The Chip Hatchery
The Chip HatcheryTM blog covers trends and musings about semiconductor
marketing, business issues, startups and investing. The expert contributors to this blog
will come from the ranks of senior semiconductor industry thought leaders with
deep experience (at least 20+ years in the chip industry). One thing is
certain in the chip industry: executives often have to make decisions quickly
without having all the information available. One's batting average
improves with industry experience, i.e., the ability to make sound judgment
decisions. Call it informed intuition -- in the chip industry,
experience counts heavily as a determinant for success
Since InsideChips is based
in the Pacific Northwest, we though it would apropos to name the blog, The Chip HatcheryTM,
a take-off on fish hatchery. Both commercial fishing and starting chip companies
demand deep experience to avoid "sinking the ship," dealing with risks and uncertainties,
flexibility to change plans at the last minute, courage and daring, being able
to forecast periods of "bad weather," having a passionate zeal to succeed, hard
work with long hours, and some luck. If you would like to comment to any
post, please submit using our
|Saturday, Mar 15, 2008|
|Leveraging Your Sales Channel|
|Posted By David Guzeman, Mindpik|
|I'm always amazed by how many calls I get from prospective clients that are wrapping up their new product development and now want me to help them develop a sales channel to sell that product. New companies invariably underestimate how long it will take to set up the channel and what it will cost. My rule of thumb is that it will take as long to set up the channel as it did to develop the product, and what's more, it will probably cost about as much. |
Traditionally chip sales channels are hybrids, made up of a combination of direct sales people, reps and distributors. Simply put, direct people are on your payroll, reps are independent agents that never take title to the goods, and distributors are third party firms that DO take title to the goods and resell them. The reason that most chip companies use a hybrid channel instead of, say all direct, is just a matter of cost… they can't afford an all-direct sales force, and safe to say, neither can you. Rep firms can make sales calls at a far lower cost than direct sales people -- as much as TEN times lower. The reason is simple… they have as many as ten companies they're representing, so that they can amortize each sales call across all those companies. Your direct sales person, on the other hand, has to cover his expenses with just your company's product sales. When you figure out all those expenses, that may work out to as much as $20,000 of sales per call, and that's really hard to do. Effectively this means the direct sales person can only call on the very largest customers. Who calls on the others? The rep! In this model, some customers are treated as "direct" and called on by the direct sales people according to some cutoff, typically a couple of million dollars.
But even where the customer base is not split up between direct and rep, the direct sales people essentially recruit, organize, train and direct the reps. The sales channel works as a pyramid -- direct at the top, the reps in the middle, and the distributors at the bottom (we'll cover them in another post). Traditionally reps made 5% on shipments (not bookings) though that number has gone down and is now sometimes as low as 3%. Because reps do not have competing product lines, they're treated as family with pretty much the same access to information as the direct sales force. The thing to always keep in mind is that there are five to ten times as many rep sales people as direct. In general, the bulk of your daily sales activity is going to be from the reps, with direct people directing them. Your leverage is in making the reps more effective… you get ten times the mileage from efforts directed at the reps!
The tendency is to rely on the direct sales people to "feed" the reps information as needed, but I think this is missing a huge potential advantage. Rather than relying on direct people, you should be feeding product and market information simultaneously to both the direct and rep people eliminating the intermediate step of passing everything though the direct people. One of the reasons I love reps is simply that I can make the numbers easily work in my favor. While a typical rep firm may have ten companies it represents, it turns out that only about five of those are really actively engaged. That is, only five are regularly communicating with the rep and involving them in the sales process. Of those five, two or three are just going through the motions. If you bring a disciplined program of regular, frequent communications that are informative and useful, you'll get far more than just 10% share of their minds. Combine that with periodic training sessions at their offices and you'll get even more. And that sort of program is what you should be doing to drive the sales channel anyway. It's that old story of winning just by showing up. Almost.
Saturday, Mar 15, 2008 08:30|
|Monday, Mar 03, 2008|
|Map Out Your Standards Strategy|
|Posted By David Guzeman|
|Should you be chasing standards with your chips or playing the proprietary game? This question goes to the heart of your company business plan, and you need a well defined answer. It probably seems like the answer should always be to stay on the "standards" approved side of the chip design, but that has not always been the case. Traditionally, one company pioneered a new technology and got an early lead in the market. The late-to-the-party competitors immediately got together and formed a committee to draft a standard that negated the first-mover advantage of the pioneer. It was easy to separate competitors in those days… the winner was the one making all the money and the losers were on the committee. |
Of course there are good and valid reasons for having standards, and with the complexity of things like multimedia formats, standards are now a practical necessity. Who can afford to create a chip with millions of gates hoping that the company can then drive the market by itself? Silicon Image created the HDMI interface for HighDef television, and then found it didn't have the marketing muscle to drive that interface into the market alone. Ultimately it was forced to open the HDMI spec to others in order to overcome the natural reluctance of the market to a completely proprietary interface. Their gamble, in this case, was that even after opening up the spec and making it an open standard, they could leverage the pioneering work they had done to maintain a technical lead. Only time will tell if they were right.
Some of these standards attempt very broad coverage that encompasses multiple levels of performance and feature sets. H.264, for instance, has a variety of "profiles" each targeting a different screen size and resolution. It is not enough for a chip to be H.264 compliant - it must also state which profiles it implements. Over time, some of those profiles will command major market shares and others will slip into obscurity. Examples like this prove that there are many opportunities for new chips that are both standards compliant but still assemble those standards and profiles in ways at will be attractive to the market.
So what is your strategy in this standards confusion? First, we should say there is nothing wrong with being the market leader and driving a de-facto standard into the market. If you can do it - if you have the market power - this can be a winning and highly profitable strategy. But even if you go the proprietary route and win, there will be a standards committee in your future as competitors get on board to endorse and expand your work. Regardless of whether you're the first mover that started the whole thing, or a later entry, if this is a key product/technology for you, you HAVE to be on that committee. If you're the technical originator, you have to be on the committee to keep from being victimized by your competitors. If you're a later entrant, you have to be on the committee to make sure it does not move in a direction that negates all your chip development you've already done. If you're new to the market, it's the place where you'll find out what your competitors are doing technically in this product direction, and by extension, if what you're doing is going to be a strong product offering or not. In short, you HAVE to be on that committee. In many cases, these standards committees are formed and driven by some sort of trade association or alliance. Companies interested in the technology band together to share information and push the technology by creating the standard. There is usually a fee - not insignificant - to join these alliances, but it's money well spent, and there is frequently some sort of lower-cost affiliate membership available as well. The key is that it is not just the chip companies in the alliance -- there will be some major potential customers there too. After all, it's in their interest to know and influence the direction of that technology as well as keep track of the players. By being part of the alliance, you have an opportunity to meet the major customers on a monthly or quarterly basis and demonstrate your knowledge and progress. When the early major deals go down, they will generally be between the customers and the chip providers in that alliance, so you definitely want to be part of it. As standards are developed and agreements reached, there will be press activity generated by the alliance and, as a member, you'll be included. This is an easy way to get recognition as a leader in the technology.
Organizationally, I usually drive this activity out of marketing, either the technical marketing or the strategic marketing groups. I find that typically my client companies will be in three or four of these alliance / standards committees, but even then it is not a full-time job. Still, it is important to recognize that the primary reason for your company to be a member is not technical but business. You're there to get competitive information, influence directions, and work early customer adopters. The lobbying that goes on in these groups can rival presidential electioneering, and you're going to need a pro at it. Many of the meetings are best characterized as babysitting -- just tracking activity rather than heavy technical discussions. So I have marketing act as the main contact point, and then make sure the company provides technical resources on an as-needed basis.
Monday, Mar 03, 2008 09:48|
|Sunday, Feb 24, 2008|
|Selecting and Entering the First Asian Market|
|Posted By Glen Balzer|
Striking out from the home market in America and creating a sales presence in Asia can be a daunting task. Your company is young. Revenues until now have come exclusively from the market you and the executive team best understands, America. It is now time to expand your revenue opportunities by launching a sales and marketing presence in Asia. Where do you start? How do you commence? The number of American companies operating in Asia lends proof that setting up a presence in Asia is not impossible. Since the executive team has no history in Asia, you wonder how to begin the process. This article is written for the company desiring to develop a sales and marketing presence in Asia, but lacking experience in the Orient.
By the time a young company establishes a presence in the USA with real sales, marketing and operations, other regions of the world start to produce enquiries. Those initial queries can, if managed properly, provide value in two fashions: First, the enquiries can transition from probing by potential customers into real sales, even without yet having a real branch overseas. Early Asian sales can be handled by American headquarters staff. Second, the opportunities can serve as a training program from which many lessons can be learned: From what countries do most enquiries originate? From which countries do the largest opportunities appear? What are the similarities and differences between the needs of the Asian and American markets?
By properly handling questions coming from overseas customers, a young company can learn quite a lot about its potential Asian market. The first order of business in the process of expanding sales and marketing into Asia is to determine which country to target first. Two questions must be asked simultaneously and the answers to those questions must be identical: First, which Pacific Rim country is most important to the company in the next two-to-four years? Second, which country can serve later as the Asian regional headquarters? If expansion into the first Asian market proves successful, migration into other Asian markets is natural. Multinational companies generally identify one capital city to serve as Asian regional headquarters.
Regional headquarters can sometimes be transitory. A young start-up company might open an Asian headquarters in Singapore or Hong Kong because of the commensurate ease of doing so and relatively minor risk. Once the regional headquarters is established and sales are flowing from several Asian markets, it may be appropriate to relocate headquarters to a country where the long-term market is largest. Relocation of Asian headquarters may be a more obvious decision once products gain increasing acceptance and a true center of marketing becomes more apparent. For many companies, China represents simultaneously the latest long-term opportunity and the country of greatest risk for a young company.
A company that lacks an understanding of which market in Asia is most important is not yet ready for Asian expansion. If selection of the first Asian market is not simple and semiautomatic, it is too early to expand. Likewise, if the country in which the Asian headquarters should be located within a few years is not yet obvious, the company should stick to its home market until the candidate country becomes more readily apparent.
Mimicking older established companies may not provide great results. The best regional headquarters in Asia for a large multinational company might not be the same for the young company looking to establish its first sales and marketing presence in Asia. A Fortune 500 company, for example, might select China for its Asian headquarters. Its has decades of sales, marketing, operating and manufacturing experience there and the Chinese market is far greater than any other in the region. A young company trying to establish a sales and marketing presence could become overwhelmed if it attempted to enter China as its first Asian market.
Sunday, Feb 24, 2008 07:42|
|Sunday, Jan 27, 2008|
|Semiconductor Sector Index at Critical Support Level|
|Posted By Steve Szirom|
It was a wild, wild week this week as the markets started out with deep plunge Southward on Tuesday with a 465 point drop in the Dow before the Fed surprise of a 0.75% cut in the federal funds rate to 3.5%. Many were wondering if the Fed was spooked or acted prematurely. After a short delay, the announced rate cut sparked a rebound which recouped 72% of the opening losses, leaving the day's loss at 128 points.
On Wednesday, down nearly 330 points in the early afternoon, the Dow stormed back to a gain of +299 points on the back of huge buying in banking and financial sector. The 625-point swing is the second-largest point change from bottom to close in the Dow's history, after a 702-point swing on July 24, 2002 after the tech boom collapse.
On Thursday, a moderate rally took the Dow up by 108 points. Chip stocks saw good follow through from the previous day's gains. The market was boosted by news that Congress and the Bush administration had agreed to a $150 billion stimulus plan even though many believed it was a weak plan, politically motivated.
After trying to rally for the third day, investors selling into the rally brought the Dow back down by 171 points today (Friday). The weak finish sets up a big week next week with the expectation that the Fed will cut interest rates again by another 0.5%. Earnings reports will flood the news next week, the Commerce Department will report fourth quarter GDP, and the Labor Department will report payrolls and unemployment.
Based on my analysis and as you read from my earlier reports, we are in a primary bear market which commenced in November 2007. See my chart analysis of the big picture titled "Bear Market Started, How Long?" under the INVESTMENT CHANNEL, Investment Outlook. With the current technical analysis, my best estimate is that this bear will take the Dow down from the peak of 14,200 to the 10,625 level -- a 35.9% decline.
In contrast to the last bear market of 2000-2002, this one will be worse in terms of the Dow Industrial Average decline. In the previous downturn, the index dropped by 28.2%. However, the SOX (Philadelphia Semiconductor Sector Index) which skyrocketed to the 1,325, fell a precipitous 82.6% to the 230 level.
Since then, the recovery levels reached peaks to the 500 to 550 level three times without being able to break to the upside of this resistance level. There is a support level for SOX at 350 which is currently being tested. If the SOX index can successfully test this level, it will be encouraging. If this support is broken, the next support level is at 200-230 which has occurred in Q3 1999 and Q3 2003. My current belief is that the 200-230 range is maximum downside for SOX -- a potential decline of 60.9% from 550. As of today, the SOX index has the declined by 35.5% from the 550 level.
Sunday, Jan 27, 2008 04:13|
|Wednesday, Jan 16, 2008|
|InsideChips to Moderate Panel on Semiconductor Startup Formation at DesignCon 2008 |
|Posted By Steve Szirom|
I will moderate a panel of semiconductor industry executives discussing the topic: "Ecosystem Environment for Starting a Semiconductor Company" at the DesignCon 2008 Conference and Exhibition (Santa Clara Convention Center in Santa Clara, Calif, February 4-7, 2008).
Fabless semiconductor start-ups face a number of challenges in today's market and investor climate. It is no longer enough to come up with a great technology and assume it will lead to success. They need to leverage resources such as those provided at the DesignCon Business Forum panel to learn what it really takes to build a successful company.
The DesignCon Business Forum panel will be held on Tuesday, February 5, 2008 from 2:00PM to 3:30PM and will feature these distinguished members of the semiconductor startup ecosystem:
- Glen Balzer, President, New Era Consulting
- Steve Bengston, Director, Emerging Ventures Practice, PriceWaterhouseCoopers
- Dave Guzeman, President, Mindpik
- Lucio Lanza, Managing Director, Lanza techVentures
- James Prenton, Partner, K&L Gates
- Steve Szirom, President, InsideChips
The panel discussion will cover topics ranging from increasing the odds for successfully launching a new venture and getting it funded to avoiding pitfalls, meeting major business milestones, and seeing the venture through to a successful exit. The panelists will share their knowledge of what makes a good startup ecosystem environment and talk about the unique challenges faced by chip start-ups, with their technology's novelty and highly more complex hardware-software design issues. The panel will address all of these issues to help entrepreneurs understand how to create an ecosystem and a community that forms a sound foundation for a new fabless semiconductor, IP, design-house or EDA venture.
Visit the DesignCon Business Forum page for more information or to register for the panel. About 45% of DesignCon's attendees are engineering professionals from the semiconductor industry.
Wednesday, Jan 16, 2008 04:23|