Fabless ASIC design companies adopt the "cost plus pricing" model

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Fabless ASIC design companies adopt the "cost plus pricing" model [Copy link]

July 20, 2006 14:16 International Electronics Business

eSilicon, a fabless ASIC design company, recently said that it has created a new business model that enables it to provide its custom IC development and manufacturing services to a wider market. According to eSilicon, the newly created eSilicon Direct model expands the company's fabless ASIC model by providing a low-cost structure for mass production. Under the new model, customers pay non-recurring costs and other expenses at the same price during product development and the early stages of production, and when the product reaches a predetermined, sales-based production milestone - usually sales of $15 million, it will transition to a "cost-plus" model. This cost-plus structure is based on the true manufacturing cost and has a lower unit cost as chip production increases. "The whole goal of this model is to enable eSilicon to go out and serve a wider range of customers who would otherwise do the work themselves and we wouldn't have the opportunity to be involved," said Hugh Durdan, eSilicon's vice president of marketing. "We offer a lower cost base and a larger sales base, and customers can amortize the expenses over time. Even before reaching sales milestones, the price under this model is what customers would have to pay if they did it themselves." eSilicon emerged in 2000 to provide a third option for companies that produce custom chips. In this regard, manufacturers basically have only two choices: the traditional ASIC model or the "direct" model. Each model has advantages, but both require huge non-recurring engineering (NRE) investments. eSilicon's fabless ASIC model requires manufacturers to pay higher NRE costs, but is said to have lower risks, lower fixed costs and lower unit costs. According to Durdan, eSilicon has mainly achieved success with the following two types of companies: one is system OEMs with large enough volumes to support higher NREs, which can achieve lower unit costs; the other is fabless companies that do not have the production scale to amortize the high fixed costs of the direct model. (Durdan said the company had sales of $60 million in fiscal 2006 and expects sales to grow 20-30% in fiscal 2007.) But large companies lack interest, Durdan said. System OEMs that want to reduce NRE and can tolerate high unit costs have always preferred the traditional ASIC model, while large fabless companies with the scale to amortize high fixed costs and the tolerance for risk continue to "do it yourself" in the direct model. But supply chain issues, product complexity and margin pressures are forcing those large companies to also consider the fabless ASIC model, or even consider completely outsourcing the production part of their business, Durdan said. The eSilicon Direct model provides NRE costs at eSilicon's standard prices (the company says it does not make money on NRE costs), uses the traditional pricing model for initial production, and then transitions to a cost-plus model after reaching mutually agreed sales volume standards. The model supports all engagement models, including specification, netlist or GDSII delivery. Durdan said eSilicon has been quietly promoting the new model for several months and has seen interest from late-stage startups and companies that “want to buy homerun insurance” and are “thinking about where to go in the future.” “This model gives them a cost structure they can live with as they grow,” Durdan said.