, IBM, Samsung and a handful more. The difference by then was The Fabless Semiconductor Association (FSA), now the Global Semiconductor Alliance (GSA), was born. Venture capital funded only those companies that outsourced and off-shored. Hundreds of companies were formed to resolve the specialized opportunities born out of the relentless growth in complexity.

Well, Joe isn’t prognosticating as much these days, but even those of us slower on the uptake can see that trend is waning.

We are reintegrating—or may be we should call it anti-disaggregating. Anyway, think about this. Just like the semiconductor “cousin” industries of enterprise software and contract manufacturing, the semiconductor space is rolling back up. EDA is on an IP acquisition tear. Big semiconductors companies are swallowing a smaller fish per week. Even Intel picked up Wind River. Say what?

And if you think this is just a fad consider this reality: When your supply chain rolls up…you’d better, too. Why, because they will use their rediscovered clout to tell you what the price is going to be. Think about it. If you don’t like what price Flextronics quotes you can you go to Solectron, right? Oops. Flex bought them a while ago. If Synopsys charges a dear price for some of its AMS products can you run over to Virage? Virage who? You get the point.

So who can afford to be small? Nobody. In a roll-up universe the sideliners get shoved into a black hole.

Yes, complexity is still increasing relentlessly, some would say exponentially. But, it appears the financial rewards of size are trumping the specialization benefits of disaggregation. In other words, at least for this 15-year cycle, size has defeated specializations as the margin of victory.

Enter the VCP (sounds like a Bruce Lee movie). The Value Chain Producer was and is the logical response to those companies that care not to play the semi game (OEMs) or cannot play effectively (the smaller fabless guys). VCPs aggregate both the technical skills and the buying power to emulate the bigger players in the rollup game. On the supply side, their customers tap into a VCP’s long-term and efficient relationships with suppliers that are rewarded with lower pricing and better allocation. From an engineering perspective, most companies cannot possibly hire and retain the array of people with the skill sets required to develop a 40nm chip. That club is shrinking every quarter.

So, here are the choices: 1) Grow like hell yourself and outperform the market until you are a “big guy”; 2) assume a “big guy” will acquire you and to your satisfaction (BTW, the last guy to get acquired gets the worst deal because he represents the smallest percentage of the market), or 3) buy yourself some time by working with a VCP until you figure out 1 or 2. The worst thing that happens to you is you pay less for a better product with less risk.

Joe was right fifteen years ago. I believe the facts support the idea the VCPs are right today. Don’t kid yourself about playing this game alone. The market is rolling and rolling fast. Your buying power has eroded. The skill sets have already become too expensive and critical, and the semiconductor market is reintegrating while you sit by and watch.

–Jack Harding is president and CEO of eSilicon.