Cracks on the Chip

Indian IC design and service houses are not a happy lot. As badly as they
need Electronic Design Automation (EDA) tools, they feel that the high cost of
tools and pricing policies of EDA vendors is seriously affecting their ability
to compete with foreign firms. And this is causing "some amount of
friction" between the EDA vendors and the local IC outfits.

IC designers use EDA tools to create a high-level logical description of the
desired performance of a chip. They are then used to translate that description
into a detailed physical map of the silicon wafer’s surface, showing where
individual transistors should be placed and how they should be interconnected.

"The
Indian semiconductor design sector invests a lot on design automation tools.
However, they are 40-50% more expensive to procure in India than in the US and
most other countries. This seriously reduces the cost competitiveness of Indian
IC design houses," says Shyam Kodavarthi, General Manager, Product
Development at Sasken, a leading Indian IC design house.

This has been causing serious skews in the market in all sorts of ways —
from the way prices are agreed upon to the excessively complex business models
local chip design companies are forced to adopt.

Complex business models

"In terms of people and talent, we are as good as Silicon valley and a
lot more cost-effective. But the cost of purchasing the tools negates any cost
advantage we have. Result — we often end up doing complicated things like
asking our customer to buy the tools that we then use over a VPN (Virtual
Private Network). Not all customers like that and we tend to lose business
because of it," says Kodavarthi. Despite this Sasken invests up to a
million dollars annually on EDA tools alone.

Tata Elxsi that also has significant investments in IC service design faces
similar problems. According to A Krishna Bhagavan, the company’s general
manager & head of operations, licensing these tools instead of buying them
outright can be more cost effective. But there are downsides to licensing.

"The tools’ resources cannot be shared with clients. This brings the
net competitive advantage back to zero," says Bhagavan.

"Plus, our inability to have more engineers trained due to rationing of
licenses is another inhibitive factor." Tata Elxsi also invests $1 to $1.5
million per year using a mix of methods–including outright purchase,
short-term leases, and licenses.

Companies in the IC design or services space adopt different models for EDA
tool use depending on the budgets and how extensively they use them. The cost of
these tools can differ when hired on an hourly basis (which is the most
expensive), a short-term lease for three to four months, annual licenses (most
cost effective) or a perpetual license with Annual Maintenance Contracts (AMCs).

In addition, it’s a bargainer’s business. "We start bargaining at a
price differential of around 70% and depending on the relationship with the EDA
tool vendor, we end up at 40-50% of the price originally stated," says
Kodavarthi.

The volumes game

Indian IC design houses feel that EDA vendors charge unfairly by the volumes—
the more the IC houses buy, the lesser the prices.

"It is well known in the US that Cadence and Synopsys together control
more than 50% of the EDA tool market. They control the EDA market and hence have
different pricing for different clients. They have flexible business models
depending on scales of businesses. They have a published list price for the
smaller guys and bigger ones bargain really hard," says an industry veteran
who did not want to be named.

Tata Elxsi’s Bhagavan agrees that volumes plays a critical role in EDA tool
pricing. "Most customers in the US buy in volume as they standardize as per
company requirement. As for service providers, such as ourselves, we cannot
standardize since we cater to individual client requirements. We need to have
multiple vendor installations. Volume plays a very crucial role here," says
Bhagavan.

The EDA companies on the other hand claim that it is business sense to charge
clients by the volumes.

"The more volumes the client is ready to commit, the more we are willing
to cut the prices. That’s the way most businesses work and EDA tools are no
exception. What we are not open to is a completely open ended revenue
model," says Dr Pradip Dutta, Managing Director of Synopsys, the second
largest EDA vendor globally.

Despite that, the problem of high tool pricing is very real for Indian IC
design houses–embarrassing explanations to clients, lost deals and a source of
worry that refuses to go away.

"When we show huge costs of EDA tools, clients wonder about our
relationships with the EDA tool vendors and this reflects very badly on us. We
have often lost deals because of EDA tool pricing," he adds. Insiders also
reveal that Sasken lost as many as 11 deals, last year, because of EDA tool
pricing issues.

"Loosing business because of these factors is very demoralizing for our
sales force," says Kodavarthi.

Also, Indian IC houses feel that there is an overall lack of transparency of
tool pricing. In addition, says Bhagavan, "we don’t have the opportunity
to evaluate tools since the vendor’s evaluation copy approval process is
pretty long. There is no direct pre sales or tech support from vendors."

Understanding EDA utility

Tool vendors, however, insist that IC design houses must not look at the
pricing issue in isolation.

"Yes, some of our clients have spoken about their pricing concerns to
us. But the point we want them to understand is that, the cost of developing EDA
tools is very high. Companies spend millions of dollars on product research and
development," says Rohit Biddappa, a spokesperson for Cadence, the world’s
largest EDA vendor.

This is one issue where even the fiercest of competitors–Cadence and
Synopsys–see eye-to-eye. They say that high pricing of EDA tools is a
"question of perception" among Indian IC design houses.

Says Synopsys’ Dr Dutta," The point is the whole EDA tools industry
revenues are worth about $4 billion–a fraction of the total semiconductor
industry revenues, which are around $125-billion mark. Moreover, EDA tools do
not sell thousands of copies unlike business applications products like MS
Office, which sell millions of copies. But the investment involved in developing
an EDA tool is several times that of a business app." They feel Indian IC
design houses hee-haw about EDA tool pricing because of the large initial
investment required for EDA tools.

Do you have a choice?

It is not that Indian IC houses are unaware of the importance of EDA tools
but what irks them the most is the attitude of the vendors.

"We have discussed the issue of high pricing of tools with the EDA
vendors. But their reaction is–do you have a choice?" adds Bhagavan.

With explanations not forthcoming, some IC design houses feel that the
leading EDA tool vendors–Cadence and Synopsys–are taking advantage of their
market leadership. As late as 2001, the worldwide EDA tool revenue was estimated
around $ 4 billion. Of this, Cadence revenues stood at an estimated $1.3 billion
and Synopsys stood a "close second at the almost one billion dollar
mark." Together, they controlled more than half the EDA tools market
worldwide.

Both Synopsys and Cadence deny that they are squeezing customers by taking
advantage of their leadership position.

"If we were really a monopoly or duopoly, bodies like the Security
Exchange Commission (SEC) in the US would have taken action on us long time
ago," says Dr Dutta.

The solution

Like most contentious issues, this one too can be solved only using one
method–talking. Indian IC design houses must talk to each other and then to
the EDA vendors. And this is not likely to happen in the environs of conducted
seminars organized by EDA tool vendors.

Another solution is the China way–the Indian government ties up with tool
vendors and buys licenses in bulk and then allows access of these tools to
private IC design houses (Read box). But, then again, that may not be a wise
idea for it may open a whole lot of issues that companies despise–red tape and
taxes.

TV Mahalingam in Mumbai