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Confab: Chips, China good investments

Posted: 16 Jan 2006 ?? ?Print Version ?Bookmark and Share

Keywords:Nicolas Mokhoff? chip industry? Moore's Law?

The chip industry may be hard-pressed to maintain a veneer of composure this year as it struggles to meet expectations for progress on Moore's Law in changing and often cynical times. But amid the pitfalls, savvy industry investors will also spy pockets of opportunitymany of them overseas.

That was the word out of the Needham Growth Conference last week as some 400 executives from the electronics, IT and biomedical sectors sought to cast their companies' positions in the best possible light before an audience of 3,000.

Needham Group analysts see the focus of system and semiconductor design activity shifting from the United States, Japan and Europe to China and the rest of Asia (ROA) over the next decade. That should focus investors' attention on the many Chinese and other Asian fabless IC companies that are listed on the Nasdaq. Investors should also be looking at companies pursuing advanced power-management solutions based on proprietary process technology, Needham analysts said.

"We believe power-management semiconductors will remain one of the fastest-growing industry segments through 2008," analyst N. Quinn Bolton stated in his January portfolio report. He predicts the segment will advance at an 11.2 percent compound annual growth rate between 2004 and 2008, from $5.5 billion to $8.4 billion.

The semiconductor industry's transition from vertical to horizontal integrationin which participants outsource manufacturing and, increasingly, design activities to focus on their core competenciesis ushering in what Needham believes will be a five- to 10-year migration of system and semiconductor design overseas.

"In the future," Bolton said, "we believe many Asian/Chinese fabless IC houses will comfortably attain gross margins of 40 percent and net margins of 20 percentmargins few U.S. companies will be able to match, given their higher labor, accounting and legal costs."

Needham predicts chip industry growth of 8 to 9 percent this year but warns that 2006 will be a critical year for the U.S. chip industry if it is to maintain its competitive edge. Some observers said the U.S. government needs to step in with initiatives for reshaping the competitive landscape. Those moves might include incentives for companies that reinvest at home instead of abroad; beefed-up broadband legislation to bolster the U.S. effort and narrow the gap with Asia and Europe, which are ahead in deployment; and changes in immigration laws, notably the H-1B visa program, to stem the "brain drain" of foreign-born but U.S.-trained scientists and innovators back to their countries of origin.

One vocal advocate at the conference for governmental leadership in safeguarding U.S. competitiveness was small-government champion Newt Gingrich. The competitive threats posed by China are "real," the former Speaker of the House said, "and we need to thoroughly overhaul our approach to math and science education as well as transform our legal and federal institutions in order to leave a better future for our grandchildren." In a keynote address, Gingrich proposed a blueprint for realizing "a vision of the desired future."

Global transformation
The work ethic and outside-the-box thinking needed to succeed in today's borderless industry are being applied by many of the companies that presented at the conference. Needham Group Inc. primarily serves high-tech companies that fly under the radar of the large investment-banking firms, and for the third year in a row it has "managed more public-equity offerings under $200 million for tech companies than any other Wall Street firm," said chairman and CEO George Needham.

Greg Hildebrand, chief financial officer of Volterra Semiconductor Corp., told the conference that his company has taken the high road in tackling the high-performance power-management segment. "Others have solutions that are 80 percent discrete components and 20 percent integrated, while our offerings are 80 percent integrated with 20 percent discrete components. That makes them very scalable," he said.

Volterra's offerings have been designed into systems from ATI, Cisco Systems, Ericsson, Hewlett-Packard, Hitachi, IBM, Juniper, NEC and Nvidia. The company also has "the sole reference design for IBM's Cell processor design-ins," said Hildebrand.

While Volterra has found a way to integrate more functions onto its mixed-signal chips, Catalyst Semiconductor Inc. is "taking apart" integrated E2PROMs, its main product line, and providing the on-board mixed-signal building blocks as self-contained products.

"We are in our first phase of bringing out general-purpose analog and mixed-signal products based on elements [that are] part of our E2PROMs," Catalyst president and CEO Gelu Voicu told the conference. "The next phase is to come up with high-performance analog and application-specific standard products."

The company has operations in Thailand, employs 160 globally, has been profitable for seven years and claims 4,000 customers, only one of which accounts for more than 10 percent of its revenue. "E2PROMs are used everywhere and are the cash generator for our company," said Voicu. "Applications include LCD displays, digital cameras, cell phones, automotive instrumentation, modems, wireless LANs, network cards, DIMM modules, digital satellite box receivers, set-tops and Internet routers."

Innovator e-Silicon Corp. touted its success as a "general contractor" to the semiconductor industry. The company addresses what chairman, president and CEO Jack Harding called the "last unaddressed portion of the design-to-manufacturing cycle: the operations. We make money by shipping chips with our customers' name on them, by engaging in all the needed processes of chip design and fabbing the chip into production for the customer. We have 40-plus customers and are shipping 12 to 15 new products every year, and I think we have the right model for a changing custom-chip market."

Harding, a veteran who in his long career has worked at companies focused on assembly, EDA, wafer fab and design, told EE Times last winter, "I'm not a technologist. I've been fortunate to surround myself with very technically competent people. Early on, I worked in a Manhattan investment bank. Perhaps that has led me to think about the business of designing chips at a more abstract level than if I had focused just on the technology."

A focus on business will need to come more naturally to many in the global market, especially as China emerges in 2006-2007 as a competitive force in semiconductors, according to Needham. The investment firm believes that with the Olympics set for Beijing in 2008, the need to finish infrastructure for the event will drive electronics food chain spending in the 18 months leading up to the games, similar to the technology boost seen in the years preceding the Seoul, South Korea, games in 1992.

Chinese companies have the obvious advantage of proximity to many of their end markets.

Needham's "Outlook 2006" report quotes a statistic from EE Times-Asia that China locally had approximately 16,500 electronics manufacturers by the end of 2004. Many of those companies elect to use locally-designed and produced chips because of lower cost, quicker turnaround and the ability to customize design, the study found.

- Nicolas Mokhoff
EE Times

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