Apple, Amazon, Facebook, Tesla, Ford, General Motors, and a growing number of other businesses are turning away from semiconductor firms and bringing chip development in-house. 

“This past year, many of the world’s largest technology corporations struggled to procure enough supply of semiconductor parts to keep up with the ever-growing demand for products,” observes Mark Bollinger, chief globalization officer at Smith, an independent global distributor of semiconductors and electronic components. Understandably, many do not want to find themselves in this situation again.

There are many reasons why a business outside of the semiconductor industry may decide to create its own chips, including supply chain resilience and control over intellectual property. “Companies are discovering that the right balance of hardware and software can be differentiating, which usually means they can’t use the same commercial solution being used by everyone else in their industry segment,” explains Shiv Tasker, global head, semiconductors, and electronics, for engineering consulting firm Capgemini Engineering. “Organizations want to emulate their market leaders who, by designing their own chips, and more of the chip software, are able to control more of their products and brand’s differentiation, user experience, and supply chain -- often giving them a huge margin advantage over their competition.”

A Change of Heart

After decades of viewing chips as something to be acquired from an external semiconductor manufacturer, most businesses in a wide cross-section of fields have never even considered the possibility of designing their own chips, either as a need or an opportunity. “Many companies have not thought about innovation at the chip level as a critical success factor or even a value generator for their own business,” Tasker says. Today, after viewing multiple success stories of in-house chip innovation spanning a wide array of industries, companies are discovering the business value inherent in designing their own chips. “When used to differentiate products or services, create super consumer experiences, or improve productivity, these chip-level innovations can offer a sustained competitive advantage that can far outweigh the upfront investment and commitment required,” he notes.

Until the past year or so, only large corporations in a few specific industries, such as consumer electronics, telecommunications, and gaming, were able to justify investing in chip development. “Chip design costs tens of millions [of dollars], takes anywhere from 18 to 30 months [to complete], and requires specialized expertise and tools,” Tasker says. “There's a lot at risk, and companies have to get it right, not just in terms of functionality but also in anticipating volumes and locking in production, especially in a time of unpredictable manufacturing capacity.”

Multiple Benefits

By producing their own chips, manufacturers can gain increased autonomy and self-reliance over semiconductor suppliers. “Businesses also have the potential to frame the innovation and design of chips to their specific technology products,” Bollinger says.

Supply chain concerns aside, for many manufacturers the primary appeal of producing in-house chip designs is gaining the ability to create custom-made chips that fit their specific requirements. “This gives them more control over the integration of software and hardware while differentiating them from their competition through performance and energy efficiency improvements that might not be possible with generic chips,” explains Syed Alam, global semiconductor lead at business advisory firm Accenture.

Cost is the major barrier preventing many manufacturers from in-sourcing chips. “Designing your own chips requires setting up a design team as well as investments in R&D, which only large companies with more financial flexibility can afford,” Alam says.

Time-to-production is another important, and often discouraging, factor. Building a team of chip development experts, and then designing, prototyping, and testing a chip technology is an expensive process that often takes years. “For companies new to chip design, the ROI, whether achieved through monetizing differentiation, penetrating new markets, charging higher prices, or manufacturing in higher volumes, is a gamble,” Tasker says. “Because of this, the decision [to develop chips in-house] is not generally undertaken as an experiment.”

When creating highly specialized chips, manufacturers must consider the expense and time needed to produce enough. Firms also must bear the risk of creating too many devices. “Without a wider market for their chips, unforeseen changes in demand for a company’s end-product could leave its specialized chips unused and obsolete,” Bollinger warns.

Takeaway

Businesses deciding to design chips internally generally do so only after carefully considering the benefits, measured risks, cost tradeoffs, and the intent to stay the course. Tasker's recommendation: “Chip design is not for the faint of heart or shallow of pockets.”

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