Chip Vendors Find System Coverage Helps Bottom Line
By John Blyler
Today’s newspapers and websites are cluttered with companies reporting increased revenues on lower sales. Simply put, this means that companies have laid off employees and cut other costs in order to show a profit. One big result of these cutbacks in workers, which this time included engineers and sometimes entire design teams, is that companies will have fewer resources to bring new products to market or to maintain existing product lines.
Such cuts may save the company money in the short term, but they may also limit what the company can do in the future. One interesting effect is to shift the task of product development further up the market supply chain. If an original equipment manufacturer (OEM) in the electronics market has cut its design team, it may mean the chip supplier to the OEM must now pick up the task of actually manufacturing their portion of the end-product.
While this is hardly a new trend, the recent downturn has accelerated it. Consider the case of Stretch, a fabless chip company that provides video surveillance and digital video recorder chips and add-in reference board designs to large end-product manufacturers. In the past, Stretch’s big focus was on developing complex video algorithm systems and associated intellectual property (IP) for the growing video surveillance market. Board-level reference designs for its chips were provided as matter of business, an essential but complementary part of its main business.
Today, however, Stretch’s OEM customers – the makers of commercial video surveillance equipment and video recording devices – are asking for a lot more. They now want Stretch to turn its board-level reference designs, which are basically prototypes, into high volume, manufacturability subsystem which the OEM will then incorporate into their larger end product.
Many start-up companies have been caught off guard by their customer’s requests to create the manufacturing ecosystem necessary for volume production of reference board designs. Bob Beachler, Stretch’s vice president of marketing, operations and systems design, explains that most start-up companies expect their customers to take the reference design, modify them as needed for product differentiation and then manufacture the modified designs themselves. Today, though, many of these same customers are asking the startup chip supplier to use the reference design as is and manufacture these designs in volume for the OEM.
What has this meant for a start-up like Stretch? “We’ve had to invest time – not really add more manpower – to find the right contract manufacturers to build the reference design board,” Beachler said. It has also meant that the chip company had to do all of the qualification (EMI) and environmental (shake-rattle-roll) testing, plus the defect screening. He confirmed that Stretch doesn’t do the actual manufacturing. That task has been outsourced to two firms in China. But the board-level manufacturing portion of the business has grown to become half of the company’s total business while the other half is surveillance chips—the place this all started.
This trend won’t work for every business. It seems to work best for well-defined products and markets, where form factors of the boards (add-in cards) and functionality are standard. Beachler said that two pioneers of this approach are Intel in the CPU and CPU motherboard market, and nVidia in the graphics card space. Both of these companies were primarily chip companies that expanded to include a system-level (printed circuit board) business.
Both companies now do substantial volumes in board-level manufacturing, even though they have an ecosystem of other manufacturers that make similar products. For example, Intel produces several slightly different motherboards for a given chipset. But companies like Asus, Gigabyte, MSI and others take Intel’s basic reference designs and customize them to produce a wide variety of mother boards. Such supply-chain companies then sell these boards in volumes that far outstrip the Intel’s versions.
The trend toward more complete system solutions within the semiconductor and board-level supply chains is nothing new. What is new is the disappearance of design teams within some of the OEMs. That is a development that is being watched closely by many within the chip design industry.
