A Veteran's EDA Outlook
posted March 19, 2006 After 23 years working in the EDA industry, it is quite difficult to walk away without imparting some words of insight on an industry that has truly helped make the electronics age ubiquitous and modernize our lives. So, from the sidelines, let me share some of my thoughts on EDA and its future, with my EDA colleagues and semiconductor customers. We've all anecdotally bemoaned at the prospect of EDA being in stagnation. Indeed, revenues have been stuck at approximately $4B per year for about five years now. And we've also all heard about the extenuating circumstances and rationalizations that have helped us convince ourselves that EDA isn't doing too badly in the face of this half-decade long semiconductor recession. However, Dataquest shows us that the EDA expenditure among semiconductor companies shrunk from 2% to 1.75%. In the overall scheme, EDA business has been losing its ground. As a result, Wall Street has lost a lot of its interest in this sector with little growth potential and a stagnant financial performance. The fact that semiconductor buyers, with their growing company revenues, have procured more EDA products at lower cost is certainly a trend that EDA needs to be very concerned about, i.e. a potential slippery slope ahead for our industry. It reveals that something is fundamentally not quite right for the EDA industry. And, if we have no desire to reverse this trend with some conscientious efforts, it will only get worse. Looking deeper, we can see several contributing factors to the degradation of EDA's value in the customer minds. First, as nanometer processes move rapidly into mainstream IC production, EDA tools have been generally behind schedule or not mature enough to meet users' needs and expectation (see EETimes 10/24/05 interview). As a result, several resourceful semiconductor companies chartered their internal CAD departments to develop in-house tools, which did work for them in several cases. Dataquest estimates that such in-house development investment increased to 27%, the highest ever since the inception of the commercial EDA industry in the early 1980s. These resourceful companies claimed to have developed only those technologies/capabilities not available from or insufficiently provided by the EDA vendors, or the interfaces to integrate various tools for more efficient internal design flows. However, it invariably took off the table the potential of a considerable new revenue source from EDA. And, this in-house charter enhanced a "we-can-do-EDA tools-ourselves" mentality among key EDA users. Secondly, the increasing influence of the large EDA companies might have stifled EDA innovation and also impacted EDA economics and growth. Large EDA companies often offered packaged deals to major accounts for deepening their account penetration. The semiconductor tool purchasers always welcomed such deals since they gained 1) much greater economic bang for their buck, and 2) more integrated flows with arrays of tools from large EDA companies, even though some tools don't work as well as the others or the third party tools. The average selling price (ASP), however, decreased substantially in all such volume purchases. When customers grew accustomed to these prices and habitually demanded such low ASPs in follow-on purchases, total EDA revenues began suffering. This trend continues today. Moreover, customers would use these higher discount rates to push other EDA vendors, including start-ups for similar prices. The result? Lower ASPs to start-ups who need to fund innovation would slow down these their company and product development. In parallel, EDA start-ups – where innovation and unique capability really get developed – had to become part of at least one large EDA vendor's design flow. Otherwise, their products usually had a hard time getting accepted by major accounts if not integrated into established design flows. Thirdly, as a corollary to the massive power of the large EDA vendors, the price slashing among competing EDA products also caused the industry's ASPs to decline. Of course, this phenomenon exists in many other industries as well. Yet, such product and price competition has injured EDA start-ups severely due to their lack of staying power and limited competitive capacity. This is where EDA's developing economic dynamics fundamentally endangers EDA. One consequence of this challenging EDA business environment is the slower growth of start-ups' business. During last four years, medium sized EDA companies with revenues between $2M and $20M were considerably fewer than those in the last decade. For a long period of time, the number of EDA start-ups stayed relatively constant. But most start-ups had, and continue to have a difficult time gaining growth momentum for five years in a row. What happens with start-ups who have to settle for lower ASPs ? Ongoing lack of market visibility, limited sales channels, short of full integration into the flows of larger EDA vendors or major foundries constitute formidable obstacles to start-ups with stand-alone products. If these start-ups cannot survive and grow in developing and supporting new nanometer EDA technologies, the delivery of certain innovative nanometer solutions to customers will assuredly also wither. Fourthly, software piracy – which results in selling unauthorized software through the internet or other channels at a fraction of its value – builds a serious threat to our industry in terms of revenue loss and IP rights violations. The EDA Consortium has been looking into this problem and it might want to find a way to identify the sources of such piracy and press them to stop proliferating EDA software or face legal charges against them in their courts of law. Such an effort needs resources and time to achieve, yet it will be more productive than each EDA company's own scrutiny and policing effort of the piracy of its products. The EDA industry can become strong and prosperous once again only if we work together constructively and do all right things as an industry. Admittedly, this will require a sea of change in EDA mentality. Since EDA's inception, we have been mired by company-provincial insularity at the cost of action to instigate the growth of the EDA market. This must change. Conducting "status-quo" EDA business will inevitably lead to industry-wide decay or very limited EDA growth at best. We already see the signs of this decay. $4B should not be EDA's total revenue ceiling and we should not accept $4B as our revenue bottleneck. It takes discipline and sacrifice among EDA companies and strong cooperation from our customers and the semiconductor foundries to build a healthy and prosperous EDA future. The key is to uphold and vigorously defend EDA's product value, even under heavy pressure from users, investors and competitors alike. Large EDA companies must take the leadership in adhere to certain pricing rules agreed among the EDA Consortium members. It is neither about price-fixing, nor cartel-decision making. Nor is it about regulatory action from the EDA Consortium. But we know that unconstrained price cutting can invariably destroy any industry and EDA is showing some of those signs. That is why product-dumping, such as memory chips selling below production cost to gain market share, is illegal. I have observed examples of sizable industries disappearing rapidly in the third world countries due mainly to ruthless cut-throat business practices. Examples include Taiwan's jade and marble product industries, which became self-destructive due to over zealous price cutting more than 10 years ago. Certain industry-wide discount guidelines that all EDA sales persons ought to abide by might be one way to retain product value and even help shorten the business closure cycle. One such example comes from the golf equipment industry. I found recently that golf club manufacturers support a uniform pricing approach. Purchasers can't get more than a standardized discount from any golf club outlets in US. A few automobile brands have also started to uphold this limited discount practice. But it's not just the EDA vendors who have to open their eyes. Semiconductor customers must start realizing that EDA is a key partner to their own success and act positively to foster such a partnership. We all know that every eco-system has its own way to stay alive and to thrive collectively and energetically. A beneficiary larger eco-system always learns to protect and assist the smaller sub-eco-systems to receive their services or products. The semiconductor users have to recognize 1) most EDA vendors' tools are vital to their electronic design productivity and 2) the challenge and high cost of developing new-generation nanometer EDA technologies, which, if compensated with a fair value will encourage more such development. Their participation in helping their EDA vendors is essential to making these technologies available sooner, continually current to meet the user needs. I experienced very positive partnerships of this nature between my previous companies and Micron, AMD, STMicro and couple of Japanese customers among others. These EDA customers/partners helped develop full product capabilities with us and integrated them step-by-step into their design flows. So what happens if EDA industry and its tools continue to be under-valued and if we allow this creeping decay to prolong into future? In the electronics high tech arena, when EDA loses, the semiconductor industry will suffer from insufficient tools to assist increasingly challenging designs. Support and productivity will decrease as users move further into the nanometer realm. There's a proverb to describe such a mutual dependence and loss: "your teeth feel cold when lips are gone." On the other hand, to win customers' trust, EDA must stay innovative and provide needed nanometer capabilities to users in a timely fashion. Unique capabilities that solve urgent problems for customers are the best way to retain EDA's value. Users are willing to pay with little discount for real solutions to their difficult problems. Nanometer SoC products have become very large, highly-complex with more and more on-chip memory and analog components, which are extremely challenging to design, verify, optimize and manufacture. EDA solutions of value include full-chip verification, ESL, DFM, DFY, power reduction, SI, mixed-signal analyses, EMI and several others. Due to their focus and diligence, EDA start-ups have a much better shot at to developing innovative nanometer products. However, they need assistance in bringing their new-generation technologies to market. Other than early funding, they can use cooperation from potential customers as well as the EDA Consortium or even large EDA companies. They are like new graduates entering a society where they can be cultivated to fulfill their potential to the society through some mentoring or assistance program. For instance, EDAC's Committee for Emergent Companies can do more mentoring than its current program of sponsoring a couple seminars in a year. Start-ups constitute a majority of the EDAC membership. They are worthy of more consortium's help. Customers, by and large, have taken the initiative at propagating their eco-system. Customer requirement specifications have been very useful for EDA start-ups to aim at as their technology and product development targets. The recent ITRS roadmap is an excellent example of the semiconductor industry specifying their needs for the future to its suppliers to guide their suppliers' development. Also, major semiconductor foundries have been actively working with EDA vendors to address DFM and DFY issues. On top of these, it is imperative that the semiconductor industry needs to reassess the EDA value and rekindle a partnership spirit with EDA. On the EDA industry side, large EDA companies need to broaden their support programs to help start-ups for the product-flow integration so that some new-generation technologies can be accepted to users more effectively. Constructive, not competitive, partnerships between large and small EDA companies may bring forth fruitful results. As a win-win EDA partnership example, my first company, EPIC, survived in 1988 with an investment by and OEM relationship with Valid Logic. At the EPIC IPO, this early investment resulted in more than 20 times financial return to Cadence (who had acquired Valid). Whether EDA will have a bright or a gloomy future depends on how all the players in the same boat work together as partners and execute with a new spirit of community and a long term vision of mutual reliance so that the total semiconductor-EDA eco-system can win and prosper together. However, the time is now fortuitous and foreboding. The decay is starting to creep in. The question for EDA is, how much do we want to cure the problem? ******************************** Editor's Note: An edited version of this essay has been published in other periodicals. This is the original version. ******************************** Dr. Sang Wang, now retired, is the former CEO of Nassda Corp. and EPIC Design Technology, Inc.
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