For all intents and purposes, the downturn appears to be over. Like the California drought, it takes time to refill the reservoirs, but at least the economic base level is rising.

All of the leading indicators in the semiconductor market point upward and to the right. iSuppli reports that distributor inventories are below average, which is particularly interesting given that the electronics content of devices has been increasing steadily. It’s cheaper, after all, to design in an electronic component than to build a mechanical one, something that should become even more obvious once the automobile market begins rebounding.

That’s also evident in iSuppi’s prediction for the semiconductor equipment sector, which it expects to grow about 47% in 2010. Given the steady rise in foundry capacity utilization, that’s a strong indication of how the market is expected to play out over the next couple of years.

Overall market projections for growth on a global base seem to support this. The Economist’s economic indicators show all major economies are poised for GDP growth in 2010, with China leading the pack at 8.6% and the United States following at 2.8%. Both Europe and Japan will show slight growth, but at least it will be in positive territory. Equally important, inflation is predicted to stay well behind those numbers, as well, leading to a net positive growth across most of the world’s economic engines.

The big sticking point remains jobs. For highly skilled engineers jobs are still available, although in some cases actually taking a job may require relocation. In the case of a low-power engineer, that relocation may be to a place like Japan or Europe. In the case of an RTL engineer, it may be India or China. The recovery so far seems to have left many others stranded, waiting for companies to become comfortable enough with growth projections to begin the hiring process again.

The good news is that by this time next year it’s unlikely we’ll have time to reflect on just how nasty a global downturn can be. And that will be a very good thing, indeed.

–Ed Sperling

This year’s DAC should be one of the more interesting shows in several years, although not for the usual reasons.

As an industry, we are just emerging from one of the worst downturns in decades. It started in December 2007, and various segments of the overall economy will begin picking up at different times, depending upon whether they’re leading indicators or trailing indicators. Netbooks and cell phones are selling well. Automotive electronics continues to suffer badly. And computers are recovering, although at much lower price points than in the past.

In the case of system-level design tools, there should be a very strong demand for the best in class and those with the best integration story. New chips are far more complicated to build than in the past, which means engineers need better tools for modeling, interfaces and DFM to ensure the chips can actually be manufactured.

Missing a market window at 45nm is expensive. At 32nm it can force a company to sell off some of its assets. And at 22nm, it actually can kill a company.

Feeding into this demand for tools is the fact that most chipmakers are short on staff. Companies cut engineering jobs during the downturn, and most will try to get through the short term hiring as little full-time help as possible. That means more focus on high-level abstractions and modeling, and more contract labor at the end of the design cycle when last-minute changes are necessary to hit a market window. The big question there is whether that contract labor will be up to speed on the newest tools and methods to be able to work as effectively as in the past.

This is a pivotal time in chip design, and system-level design tools are an integral part of this transition. But so are shifts in the job market for engineers, new skill requirements and globalization. That means lots of griping, lots of uncertainty and lots of questions—and right now it doesn’t appear there will be enough answers to satisfy most people.

So if you’re attending DAC, check out what’s happening on the show floor and in the conference rooms. But make sure to listen to what’s being talked about in the hallways. That may be where the really interesting stuff happens.

–Ed Sperling

The economy appears to have hit bottom. This is good news, but there are caveats.

First of all, not all industries will recover at the same rate. Communications never fully recovered from the dot-com bubble. Anyone who bet big on a communications recovery has either switched careers or retired. Now it looks as if the auto industry will be dragging for some time, and companies that hitched their future to that wagon will be feeling pain for some time. Electric cars are still little more than a second car for the rich and plug-in hybrids are still years from mass production—and in between, no one wants to plunk down a large sum of cash unless they have to.

Second, it also doesn’t mean the economy will recover quickly or that more jobs won’t be eliminated. Jobs are a trailing indicator, and virtually everyone knows someone out of work. That tends to dampen the exuberance to spend money. But system-level design is a leading indicator, if that’s of any comfort. Jobs should return to this industry first, even if they aren’t necessarily in markets that you know or in places that you want to live.

One of the best positive markers is the stock market. It bottomed out at 6520, and it could well plummet again. But with banks paying the lowest interest rates in decades for savings, many people have started returning to the markets. They may be ahead of the overall recovery, but that money can be used to fund business deals and get the economy moving again, which starts an upward cycle again.

Second, the stimulus money will begin filtering into the economy over the next few months, as well. That will add more fuel for businesses to spend money, whether responsibly or not. But at least there will be something to work with.

None of this means the economy will recover quickly. Even if the market goes up, it can seesaw for awhile. But we are seeing some positive signs of change, including predictions from foundries of a better second half and more design exploration that will lead to the purchase of new tools, new equipment and ultimately to tapeouts. The good news is that will leave us all thinking about time-to-market issues again—instead of the markets themselves.

—Ed Sperling

The strong get stronger in a downturn for reasons that aren’t readily apparent at the outset of the slump.

First of all, contracts that are in place at the outset typically don’t get canceled—at least not at first, and frequently not at all. In the system-level design world, those contracts can last as long as 18 to 24 months. Even if the number of derivative chips is scaled back, or killed altogether, there’s a cost involved in that. More commonly, companies opt to skip a process node and live with what they have longer.

Second, many of the startup companies competing with large established players in the system-level design market are funded by private investors. Those investments are made in A, B and C rounds (there are multiple other names that mean the same thing), and the funding is often doled out over periods of two years or more.

Finally, it takes time for a slowdown to really sink in. No one knows how long a downturn will last when it begins, and they don’t know how long an upturn will last. The dot-com bubble exploded violently in 2001 largely because it went on entirely too long at an unrealistic growth pace. The current downturn is following roughly the same course, filled with uncertainty because of the effects of globalization. There was less inventory, but the supply chain is much more dispersed.

Corrections eventually lead to overreactions on the part of customers, which is where the real damage to small companies gets done. The customers of the customers who develop systems now are asking for more integrated solutions rather than just chips. They want it complete with software, integrated and fully tested IP, and it has to work within a power budget that extends well beyond the chip itself.

It’s becoming too complicated—as in time-consuming and expensive—to integrate IP blocks from different vendors. It’s also too expensive to integrate point tools, which individually may be best of breed. And it may be getting to expensive to integrate homegrown tools, despite the fact that the development on those tools is already depreciated.

All of these changes take time to unfold. Market shifts are measured in years rather than months. You don’t starting looking to save pennies at first. You start with those places where you can save dollars and the lowest-hanging, most visible opportunities. IDMs outsourcing their production to foundries was an easy choice. Skipping process nodes was another. But now the focus is shifting to tools.

The first signal that something was amiss was when exit strategies for startups migrated from IPOs to acquisitions by large companies. That dramatically weakened their leverage to cash out at a premium. The next step was a sharp reduction in VC capital flowing into the ESL tools market, because with no easy exit the return on investment was far riskier. Following that came a cut in the amount of money available to EDA and ESL startups, because there was no reason to fund massive infrastructure if the companies weren’t going public.

Finally, with investments now considered riskier, venture money is shifting to lower-cost geographies such as China where the amount of startup capital needed is even lower. While labor costs are rising, it still costs less to hire engineers in China than in the United States, and a half-dozen engineers in China led by a U.S.-trained manager is much less of a financial risk than trying to build a company in Silicon Valley. It’s also much cheaper for a large company to buy an offshore startup or their IP and integrate it into their tools suite.

Add all of this together and the strong become even stronger. Downturns work in their favor because it costs even less money to add new tools or expertise. It remains to be seen whether an uptick in the market, probably beginning in the second half of this year, reverses this trend. But just as it took time to get to this point, it will take months if not years to figure out if it’s reversible.

–Ed Sperling

First off, let me say at the outset of this column that I’m a fan of intelligent globalization. My understanding of what turned the 1929 market crash into a depression was protectionism under Smoot-Hawley. That point has been argued back and forth repeatedly, and I weigh in on the side that it was bad.

Now that I’ve made clear my vantage point, I’m hearing a lot of complaints from engineers these days that too many jobs are disappearing to Asia and that companies are only using H1-B visas to cut more expensive jobs and replace them with lower-paying jobs.

Let’s take a look at several scenarios—and I welcome your comments because I don’t pretend to have all the answers—and examine some consequences.

·      The U.S. government does nothing. The problem is that total inaction on the part of the federal government has been shown to be disastrous. In 1837, and again in 1839, president Martin Van Buren sided with the camp that no action by the federal government to control the successive panics was the right approach. Van Buren became known as Martin Van Ruin and the downturn lasted until 1845, which was the longest downturn in the history of the United States. What eventually brought the U.S. out of the Great Depression in 1929—a misnomer in comparison to the Panic of 1839—was federal government involvement and debt financing. So the government has to do something—but what?

·      The government can create protectionist barriers. That reduces overall sales while increasing inflation because the price of manufacturing domestically is higher than internationally. Offering subsidies and rebates is the same thing in reverse, which virtually every major economy does for industries it believes it needs to be strong. China did that with its foundries and design houses; the United States does that for solar energy companies and everything Green. Canada does it for farmers. Subsidies are much harder to measure than tariffs, however, and often fall under the radar of market watchers. But in real terms they’re basically the same thing. The problem for electronics companies in the United States is they don’t get subsidies, while in other countries they frequently do—sometimes in the way of cheap land or utilities or low taxes for 50 years. In a global economy, the field needs to be level. Otherwise, it needs to be explained loudly and clearly that you can’t do business with a country until they clean up their act.

·      H1-B visas are a blessing and a curse, and the blame for the latter can be split among lots of different groups. Companies are complaining they’re not getting enough expertise in the United States, so they have to either hire more foreign students or go overseas. There is some truth to that. Part of it is also disingenuous. If engineering and science were billed as the only way to solve global warming and save the planet—and they are, short of everyone giving up their cars, televisions, cell phones, etc.—then we’d have no shortage of students pounding on the doors of universities. This is a major shortcoming of both universities and teachers in k-12, and it’s something that needs to be driven by electronics companies and politicians. At the same time, if we extended more visas for foreign students, we’d have plenty of them sticking around and adding something to our melting pot of ideas—and enough to tide us over until the numbers rise in the schools.

Each of these problems is more complicated than anyone can comprehend, and there are many sides to each of them. But tough times demand well-understood solutions, and knee-jerk reactions are bad for business in the short term and the long term.

What do you think?

–Ed Sperling