The Co-optition Strategies of IC Design Service Industry in Taiwan

Since the invention of the first integrated circuit (IC) in 1959, the semiconductor industry has been evolved from a vertically-integrated industry to horizontally configured industries based on increasing levels of specialization. In the early 1980s, specialized IC design companies appeared. But it is not until 1990, when the specialized semiconductor manufacturing company, so called "foundry", came into play, did the fabless IC design companies prosper and pump up the industry growth. As Moore’s law continuously guides the development of semiconductor manufacturing technologies, a chip can contain more and more electrons inside and the IC design becomes even more complicated than ever. Therefore, a new design approach based on IP reuse becomes more competitive as the design productivity increases, which in turn induces the emergence of IP providers and design service companies. The semiconductor industry had literally entered its 3rd evolution of the horizontal specialization.
Although Taiwan has been the second largest semiconductor industry in the world, most of its design service companies are still underperformed, compared to its global competitors. The objective of the present study is to explore the structural reasons underlying the industry development by exploring the positioning of the design service companies in the semiconductor industry’s new industry landscape as well as the competitive dynamics among value-net players.
Based on field interviews and qualitative research on the broadly defined semiconductor industries, we reached several conclusions: (1) The relationship of the design service company with its business-related companies remains more cooperative than competitive; (2) The entry and exit barriers of the front-end design service are not high, while the foundry’s attitude determines major entry barrier of the back-end design services; (3) Due to the very low marginal costs, the fabless and the IDM with the IDM-foundry business model are both the potential competitors of the design service company; (4)As the result of the nearly indifferential and low value-added characteristic of the back-end design service, the price competition in this area is dramatically high, which makes the back-end design service firms earn too little and declining margin and forced them to stretch to the higher value-added front-end design service business; (5) Almost all the upper-streamed companies of the professional design service company are its complimentary partners. However, the SIP vender still has certain degree of substitution with the design service companies; (6) Two of the three major EDA venders, the DS companies’ upper-stream providers, also entered the business area of the design service business as a result of their strategic choices in the global market, and that may brought potential threat to the professional design service companies; (7) For the back-end design service company, its relationship with the foundry is vital to its competitive advantage; (8) As the foundry put higher priority on its COT customers, the growth of the design service company would be constrained if the capacity usage rate of the foundry was high and tight. Beside, the value-added of the design service company would be low to the foundry that has constantly high capacity usage rate.
Base on the above analyses, we propose several pieces of advice for the design service industry in Taiwan: (1) The back-end design service company should strengthen its relationship with its cooperative foundries; (2) The company should go out of Taiwan to the global market in order to develop its ability of taking the high-end design service orders; (3) It is necessary for the back-end design service company to enter the front-end design service business area; (4) It is improper for a foundry to ally with too many design service companies; (5) For the design service firm that has too small scale and limited resources, the best strategy for it to grow and develop its capability as quick as possible is to merge with another firm that has its complimentary strength and resources; (6) To gain customers’ trust, the design service company should not have its own chip product. Thus, the IP business appears to be a good choice of diversification.