Which semiconductor R&D outsourcing model is suitable in times of Covid-19 and the US-China trade war? In the first part, I take a look at seven developments that will impact the semiconductor engineering services industry in 2020. In the second article (part 2) I provide a hands-on concept to develop a semiconductor R&D outsourcing strategy for your organization.
Seven semiconductor R&D outsourcing developments and their implications in 2020
In 2019 the semiconductor R&D engineering services industry grew to USD 71Bn with a year-on-year growth rate of 10% according to Zinnov. The numbers for 2020 are still outstanding, but I expect a reduction or at best a sluggish growth for the semiconductor engineering services industry in line with the various forecasts for the overall semiconductor industry ranging between -4% and +1.2%. Various global engineering players (e.g. Altran, Wipro, TCS) and regional specialists (e.g. ChipGlobe from Germany) are competing for projects in ASIC, FPGA and embedded systems design at IDMs and fabless companies. The following will be the major developments that will shape the industry in 2020.
Cost efficiency will grow to peak importance: IDMs see ever increasing design costs in 2020 with high double-digit CAGRs for next generation product developments on advanced nodes. Although IC sales are projected to recover with a modest 3% growth in 2020 from previous year’s 15% decline, in industry segments that were able to profit from “stay-at-home” expenditures, the overall semiconductor industry will be impacted by the global economic recession. The difficult economic situation increases the pressure for semiconductor IDMs and fabless companies towards turning internal fixed R&D personnel costs into variable costs by using engineering outsourcing services providers, ideally at lower offshore/near-shore rates.
Onsite engagements will face further obstacles: Time & material based onsite body leasing engagements of external engineering personnel will become more restricted due to Covid-19 related „remote-work“ policies on top of strict co-employment legislation introduced in many high-cost countries during previous years. This is likely to create an even stronger push to use remote engineering services provider setups.
Established „glocal“ R&D engineering providers will profit: Reliability and trust are key aspects in times of economic uncertainty. Engineering services providers who were able to build trust and deliver successful projects during recent years will win new engagements. Especially if they can offer mixed on-site/offshore models with a local presence close to customers, complemented by global offshore execution centers. This setup can ensure the required flexibility by having key external engineering personnel close to IDM’s engineering teams and reduce coordination costs compared to offshore-only models.
Performance based contracting will gain popularity by reducing transaction costs: Distributed R&D workforces working from home across different geographies in times of covid-19 give a push to turnkey and outcome-based contracts incentivizing quality improvements, effort reduction and risk sharing.
Access to critical EDA tools will get more difficult: Ensuring access to the required design tools when setting up engineering outsourcing services engagements between in-house R&D teams, outsourced engineering providers and foundry partners moves into the spotlight as EDA players like Synopsys will face restrictions in their license usage due to trade-war restrictions.
IP and IT security aspects will move to the spotlight: Recently reported cases of deep intrusions into Taiwanese semiconductor companies’ networks – allegedly by Chinese hacker groups – underline the need to establish and monitor sophisticated security practices with engineering providers. Special considerations on technology sanctions have to be taken into account when setting up projects, for instance limiting the remote access of 3rd party personnel.
2020 will be the starting point for further market consolidation: 2018 and 2019 were marked by the successive takeovers of Aricent by Altran and later of Altran by Capgemini forging a leader in semiconductor engineering services with strong footholds in other industry verticals like automotive and aerospace and combined revenues of USD 4bn. Covid-19 – as any other global recession – will separate the wheat from the chaff by retaining leading players and industry specialists who were able to create a competitive differentiator in the past. As a result new M&A activities and market consolidation will be triggered.
You should consider the above mentioned developments when reassessing your 2020 semiconductor R&D outsourcing strategy. In the second part of this article, I will walk you through a concept that supports semiconductor companies in developing an appropriate R&D outsourcing strategy.
