Skin in the game
08/01/2007
The semiconductor industry continues to promise greater rewards, with compound annual growth rates forecasted to be in the high single digits for many years to come. But many companies will not be able to survive the growing risks inherent in the industry’s new economic reality-characterized by rising fab costs, greater market fragmentation, smaller product volumes, shorter product lifecycles, and ongoing business fluctuations-unless they form new manufacturing alliances, similar to the partnerships that have proven successful in the R&D realm. “Manufacturers can no longer afford to play alone,” concluded NXP CEO Ajit Manocha in his keynote address at PennWell’s recent ConFab event, a meeting of key semiconductor industry decision-makers.
While touting NXP’s “asset-lite” model with foundry partner TSMC, Manocha predicted that such partnerships will evolve into a multitude of heterogeneous manufacturing alliances encompassing any combination of IDMs, fabless companies, materials and equipment suppliers, private equity firms, EDA houses, assembly and test facilities, and other entities in the supply chain. “It’s time for a shift in the manufacturing model to bring together different elements,” he asserted. “If you share the risks, the results can be highly rewarding for all members.”
But what are the most effective ways to nurture such partnerships? In a panel discussion titled “How to manage successful manufacturing alliances,” also held during The ConFab, experts from TI, Spansion, KLA-Tencor, and a range of chipmakers and suppliers in attendance shared some of the following secrets to success that they have learned from their most recent partnerships:
Put your partner first: Applied Materials Chairman Jim Morgan’s first rule of successful partnerships is to take care of your partner before taking care of yourself. Some alliance members may make proposals that would be advantageous to their companies, but it’s critical for them to think through how these ideas would also benefit the other partners.
Manage expectations: The biggest cause of alliance derailment is when one company feels that another is not contributing its share of the work or is reaping too great a portion of the rewards. Either scenario usually results from a failure to set appropriate expectations initially and throughout the relationship. No one should expect contributions beyond the capability of any given partner. And while a win-win outcome for each player is important, one should not expect that everyone will win equally, but rather that there will be a non-zero sum gain by which all players improve.
Start small: A partnership needs time to develop. Start simple and establish an early win for all parties in order to gain their confidence before moving onto more risky and grandiose projects. As projects increase in size and complexity, implement more rigorous business processes to run the alliance as if it were your own company.
Prevent IP leakage: If everyone is walking around carrying a copy of the contract, then the partnership is probably going to fail. But engineers love to talk, so it’s essential to ensure that the information transmitted and received is specific to the alliance and that there is a central authority available to both management and engineering groups to clarify what is included in the agreement.
Focus on yield: The key to profitability is yield. According to KLA-Tencor, in one of its recent alliances with a logic customer, the partners were able to reduce the development time required to achieve 20% yield from 12 months to nine months, which resulted in a savings of $150 million. They were then able to ramp to 20%-50% yield two months faster than expected, for a savings of $200 million. And they reached production at 50%-80% yield nine months sooner than planned, for an additional $120 million in savings, plus a 10% higher overall yield.
Have an exit strategy: Every party must be able to walk away from a partnership when the stakes become too high or if one entity becomes captive by another. Companies should also have insurance in place, especially if the downside is steep, in the event that circumstances slip beyond the control of any of the partners.
Beyond these tenets, other lessons learned were that partners must gain sponsorship and regular participation from the highest possible levels of management; have the freedom to remain competitive in their given fields; and continually adapt the alliance to cope with changing technologies and market conditions. Yet, perhaps the most universally accepted advice of all was that each player must have “skin in the game.” Indeed, the more each partner contributes something of value, and the more that each partner’s profitability depends on the results of the alliance, the greater the likelihood of success.
Phil LoPiccolo
Editor-in-chief