Continuing the trend by electronic component distributors to roll out fee-based services, Arrow Electronics Inc. and Avnet Inc. are quietly introducing separate ASIC design programs targeting an emerging class of IC start-up, EBN has learned.
Under their respective initiatives, Arrow Engineering and Design Services and Avnet Design Services will each license and resell intellectual property cores using LSI Logic Corp.'s design methodology and manufacturing processes.
The aim is to match OEMs with small and midsize semiconductor start-ups that require third-party ASIC design expertise, start-ups which, because they have few or no IP cores of their own, are sometimes referred to as "chipless" companies.
The distributors said separately that they expect to provide design services and facilitate production in cooperation with LSI Logic's Foundry Services group. For LSI Logic, the program allows the company-through an exclusive arrangement with i ts distribution partners-to target a growing business segment composed mostly of small companies that lack the IP to get their designs to market.
"Sometimes the suppliers need help on chip development," said MaryBeth Rotermund, senior director of marketing operations for distribution at LSI Logic, Milpitas, Calif. "These distributors are an extension of our engineering team with the ability to reach suppliers and OEMs otherwise unreachable by LSI Logic. We can't serve every company. There are never enough engineering resources."
With profit margins for traditional distribution functions on the decline, top-tier distributors increasingly are relying on value-added OEM services to bolster their bottom lines. The latest moves mark yet another shift, as Arrow and Avnet extend these services into the semiconductor supply chain.
"In the past, almost 100% of our LSI Logic ASIC engagements were OEM customers, but that has changed dramatically in the last two years," said Jim Schaeffer, senior vice presid ent of Avnet Design Services, Phoenix. "The customers that have been coming to us for services [now] are a mix of suppliers or OEMs that might build end equipment and need assistance with ASIC design."
Better than the average
Venture funding has fallen off across most electronics sectors in the past year, but fabless chip companies have fared comparatively well. VC funds to fabless start-ups totaled $2.6 billion in 2000 and $2.5 billion in 2001, according to the Fabless Semiconductor Association. The FSA also found that VCs completed 156 funding rounds with fabless companies in 2000, and said that number actually rose last year to 162.
By working within the channel, small start-ups with lean budgets are able to access LSI Logic's extensive IP library, improving time-to-market and affording them a better chance of jumping ahead of existing technologies, according to observers. In return, Arrow and Avnet hope their OEM and EMS customers will view the distributors as a main avenue for ident ifying new product solutions.
Moreover, the IP distribution model could enable the two to garner gross margins between 30% and 50%, analysts said, compared with the low teens for more conventional distribution functions.
"The model Arrow and Avnet are suggesting could add a lot of value to the emerging [chipless] market segment that has unique needs, though it's relatively small in scope," said Robert C. Damron, an analyst at SWS Securities Inc., Milwaukee. "It potentially brings Arrow and Avnet more business as design companies, as they continue to move past just being distributors.
"Their goal is to become more integrated in the supply chain by offering an array of value-added services. Increased opportunities to sell engineering services will make them stronger companies," Damron said.
Under their programs, Arrow and Avnet will serve as surrogate design houses and use LSI Logic's foundry partners-Taiwan Semiconductor Manufacturing, Chartered Semiconductor, and Silterra-to make the chips.
"Think of Arrow Design Services as LSI Logic's outsourcing arm. They are like our foundry," said Michael White, director of ASIC design engineering for Arrow, Melville, N.Y. "Arrow had planned to shy away from start-up fabless semiconductor companies due to the risk involved. However, the new fee-for-service offering would mitigate some of the risks and allow us to engage with more fabless start-ups."
This is not the first time that LSI Logic has entertained such a business plan. In 1999, the company and Avnet flirted with the idea but pulled back over conerns that its design methodology and manufacturing processes could be used by its distribution partner to solicit business from other ASIC vendors. The exclusive nature of the new plan is designed to prevent that, although for small companies that prefer FPGA-based designs, Avnet said it will also distribute code from FPGA house Xilinx Inc.
For LSI Logic, the deals with Arrow and Avnet are also a recognition of h ow far distributors have come in the past few years in their ability to offer advanced engineering.
"We've enabled the distributors to do more of the design process, so they can engage and support customers and hand off the [finished] designs to us," said Richard Brossart, LSI Logic's director of marketing for ASIC technology. "Hopefully, this means more designs into our fabs and the fabs of our strategic partners to drive production revenue."