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