By Ed Sperling

In the midst of the longest and deepest downturn since the invention of the transistor, not everyone is doing badly. In fact, there are some bright spots across the electronics industry that seem to defy gravity, so to speak.

In particular, design tools are doing well. When the industry is down, they’re typically down less because, as any successful executive in technology will tell you, the only way out of a recession is to design your way out. If the recession ends and there are no new designs ready for the rebound, that could be a career-limiting move at best. At worst, it can kill a company.

This is reflected in sales of EDA and other design tools. While the industry overall is down, some companies are posting record growth.

Synopsys, for one, saw its Q4 revenues rise by 11.9 percent. It expects to post year-over-year growth for the current quarter, as well, according to published statements. Mentor Graphics, while reporting some slippage in revenues due to delays in contract renewals, said the company is extremely well positioned heading into 2010.

In the virtual prototyping market, Carbon Design Systems posted 87% year-over-year growth for 2008 versus 2007, and 108% revenue growth. While that kind of growth is remarkable even in good times, it’s particularly noteworthy in a downturn that began in December 2007. Rick Lucier, Carbon’s president and CEO, said in a statement that he is confident that growth will continue based upon support from the IP community.

In the high-level synthesis world, Forte Design Systems posted 30% growth in Q4 and finishing off 2008 with a record year in terms of revenue and bookings.

In the embedded world, some areas are at least showing a pulse. Designs are under way in the retail point of sale market, signage and the medical electronics fields and third-party vendors anticipate these segments will be out of the recession relatively early.

Intel’s commitment to invest $7 billion in new fabs in the United States also is likely to stir up some business in areas such as capital equipment, EDA tools and the IP market.

And at least one investment banking firm has raised its opinion of chip stocks. In his blog in Seeking Alpha, Eric Savitz astutely noted that UBS has suddenly turned bullish on chip stocks, upgrading a slew of them. Given the fact that the market has been diving lately, that may seem like a stretch. But with banks lowering interest rates on short- and mid-term CDs, coupled with the likely design activity that will begin to bear fruit later this year, it doesn’t look like such an odd shift.

By Ed Sperling

San Jose, Calif.—Jan. 15, 2008—The EDA Consortium’s annual forecast meeting this year was focused on just how deep and how long the recession will go—to the point where the panelists actually polled the audience on their thoughts.

The overriding opinion among attendees was that the downturn would be long and deep, with a second group believing it would be long but short. Considering the recession already has dragged on for 13 months, and the longest two downturns in the past 40 years were 16 months, it’s hard to imagine it going short. Only the Great Depression was longer. It lasted for 43 months.

For the EDA world, in particular, the downturn will be significant but not debilitating. Wally Rhines, Mentor Graphics’ chairman and CEO, said the EDA industry will likely post a loss of 8 percent in 2009, based upon the impact of the overall economy and the way revenue is being recognized. It will be only the fourth time that EDA has posted negative growth, and the only time it has occurred in two consecutive years. The industry had negative growth in 2000 and 2003, as well.

In the meantime, he noted that semiconductor R&D growth has only been down once since 1980, which was the year 2001. The difference that time was the huge inventory surplus. There is none this time, and while that doesn’t lessen the impact from customer buying it should make for a quicker recovery.

When that recovery will occur in earnest is anyone’s guess, however. Aart de Geus, EDAC’s chairman, as well as chairman and CEO of Synopsys, said the downturn will accelerate all trends that have occurred so far in the industry, including the push to a fabless model and changes in R&D.

“Electronics is among the most protected sector,” de Geus said. “Obama and his team will go high tech. Science is coming back to the White House.”

And even in the down numbers, some sectors will do well. Chris Rowen, founder and CTO of Tensilica, said differentiation still brings a premium, although these days it has to happen within a constrained budget. He noted that bright spots in the mix were mixed signal and analog signal processing. Those areas continue to see double-digit growth even as the rest of the industry shows problems.

But as the industry does come back to life, it may be a different world that it returns to. Rajeev Madhavan, chairman and CEO of Magma, said the PC market may not be a major source of chip revenue in the future because of a shift there from PCs to handheld devices. At the same time, he said the move to electric vehicles and Green everything will be a huge opportunity for EDA.

“There will be a change in customers and a change in chips,” Madhavan said, noting that not all companies will survive the downturn. “The challenge in the short term is that companies will have to be profitable with a limited number of customers.”

Independent investor Jim Hogan talks about where the real value is and what companies need to do to survive in a changing market.

By Ed Sperling

In the chip world it’s beginning to look like the erosion of the middle class, or at least the middle tier.

The bulk of companies working in the semiconductor industry—from design to development—have annual revenues of either less than $10 million (26.2%) or more than $500 million (25.4%). The number between $10 million and $100 million is only 12.8%, while the number between $100 million and $500 million is only 8.8 percent.

These numbers reflect several important trends in the chip design world. First, there are far fewer IPOs than in the past, making the exit strategy for investors less clear cut. That, in turn, limits the number of new companies being started, particularly in the United States, Europe and Japan.

Second, companies that do achieve enough mass to hit the radar screen—usually with successful products and unique technologies—often become acquisition targets for larger companies. These acquisitions are not always amicable, though, which has made integration and assimilation much more problematic than simply acquiring a technology or a technology team and developing technology in-house.

Third, the table stakes for getting into the system-level design world are much higher than in the past. Technology is more complex, and often it is the integration of more than one piece that makes it attractive to potential customers. While chip chip design and development always seems complex compared with what came before—everything from lithography to substrate materials, packaging, gate design and tradeoffs between power and performance—solving these issues can no longer be done serially. Architects can no longer just pass the concept to the designers, who in turn pass it along to the developers and verification engineers, and then pass it along to the software coders.

Finally, despite the perpetual development of new technology, the chip design world is maturing. That is marked by relatively stable single-digit growth by companies in good times, and fewer entrants into a market. While the industry is still viable, with enormous opportunities for players in the industry, the number of companies entering the field will be limited until there is a radical shift in technology, which usually happens when something is broken or there is a huge demand for new technology.

The data also shows that the bulk of the pre-design activity was done by the design engineers, who accounted for 44.6% of all work. Engineering and executive management entered into 20.1% of all decisions, a reflection of how much money it now costs to develop a new chip.

The numbers are down, but the outlook isn’t all negative. George Scalise, Semiconductor Industry Association president, said the political change in Washington will open all sorts of opportunities—and quickly—for massive changes that affect this industry.

One the numbers side, Scalise said there is a sharp difference between the 2001 downturn and the current one. In 2001, the industry dropped from a $200 billion run rate to $140 billion almost overnight, and inventories were enormous due to double ordering. In 2009, he expects the industry’s sales to drop 5.6 percent, with gains of 7.4 percent in 2010 and 7.5 percent in 2011.

“That’s reasonable, assuming this crisis gets solved,” he said. “There’s a high risk to make projections at this stage.”

On a global basis, there is still growth in China (9 percent) and India (7 percent), and positive growth in both Brazil and Russia.

But the real positive news comes from the incoming Obama administration, said Frank Kelly, Deutsche Bank’s managing director and head of government affairs for the Americas. Kelly said the current balance in Congress between Democrats, moderate Republicans and still undecided U.S. Senate seats means action will be taken very swiftly in Washington in areas such as the bailout, tax reform, immigration reform, trade and the direct investment policy and Green investments.

“This is tech’s time in Washington,” he said.

–Ed Sperling