Here it is,
“Tower can’t compete”
eSilicon's Jack Harding: In ten years there’ll be only ten semiconductor manufacturers; the rest will be fabless.
Hadas Manor 3 Nov 05 19:36
US fabless semiconductor company eSilicon Corporation has set up a branch in Israel to operate in the local market. eSilicon became famous in the industry thanks in part to the design of application-specific integrated circuits (ASIC) for Apple Computer’s (Nasdaq:AAPL) iPOD, which is hot now. eSilicon representative in Israel is Shai Mor, a co-founder of Zoran Corporation (Nasdaq: ZRAN) and VP at DSP Corporation.
In his first interview with an Israeli newspaper, eSilicon chairman, president and CEO Jack Harding, who is visiting Israel, said, “Silicon Valley knows that Israel is the Silicon Valley of the Middle East, and is a center of innovation. Israel has recovered quickly from the collapse of high-tech four years ago. With 25 years experience, Israel is an excellent market for technological entrepreneurship.”
Founded in 2000, eSilicon is a new fabless company in the ASIC field. It designs and produces processors according to the specifications of leading electronics companies. In effect, eSilicon is their organizing arm: it develops or buys technology, and finds the optimal manufacturing sites in order to bring to market the product at the best price as quickly as possible.
The goal of eSilicon’s team of design and manufacturing experts is to ensure a processor’s success in its first manufacturing run, thereby shortening the time-to-market of products based on the processor. “The goal,” says Harding, “is achievable… deliveries of new processors are fast and cost-effective.”
eSilicon’s activities model is based on a concept that is rapidly gaining adherents in the semiconductor industry that of a fabless company that integrates design components of processor sections, each of which comes from a different source, and are classified as intellectual property, in order to build new processors very quickly. For example, one company develops a communications interface, another the processing engine, and a third the memory management system. An integrator like eSilicon collects these design components, converts them into detailed designs on a single processor, which it sends to an external manufacture under its supervision. eSilicon is targeting the international ASIC market, estimated at $10 billion a year, especially fablesss semiconductor companies and original equipment manufacturers (OEMs) for a broad range of products.
eSilicon’s customer range from start-ups to giants such as Microsoft (Nasdaq:MSFT), and Eastman Kodak (NYSE:EK). Applications include music players and digital cameras, printers, household routers, communications processing engines for rerouting traffic from central processors, subprocessors for security, and next-generation storage networks.
Harding says, “When we met with the staff of PortalPlayer Inc. (Nasdaq:PLAY) (the manufacturer of the processor for Apple’s iPOD) in 2001, it was a year-old company with a great idea. We had effective technology for making the processors. They put the idea into practice 18 months ago. Their success also boosted our growth. Without our help, they wouldn't have gotten to market so quickly, and presented a successful consumer product that set the current trend in sound.”
Following PortalPlayer’s success, many new companies in the US contacted eSilicon, and it achieved 7,000% growth in four years (400% a year). “Inc. Magazine” ranked eSilicon third in its 500 fastest growing private companies in the US rankings for 2005. It had $1.3 million in sales in 2001, and posted a profit on $91 million in sales in 2004.
Although eSilicon mainly operates as an integrator, whose business model is a contractor in the ASIC sector, it also has proprietary technologies in two fields: shrinking processor size, while lowering production costs; and increasing the capacity of each silicon wafer, giving its customers a significant economic edge.
“Globes”: Why do you work with fabless companies?
Harding: “The microelectronics world is adopting the fabless concept. This saves product manufacturers the need to build independent development systems and factories at immense cost. We’re a portal for companies with limited access to technology, reduce their risk, and develop markets for them. The trend of using fablesss semiconductor companies like eSilicon is expanding worldwide. The semiconductor industry is so complex that only large companies that move fast can compete. Small fablesss companies have no chance of competing without entities like eSilicon, whose business models, marketing chain, and technology can bring them to market in minimum time.”
Tower Semiconductor isn’t enough
Why are you visiting Israel now?
“We’re a new company. Our main investors are the venture capital funds of large financial companies, including the Fremont Group (which owns Bechtel Corporation, a contractor company active in Iraq and South America). Fremont Group has global interests, as well as a venture capital arm, Fremont Ventures. Another investor is Sweden’s Investor AB, owned by the Wallenberg family. These investors suit us, because they have a global perspective for our activities. Our strategy was to rely on the US market, but we began expanding internationally a year ago. We’ve opened offices in Japan, the UK, and in Israel.”
Will you cooperate with Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE:TSEM)?
“We can’t buy from Tower. We examined it as a supplier, but we didn’t buy from them because the processors we work with have complex technologies that Tower can’t provide. I’m sure that their technology will advance, and they will sell to us and our customers, but that will take several years.”
When Harding compares fabless and fab semiconductor companies, he says that only companies like IBM (NYSE:IBM), Intel (Nasdaq:INTC), Samsung Electronics Co. Ltd. (KSE:5930), and Toshiba (TSE:6502; LSE:TOS; XETRA, AEX, Paris:TSBA) can justify the investment in new fabs and make a return on the investment. “The market for companies that can justify the huge investment to build a new semiconductor fab is shrinking. Fablesss companies are the future,” he says.
“The fab model is under great global pressure, partly because of competition from China, whose infrastructure costs cannot be competed against by other companies in the world. Since the situation won’t change, successful companies in the industry will be those offering advanced technologies without fabs.”
What about Tower? Can it compete in this market?
“I’m not sure that Tower offers unique differentiation and technology, and it cannot compete on cost or price. Therefore, unless it has an edge, its developments will lag far behind. Local geography is no longer a competitive advantage in the semiconductor market. It doesn’t matter to a buyer where the processors are made. It wants processors with the right technology at the lowest cost. Our customers in Israel have almost no domestic sales; everything is for export. We offer 130-nanometer technology processors, while Tower works with 180-nanometer technology, and our customers no longer work with that technology. Some customers already use 90-nanometer technology.
“Tower will have to invest hundreds of millions of dollars to make the jump to the new technology, a massive investment for a company struggling for financial survival. To be fair, most the world’s demand is for 0.18-micron (180 nanometer) technology. But Tower’s competitors in Taiwan and China are offering bargain-basement prices, so it’s hard for Tower to compete in price for 0.18-micron technology processors.
“This industry is already two generations ahead of Tower. Although Tower’s executives say they already have 0.13-micron technology, it will take them several years to get it to market.”
This is why eSilicon does not compete in the mass market in which only low-cost companies will be able to compete in the future. “Our customers say that the most important thing for them is price, provided that they get the most suitable technology,” says Harding.
In addition to branches in Japan, Romania and Israel, eSilicon has three centers in North America and its headquarters in California. The new Israeli office offers companies processors, sales support, and help in opening international markets, as well assistance from its team of engineers who at present come from the company’s Romanian branch, which supports customers in Europe and the Middle East. The idea is that customers design the processor’s configuration, and eSilicon implements the technology.
Harding believes that, because of the complexity involved in developing processors for Israeli companies, within a year eSilicon will employ a team of Israeli engineers and development staff. The company’s business in Israel is small at this time. Contracts have been signed, but deliveries will take another year. In five years, 10% of eSilicon’s business will be with Israeli companies. “I’m optimistic about developments in the Israeli market, because it has the combination of entrepreneurial edge and geographical disadvantage, in other words, there are no suppliers in your area. I believe that we’ll create a combination between Israeli companies that are good in finding customers, and ourselves, who excel in finding suppliers and technology.”
Do you plan to go public?
“eSilicon is planning to hold an IPO in a year or two. Our goal was an IPO from the beginning, but the US standards for floating a company are constantly rising: turnover of $100 million, strong profits, and the ability to project growth over the coming years. In addition, the Sarbanes-Oxley Act, which also affects Israeli companies planning to hold IPOs, makes going public more complex and expensive. We’re therefore waiting until we become big and profitable, so an IPO won’t affect the company’s development.”
eSilicon offers its customers several types of communications, including an Internet monitoring system for design and manufacturing processes and 24-hour supervision of the chain of supply. It targets all processor consumers, including in the consumer products markets, one of the fastest growing sectors in the semiconductor industry, and one that undergoes rapid change. This market includes digital photography, camera-equipped handsets, printers with enhanced color capabilities, the ability to supply high-capacity processors able to provide high-resolution pictures and digital signal processing (DSP). There are also memory control processors for increasing the number of megapixels.
In the telecommunications sector, eSilicon helps customers achieve complex processors that support multiple speeds and communications standards. It has also grown thanks to rising demand for processors for the security market, designed to handle the rising threat from viruses, malicious software, and network invasions. The main demand here is for processors with servers and routers that also reduce encryption processing traffic from the main processors. These ASICs can also check data, and some can also support applications themselves.
Harding predicts that within ten years, “complexity and costs will so great that only ten semiconductor conductor companies in the world will equal the value of their fabs, compared with 60 today (of which 35 are in the Far East). This means that all the companies in the industry will be fabless. As the manufacture of processors becomes more complex, our business will grow, and we’ll close the gap between entrepreneurs and their ability to produce in the global reality.”
Published by Globes [online], Israel business news - www.globes.co.il - on November 3, 2005
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