Travelling On The Silicon Road

An MoU was signed between Silterra and Might Meteor last week. It was basically about kicking off a training program under a wider umbrella of human capital enhancement. Being a part of the training program – and the fact that the MoU ceremony was held during the time I was there (!) – I got the opportunity to meet the top management involved from the two organizations as well as got a special guided tour of Silterra’s fab facilities.

During my various stints in the Bayan Lepas complex, I have attended a few IEEE talks too, courtesy the local IEEE chapter. These events mostly lasted no more than a couple of hours, after work, and did attract a decent size crowd – a good platform to share insights as well as network. The local Centre of Excellence in Electronics also holds regular technical talks. Different government-industry-universities consortia exist. Most of the components of a thriving semicon eco-system exist. What is missing though, especially for a country moving to high income, innovation economy is the buzz and the high energy that is usually associated with such an eco-system – making it vibrant. The one thing that intrigues me is that in spite of the ingredients, the region (Penang, Kulim) lacks any big annual semiconductor event. An event where industry/govt/academia leaders can share their insights, members of the eco-system can network, biz mapping be done etc. Neighbouring Singapore (where I am based) has regular shows like SEMICON, CommunicAsia, Electronics Fair, MIDAS Semicon Show (now SSIA semiconductor show) etc.

Would be great to have something on the above lines there….!

On a recent flight to Penang (a biz trip and not a vacation!), I was thumbing through a special edition of HBR – Essential reads for Global leaders” and came across this interesting and old HBR article “What is Strategy?” by Michel Porter. While this was published in HBR Nov-Dec 1996 issue, it reflected so much of today’s biz world, especially the hot competition amongst the smart phone and now the tablet vendors that I wanted to share it here.

First the article outlines the difference between Operational Excellence (OE) and Strategy – something that is so often confused in today’s biz arena. OE means performing similar activities better than rivals. Strategy is the creation of a unique and a valuable position, involving a different set of activities. It is creating a fit among its activities. The essence of strategy is not just of what and how to do but very much of what NOT to do.

Some statements from the article, which resonate so well in today’s market of smart phones and tablets –

“Gradually managers have let operational effectiveness supplant strategy resulting into zero-sum competition, static or declining prices ad cost pressures”

Take the example of Mediatek. By providing a cheap reference design and a complete system, it became a game changer for the shanzhai market in China. However, this was more of an OE coupled with targeting the right market. With Spreadtrum making inroads in the same space at even more competitive prices, Mediatek is now losing ground to such rivals and is tweaking its strategy.

“Competitive convergence is one reason why OE is insufficient. As rivals imitate one another’s improvements in quality, cycle times, or supplier partnerships, strategies converge and competition becomes a series of races down identical paths that no one can win”

“Strategic fit among activities is fundamental. It is harder for a rival to match an array of interlocked activities than it is merely to match a process technology or replicate a set of product features” – Now is this not exactly what Apple is doing (user experience pervades all activities within the company. Everything Apple does just re-enforces this and it has a close end-to-end system to ensure this)? The others are following it with a “me-too” approach, which can provide an explosive growth for an interim but not last long.

On approaches to preserve growth and re-enforce strategy – “One approach is to look for extensions of the strategy that leverage the existing activity system”

I look at RIM and its foray into tablets with Playbook here. RIM’s strength with its Blackberry phones has been enterprise. Analysts attribute RIM’s decreasing influence to the growing trend of CIO’s decisions on smart devices to be used by the enterprise employees as being increasingly based on what the employee uses as a consumer – thus skewing it away from the enterprise world which had always been RIM’s strength and essential to its strategy.

But then look at it from another perspective. Tablets are not just being used as a general consumer product – for the consumer to be connected. It has a tremendous potential (and is already being used thus) for enterprise productivity. RIM needs to see how to connect or rather leverage on this fit and communicate the strategy better to the customers who value this enterprise productivity.

A Tablet market report from Goldman Sachs states “The OS platform wars could drive greater hardware commoditization over time. We believe that over time the more open platform vendors may have to impose standard hardware and user interface specs on handset and tablet OEMs to ensure that software developers have a uniform installed base. This move to standardization would narrow the ability for hardware manufacturers to differentiate their technology over time and could result in hardware commoditization like that found in the traditional PC market.”

With the gaining importance of software in the Mobile Internet Devices (MIDs), hardware’s role as a differentiating factor is indeed diminishing. And with that, so do the profit margins for the chip industry incumbents. So, how are the chipset players reacting to survive, if not thrive, in this evolving market?

Qualcomm shows a recent example - “Qualcomm will give web apps a boost”.
As a part of the company’s effort to enable a shift away from today’s fragmented set of native mobile environments, it is set to release shortly a set of applications programming interfaces geared to give Web-based applications deeper links into hardware. The company already supports Android, Blackberry, Windows Phone and WebOS mobile OSes among others. A move to Web-based applications would help it reduce the variety of platforms for which it needs to write software supporting its chips.

Web vs. native apps - as the mobile usage increases, both will grow with it and become valuable factors of product road maps. The question the product strategists need to ponder upon, however, is “what does my target audience need?” While the debate of web vs. native apps is not new, it does throw some interesting options in this backdrop of looming hardware commoditization.

One option is - The chipset vendors start conforming to the standard specs set by the open platform vendors. The hardware is strongly connected to the OS platform and with a proliferation of various mobile OS in the market, it is not an easy task supporting them all or even hedging on a few. Not enticing.

But what if a chipset vendor were to make inroads into web apps and get a deep link between web apps and its native hardware through some popular browsers? it can potentially get some interesting revenues by tapping the right web apps based on their target market – and remember that web apps is an open platform – no waiting, no approval. Its success is hinged on its adoption by the user community.

Having said that, the speed comparison (of compiled vs. interpreted code/web vs. native) will be there as well as cases, especially till the near future, where native wins over web but companies are working on those too (Qualcomm has been working for two years to optimize software so that browsers run as fast as possible on its chips). What has happened to desktop apps, can also happen to native mobile apps. Hmmm…. This may be one escape route from the commoditization problem.

Setting up fabs has been a point/initiative that keeps popping in and out in the Indian semicon landscape; and has been happening ever since India’s main fab (SCL) in Mohali had a major fire in late ‘80s!
(incidentally STMicro and IME/S’pore owe a lot to that as the SCL employees moved to these and other pastures following the fire!)

As mentioned in the article, a couple of years back the fab initiative again got some major push courtesy SemIndia as well as Hindustan Semiconductor Manufacturing Corp/Infineon combo but never took off.

While there are several proponents for building semicon fabs in India, personally I am not too gung-ho about the same J, mainly because

·        India does not have the apt environment and infrastructure needed for a fab (these fabs can help a lot on the local employment scene, though)

·        Fabs are too costly to be handled by small players. I do not see the big ones entering here in India w/o being incentivized by sizeable subsidies/tax breaks from the govt.  Intel was an interested player (though I think for backend fab) but the govt. and the tech bellwether could not come to anything mutually beneficial.
·        Even if the fab comes, the technology produced is another question. Are we talking about the low end technos (how will that develop “localized content and value-addition to the Indian made electronic products”?) or the high end ones (which IDM/foundry will opt for this?)
·        With fabs increasingly being seen as only a big players’ game (or of a consortium of big players) and IDMs going fab-lite, there is not much fiscal sense in pushing for a domestic fab in India. Even strategically (long term), it is a too high cost game for new players. However, should it be for some analog process (which generically trails behind the digital ones), it may make sense – will TI be interested (it already has a big R&D set-up in India)
 

 ·       I personally see hardware morphing into a diminishing role in the electronic products – software (embedded as well as application) is growing into a differentiating niche. India can leverage its strengths in embedded design, software development and large domestic market to attract the big global players further and climb up further in the value-chain. It has already been doing so (moving from routine tasks outsourced from the global HQs to local offices to chip development and now slowly on to system development)

 Domestic fabs can spawn the right eco-system to catalyse India into a big player but right now the odds are too much stacked against it – and am not sure if the projected gains are sufficient to warrant this path….

Recently a friend mentioned about the tremendous impact on Intel from Oracle’s March 22 announcement of its discontinuing development on Itanium.

While I had known about this announcement, I had not really given it much thought from the semiconductor perspective. So when I heard this comment, I started digging up…!

A bit on the background first: Using an architecture (based on explicit instruction level parallelism - in which the compiler decides which instructions to execute in parallel; as opposed to the superscalar architectures in which the processor manages the instructions dependencies at run time) that originated at HP and was later jointly developed along with Intel, Itanium is a family of 64-bit Intel microprocessors. The architecture was formerly called IA-64.

By 2009, the chip was almost entirely deployed on servers made by HP, which had over 95% of the Itanium server market share making HP-UX the main operating system for Itanium.

Ironically, the hardware competition to Intel’s Itanium comes from a chip from its own stables – the Xeon (Intel’s response to AMD’s x86-64 Opteron in 2004) that has cranked up its market share in the server pie over the years.

In comparison with its Xeon family of server processors, Itanium has never been a high-volume product for Intel. Majority of Intel’s server business is x86 and it will in the end suffer only a token loss of revenue as a result of Oracle’s announcement. Itanium has become such a niche product for Intel that the announcement had little effect on the chipmaker’s stock - Intel shares were up .02%, to $20.15 the morning after.

Here are some figures:

In the fourth quarter 2010, both Gartner and IDC saw x86 server revenues grow more than 20 percent. According to Intel (which cites figures by IDC), revenues of Itanium-based servers was $4 billion in 2010. By contrast, x86-based server sales was around $33.3 billion in 2010. With the x86 server market being eight times larger than that of Itanium, it does not make much sense for Intel to invest into Itanium’s development. On the other hand, it also cannot simply ignore the $4B Itanium market especially with the fact that the sockets for Itanium and Xeon are NOT interchangeable – as yet. Intel shared some information and re-iterated its commitment on the Itanium roadmap this month.

Btw, Intel recently announced 2 more server makers into its Itanium roster: Huawei Technologies and Inspur – that’s a 50 per cent growth rate in the Itanium OEM base.

IC Insights revised its capex forecast last week in which they indicate that semiconductor industry capital spending is projected to grow to $60.4 billion in 2011, up 17 percent from $51.8 billion in 2010,

I had done some number chewing from the earlier (Jan) report in a previous blog. So was curious to look at the changes. Looks like a couple of big ones in this revised one from the previous (Jan ‘11) forecasts - and they are for ST and Sandisk.

ST’s is 100% (from Jan’s 750M$ to April’s 1500M$) and Sandisk’s is 77.7% (from Jan’s 900M$ to April’s 1600M$). TSMC’s % change from previous is 23.8% increase.

Sandisk had already reiterated its 2011 capex budget of $1.4-$1.6 bn in Feb’11 and IC Insights’ new table reflects that (where did the earlier figure of 900M$ come from??). ST had also announced its capex plans ($1.1 -$1.5b) in as early as late Jan ‘11 (reflected in IC Insights’ latest table)