Make vs. Buy

How market dynamics are changing the formula for what needs to be developed internally—and what companies still need to keep in-house.

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By Ann Steffora Mutschler

The age-old question of whether to make or buy is time immemorial, and is particularly true for the cyclical semiconductor industry. At the end of the day, the answer comes down to how the decision maker feels about having or losing control.

Fifteen years ago, whether to make or buy something—be it the design, libraries, memory, implementation, verification, testing, mask set, even manufacturing—was not relevant because an alternative didn’t exist. All semiconductor companies were integrated device manufacturers (IDMs) and did everything from concept to finished product as their title implies. Chips were created by a company for their own purpose: to be put it into a system and sold in a box, whether that was a PC or a mainframe. Think IBM or Digital Equipment Corp. (DEC).

As Moore’s Law allowed for the increase of chip complexity, combined with demand for new and different products, along with other market dynamics, the fabless semiconductor industry was born. Until the mid-’90s, the majority of chips manufactured were used in data processing and computing applications. Then came the explosion in consumer-demand for technology, spawning new and varied semiconductor and systems companies to meet the needs of markets.

These changes drove the disaggregation of the IDMs and served as the genesis of the standalone EDA, capital equipment, tester, packaging, and foundry industries.

As time has moved forward, with leading-edge process technology at 40nm, it now makes increasing sense in many cases to buy some of the individual pieces in a chip. And for many companies, it is not enough to simply purchase individual pieces. They now want a third party to pull everything together. It all comes down to the numbers, said Kalar Rajendiran, senior director of marketing at eSilicon.

“In 2004, when 0.13 micron was the leading edge, a mask set probably cost $300,000. Today, the bleeding edge is 40nm and a mask set is about $1.5 million, depending on the number of layers. That is a five-fold increase in the mask set cost over five years. Leaving out really large semiconductor companies like nVidia, Broadcom, and others, who are in the billions of revenue, there are lots and lots of companies that are in the $100 million dollars or less range,” he said. “These companies have good products, but in terms of the investments they need to make in order to get a product out it could easily be $30 to $40 million to completely produce a chip from the idea all the way to fully qualified product.”

Most semiconductor companies don’t have that kind of funding in big pieces. Even in the heyday of VC funding, a semiconductor company would never get $30 million or $40 million in one chunk. “When you are doled out a few million here and there, you can’t really use that to build an entire team,” he added.

The past five years have seen complexity and costs increase so much that if you look at it just from the cost side, it is impossible for all but the largest IDMs to go it alone. That leaves the majority of semiconductor players weighing the pros and cons of outsourcing.

Brani Buric, executive vice president of marketing and sales at Virage Logic, observed that for customers the ‘make vs. buy’ decision can be broken into three categories.

First, more noticeably today than five years ago, is whether the company going to do design in-house or buy complete design services. “Five years ago I would say that the whole COTS business as a part of the fabless process was at a high,” Buric said. “What has happened in the meantime, especially as we are moving to new processes, the cost of development has become very, very high. That includes having an engineering team, having folks in-house developing IP, doing test chips, test process, paying for mask sets—every single component is going up. So the first ‘make vs. buy’ decision occurs once somebody has a spec. Do they need to do design in-house or they can find somebody who is in business of doing designs and get the design done or even get silicon back?”

Buric believes this is the driving force behind companies such as Global Unichip, eSilicon, Open-Silicon and VeriSilicon. Even traditional ASIC companies such as Texas Instruments, LSI Corp. and NEC have outsourced their manufacturing. “There is definitely a new trend where people have an idea, they have a spec, but they don’t need to implement the spec [themselves], and that is the first breaking-point decision in the ‘make vs. buy’ process that we didn’t see five years ago.

Second, if the customer believes they must do their design in-house, it would likely be in a case where they believed their spec had tremendous value that they didn’t want to share. Then, they would make the decision about what they had to build in-house vs. what they could buy or outsource.

In some cases, a company may do its own RTL design but outsource the physical implementation and the back-end implementation possibly to a company such as eSilicon or Open-Silicon. Connected to this is the choice of whether to completely own the design. The difference is basically long term and what they want to accomplish with the design. “If they believe that long-term they have a manufacturer that will give them good prices for silicon and they stay with a single source (which are typically designs that have high value beyond the cost of silicon), then they may stay with them and just say, ‘You own IP, I don’t care. My IP is in my specification,’” Buric noted.

However if the company is more price-sensitive, they may decide at the beginning to go with outsourcing and later on decide to move. For example, they may do the design and back end in-house because they are strong enough and don’t need external help. In that case, they would immediately become the owner of the IP rather than let their design services provider own the IP because that gives them independence in future decisions. That gives them the freedom to move from one foundry to another.

Third, for every single piece of IP that a company must use and decides to own, critical decision-making points concern whether that IP is available and if it is silicon-proven. “If it is available, is silicon proven and fits their needs, then in 99% of cases the decision will be to buy. If it is not silicon proven then they may think about making it. The only time when people don’t make the decision to buy is if there is no IP available or if there is no service company that has a proven track record of developing a specific IP,” Buric said.

Texas Instruments is intimately aware of the ‘make vs. buy’ decision, especially in regard to its manufacturing. Since November 2001, the company has gradually shifted all of its logic manufacturing to foundry partners – a big change for the chip giant, which at one time in its history was one of the world’s biggest IDMs, and owned everything from the wafers to the capital equipment.

However, the changes have allowed the company to remain nimble in the market. Tom Thorpe, vice president of external development and manufacturing at Texas Instruments explained, “One thing that we are really clear about at TI is that we want to maintain independence and be able to move loadings from one foundry to another based on quality, cost, delivery and service so that we can maximize our responsiveness to our customer base. The IP is a big part of that discussion because if you partner with a foundry and use IP that has been designed only for that foundry, or which that foundry has paid for, then you can’t take that IP somewhere else.”

Thorpe noted that one of the key factors in TI’s decision-making process is figuring out how to maintain independence. “We’re outsourcing a whole lot of our production, especially on the leading edge, so we have to figure out how to maintain our independence. That means you have to either do the IP yourself or contract with some firm to do it for you. And we have to pay for it. Otherwise the foundry pays for it and it’s going to lock us in. Certainly you want to have components of the IP which are owned by your company.”

A major part of that decision is what makes one company’s product different from another’s, but that differentiation changes over time. “There is always something new that you want to keep internal in order to have a competitive advantage,” Thorpe said. “Over time, whatever it is that you were keeping to yourself becomes common enough that other people start to do it and then it is no longer a competitive advantage. When that happens you might as well buy it from some third party. It’s just a natural progression. There’s nothing we can do in this industry that people don’t know about over time.”