A quiet revolution is on for semiconductors  

At the heart of our era’s digital transformation—powering everything from satellites to energy-saving lights, from our connected world to the GPS we use to get away from the world for the weekend—all the changes we’ve lived through come down to tiny, intricate semiconductor chips. Today, the semiconductor industry is undergoing a quiet revolution, one that will have profound effects on the digital world. 

In this article ,we’ll be exploring the opportunities facing chip companies at this turning point, along with some of the challenges along the way We’ll answer the questions:

• What’s driving this softwarization shift?
• What opportunities will this give rise to?
• How has this transformation affected other industries?
• How can we take full advantage of these changes?
• How will we know if we’re on the right track?

Market opportunities and present approach 

 The first question is, what horizon are we looking at? If your core mission is simply to manufacture the best chips possible, your horizon will be different than that of a company whose mission is, for example, to support its customers’ needs. Whatever your mission may be, expect opportunities everywhere.  

More custom chips… More custom applications…  

More custom everything, in fact, and chips are no exception. Multiple trends are driving the need for more specialized chips, often called Application-Specific Integrated Circuits (ASICs). This includes demand across industries, from automobile, life sciences, healthcare, and telecom to entertainment, space, manufacturing, defense, and the list goes on! 

It all starts from the need for semiconductor companies to pursue the strategy of expanding into several adjacent industries for these crucial reasons: 

• Diversification of revenue streams: Diversifying into multiple industries reduces dependence on a single market, thereby mitigating risks of market volatility. 
• Leveraging core competencies: Semiconductor companies can capitalize on their existing strengths and technologies to offer solutions in related industries, maximizing the ROI of their research and development investments. 
• Growth opportunities: Adjacent markets often provide significant growth opportunities, especially as emerging technologies and trends (like IoT, AI, or 5G) create new demands and opportunities (R&D) across various sectors. 
• Economies of Scale: Operating across multiple markets can lead to economies of scale in manufacturing and R&D, reducing costs per unit and increasing overall efficiency. 

In other words, semiconductor companies (a.k.a Semicoms) create customized hardware tailored to specific industry solutions. This involves designing and manufacturing chips with particular features and capabilities that cater to the needs of different sectors such as automotive, healthcare, or telecommunications. This is what we call a ’hardware-centric’ approach. 

In the HW-centric approach, the focus is on creating a product that meets the industry’s unique hardware needs first, and the primary value lies in the physical chip capabilities, with software playing a ‘supporting but an important role’ which is essential to bring out the full potential of the hardware….Well it’s the intermediary that makes the hardware te accessible and useful to the overall system by providing the necessary interfaces, controls, and customizations. 

Then, what’s the challenge with this approach? 

1. Long lead times. Time-consuming design and manufacturing processes due to the complexity of custom HW – often leading to missed time-to-market targets. 

2. Rigid solutions/fixed functionality. HW with fixed functions designed for specific tasks within an industry, with limited flexibility for updates or changes once the HW is deployed. 

3. High HW costs. Significant investment in design, prototyping and fabrication of industry specific HW. 

4. Software (SW) costs still constitute a significant portion (up to 40%) of the overall budget, yet there’s no effective corresponding revenue model. 
   • SW is seen as an essential part of the HW, expected to be included in the purchase price of the chip. 
   • SW is viewed only as a cost – the cost of doing business, necessary to make the HW operable and appealing to customers, rather than as a product or service that could be sold independently. 
   • SW updates, bug fixes, and support are usually provided as part of the post-sale services with no additional charges. 
   • SW customization possibilities are limited by the HW – hence there are very few opportunities for additional SW-based revenue. 

So, as a semiconductor company that needs to pursue the strategy of expanding into several adjacent industries whilst still leveraging a HW-centric approach, we can summarize the UN-DESIRED challenges as follows: 

1. Costly and time-consuming design and production. Today’s business model necessitates designing and manufacturing a diverse array of chips, each tailored to specific industry requirements. This process is not only expensive but also time-consuming, involving extensive hardware and software development for each unique industry solution. The high cost of design and production is a major concern, especially as we navigate the risk of missing crucial market deadlines. 

2. Software development as a cost center. Despite the considerable investment (nearly 40% of overall ) in software development to support these industry-specific solutions, it doesn’t translate into direct revenue generation….so Software, in this model, is a cost center rather than a profit center. 

3. Rigidity and lack of adaptability. The solutions the industry today offers are inherently rigid. They come with fixed functionalities, which means any significant change in industry requirements or standards necessitates a new round of costly and time-consuming chip development. This lack of flexibility in chip offerings limits the ability to adapt to evolving market needs without incurring substantial expenses and facing the same risks. 

4. Scalability challenges: Scaling production up or down to meet fluctuating market demands is a major hurdle in my current operation. With each industry requiring distinct chip designs, rapid adjustment of production volumes becomes complex and costly, affecting my ability to respond to market dynamics efficiently. 

5. Environmental concerns: The current approach also raises sustainability issues due to the frequent development of new hardware thus also increased material use and waste. This conflicts with global environmental sustainability trends, pushing us to consider more eco-friendly production methods. 

Some additional considerations include: 

• Supply chain dependencies. Reliance on a complex supply chain for diverse hardware production is a vulnerability, particularly in times of unprecedented disruption. 
• Inventory and logistics complexities. Managing a broad spectrum of customized chips leads to intricate inventory and logistical challenges. 
• Rapid obsolescence: The pace of technological advancement can quickly make our hardware obsolete, demanding continual innovation. 

Moving from hardware-designed to Software-defined 

Softwarization for Semiconductor depicts the desired future based on the adoption of a “software-centric” approach  

In a software-centric approach, the objective is to develop a more standardized limited array of base chips that can be customized for various industries and solutions through software. The idea is to reduce the number of unique hardware designs and instead leverage software to provide industry-specific functionalities – moving the “logic” from silicon to software where the base hardware is standardized and simplified, the software layered on top is what provides the industry-specific customization. 

Finally, the software-designed custom silicon is validated against industry frameworks for performance and functionality., The integrated solution of (hardware plus software) still needs to meet the stringent performance and functionality standards of specific industries.

An “industry framework” in the context of semiconductor products and software refers to a set of standards, regulations, guidelines, or specifications that have been established by industry groups, regulatory bodies, or standard-setting organizations. These frameworks are designed to ensure that products and services meet certain levels of quality, performance, safety, compatibility, and interoperability within a specific industry. It can include (but is not limited to):

• Technical Standards: Specifications for product design, materials, processes, and performance. For example, in telecommunications, standards like 3GPP or IEEE define how devices should communicate and interoperate.

• Industry-specific software protocols: For software, frameworks might include coding standards, architectural guidelines, and protocols that are widely accepted in specific industries.

• Compliance checklists: In some industries, there are comprehensive checklists or guidelines that products must adhere to for legal or market access reasons.

• Interoperability guidelines: Standards ensuring that products from different manufacturers can work together seamlessly, common in areas like home automation (e.g., Zigbee or Z-Wave standards) or data technology (e.g., USB or Bluetooth standards).

• Quality certifications: Benchmarks for product quality and reliability, such as ISO 9001 for quality management systems or the Automotive Quality Standard IATF 16949.
• Security protocols: In industries where data security is paramount, like finance or healthcare, there are specific standards for data protection and cybersecurity (e.g., HIPAA for healthcare data in the U.S., or PCI DSS for payment card security).

Advantages of Softwarization

Our Desired Future is to gain the following advantages

1. Efficient and cost-effective design and Production: Adopting a software-centric approach, the Semiconductor company streamlines its business model by developing a limited array of versatile base chips. These chips can be customized for various industries through software, significantly reducing the cost and time involved in hardware development. This approach allows for quicker iterations and a more efficient production process, effectively addressing the risk of missing market deadlines.

• Software development as a revenue generator: In this future model, software development transitions from being a cost center to a key revenue stream. By offering customizable software solutions, feature upgrades, ongoing service subscriptions, and developing a robust ecosystem for third-party applications, Semiconductor companies can monetize their software development efforts more effectively. This ecosystem approach not only allows for direct revenue generation through licensing and platform fees, but also enhances the value proposition of their products, creating a ‘platform effect’ that attracts more users and developers, thereby expanding market reach and creating new revenue opportunities.

• Flexibility and adaptability: The ability to update and customize software for different industry requirements means Semiconductor companies (Semicoms)  can adapt to market changes swiftly, without the need for time-consuming and expensive hardware redevelopment. This adaptability allows them to respond rapidly to evolving industry needs.

• Enhanced scalability: The standardized hardware base in a software-centric approach simplifies scaling production to match market demand. The need for distinct hardware designs for each industry is eliminated, making it easier and more cost-effective to adjust production volumes, enhancing Semicom’s ability to respond efficiently to market dynamics.
• Sustainable and environmentally friendly: This future-focused approach aligns semicoms with global environmental sustainability trends by significantly reducing the frequency of new hardware development. The focus on software updates and longer-lasting hardware reduces material use and waste, promoting a more eco-friendly production model.

Additional Considerations:

• Reduced supply chain Dependencies: The reliance on a complex supply chain is diminished as the demand for diverse hardware production decreases. This shift reduces semicoms vulnerability from supply chain disruptions, creating a more resilient business model.

• Simplified inventory and logistics: By minimizing the variety of customized chips, inventory and logistics management becomes more straightforward, reducing operational complexity and cost.

• Slower technological obsolescence: With a software-centric approach, the lifecycle of hardware is extended. The ability to continually update and adapt the software reduces the pressure of rapid hardware obsolescence, allowing for sustained innovation and relevance in the market.

Overall

Transitioning to this futuristic software-centric approach transforms key aspects of operations, positioning a Semiconductor company to be more agile, cost-effective, environmentally conscious, and capable of generating new revenue streams.

As a direct consequence of this Software based transformation, a semiconductor company can offer tailored products and services to its industry customers thereby enhancing their value proposition and increase its differentiation in the market.

In essence, for semiconductor companies, the software-centric model means access to cutting-edge, customizable technology solutions that are sustainable, cost-effective, and come with comprehensive support, all of which are crucial for staying competitive in today’s fast-paced market.