Despite chip shortage, chip innovation is booming

A global shortage of semiconductors has cast a cloud over the plans of carmakers and other companies. But there is a silver lining for Silicon Valley executives like Aart de Geus.

He is chairman and co-CEO of Synopsys, the biggest supplier of software that engineers use to design chips. That position gives de Geus an intimate perspective on a 60-year-old industry that until recently was showing its age.

Everyone now seems to want his opinion, as shown by the dozens of emails, calls and comments he received after addressing a recent online gathering for customers. Synopsys said people tuned in from 408 companies — more than double the number for an in-person event last held in 2019 — and many were not conventional chipmakers.

They came from cloud services, consumer electronics companies, defense contractors, auto component providers, U.S. government agencies, universities, two Bitcoin mining companies and a furniture-maker. Their overriding question: How do you develop chips more quickly?

Even as a chip shortage is causing trouble for all sorts of industries, the semiconductor field is entering a surprising new era of creativity, from industry giants to innovative startups seeing a spike in funding from venture capitalists that traditionally avoided chipmakers.

Taiwan Semiconductor Manufacturing Co. and Samsung Electronics, for example, have managed the increasingly difficult feat of packing more transistors on each slice of silicon. IBM on Thursday announced another leap in miniaturization, a sign of continued U.S. prowess in the technology race.

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Perhaps most striking, what was a trickle of new chip companies is now approaching a flood. Equity investors for years viewed semiconductor companies as too costly to set up, but in 2020 plowed more than $12 billion into 407 chip-related companies, according to CB Insights.

Though a tiny fraction of all venture capital investments, that was more than double what the industry received in 2019 and eight times the total for 2016. Synopsys is tracking more than 200 startups designing chips for artificial intelligence, the ultrahot technology powering everything from smart speakers to self-driving cars.

Cerebras, a startup that sells massive artificial-intelligence processors that span an entire silicon wafer, for example, has attracted more than $475 million. Groq, a startup whose CEO previously helped design an artificial-intelligence chip for Google, has raised $367 million.

“It’s a bloody miracle,” said Jim Keller, a veteran chip designer whose résumé includes stints at Apple, Tesla and Intel and who now works at the AI chip startup Tenstorrent. “Ten years ago you couldn’t do a hardware startup.”

The trends are not necessarily good news for chip customers, at least for the short term. Scarce supplies of many chips have manufacturers scrambling to increase production, and are adding to worries in Washington about reliance on foreign suppliers. Extra demand could extend the shortages, which are already expected to last into 2022.

High demand was evident in earnings for chip companies last quarter, which ended in March. Revenue grew 27%, for example, at NXP Semiconductors, a big maker of auto, communications and industrial chips, even though it temporarily closed two Texas factories because of a cold snap.

The industry has historically been notorious for booms and busts, usually driven by purchasing swings for particular products like PCs and smartphones. Global chip revenue slumped 12% in 2019 before bouncing back with 10% growth last year, according to estimates from Gartner, a research firm.

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But there is widening optimism that the cycles should moderate because chips are now used in so many things. Philip Gallagher, CEO of the big electronics distributor Avnet, cited examples like sensors to track dairy cows, the flow of beer taps and utility pipes, and the temperature of produce. And the number of chips in mainstay products like cars and smartphones keeps rising, he and other executives say.

“This is a lasting growth cycle, not a short spike,” said Kurt Sievers, NXP’s CEO.

A longtime industry watcher, Handel Jones, who heads the consultancy International Business Strategies, sees total chip revenues rising steadily to $1.2 trillion by 2030 from roughly $500 billion this year.

That growth could arrive just as the industry fundamentally changes. More companies are concluding that software running on standard Intel-style microprocessors is not the best solution for all problems. For that reason, companies like Cisco Systems and Hewlett Packard Enterprise have long designed specialty chips for products such as networking gear.

Giants like Apple, Amazon and Google more recently have gotten into the act. Google’s YouTube unit recently disclosed its first internally developed chip to speed video encoding. And Volkswagen even said last week that it would develop its own processor to manage autonomous driving.

Chip design teams are no longer working just for traditional chip companies, said Pierre Lamond, a 90-year-old venture capitalist who joined the chip industry in 1957. “They are breaking new ground in many respects,” he said.

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Little of that activity would be possible, Keller and others said, without advances in design software by Synopsys and its biggest rival, Cadence Design Systems.

Chip design software gained popularity in the 1980s to streamline tasks that engineers once carried out with pencils and drafting tables, painstakingly drawing clusters of transistors and other components on chips. The software tools have continually evolved; some carmakers, for example, use Synopsys-powered simulations of how future chips will work to write software for them in advance, de Geus said.

Synopsys, which he co-founded in 1986, has grown steadily, partly by acquisitions, to a valuation of $36 billion.

De Geus said new growth was coming from what seemed like a problem: a slowdown in Moore’s Law, industry shorthand for the perennial race to shrink chip circuitry so chips do more with less silicon. In response, he said, some companies are using Synopsys tools to design entire systems and bundles of smaller chips that work like a single processor.

During his recent speech to users, de Geus demonstrated how artificial intelligence enhancements could allow Synopsys tools to automatically decide how best to situate and connect blocks of circuitry on a chip. A system managed by a single engineer did the work two to five times faster than a team of designers, de Geus said, while its design used up to 13% less energy.

“The ability to use AI to design AI chips, that is the ultimate cool,” he said. “There you meet science fiction.”

Such software is one of the biggest expenses facing startups, chip executives said. That was one reason Rick Lazansky, an industry veteran, in 2014 formed Silicon Catalyst, an incubator that aids startups with donated design software and other services in exchange for equity stakes.

The firm estimates it has evaluated more than 400 such ventures and selected 38 to help. One is Sonical, which is developing chips to power a kind of computer for the ear, using artificial intelligence to blend sounds around a user with those delivered from devices like smartphones, said Gary Spittle, its CEO.

Despite some successes among startups, Spittle said, he still has difficulty courting venture capitalists who continue to prefer businesses like software. So does Aron Kirschen, CEO of Semron, a German startup that is working on an augmented-reality chip that could fit on a contact lens.

He got help from Berkeley Skydeck, a business accelerator affiliated with the University of California that aids 130 startups every six months. So far it has chosen only seven related to semiconductors, but hopes to pick up the pace as more investors warm to the field.

“Venture investors who typically would not have touched chips with a 10-foot pole now have maybe a 5-foot pole,” said Caroline Winnett, Skydeck’s executive director.