Pigs on ice

Pigs are supposed to be smarter than horses, but pigs will try to walk on anything, including ice. Pigs will wander out onto ice and fall down. Since they cannot get up, they struggle, roll over, grunt and groan, thrash around, and generally entertain you. I have seen horses watching them for hours, silently “laughing out loud.”

The current economic deterioration has put many of
us in a situation where we must try to do business on ice. However, these
conditions did not materialize just this year. They have been a long time
coming. Board makers in the telecom industry noticed that things started to get
icy and slippery around 2000. Eventually, all of the board-level technologies
aimed at this sector became commodities, creating intense competition and low
margins on small-volume orders. After struggling for years to stay on their
feet, both Motorola and Intel sold their telecom board groups within weeks of each
other in 2007. During that time (and even since then), a lot of board vendors
have wandered onto that ice, coaxed there by market researchers and technical
publication editors who claimed it was still solid ground.

However, there are perhaps some glimmers of hope
for the telecom board makers as a new administration comes into office in the
United States. The Telecommunications Industry Association (TIA) has sent
letters to the new president, asking for government subsidies to expand
broadband coverage across America. The new administration has made noises about
bringing classrooms in public schools up to 21st-century standards, and that
suggests broadband connections and new equipment.

At the same time, though, consumers are reducing
their telecom services and costs as they adjust their spending patterns to an
uncertain economy. Businesses have also cut their capital expenditures and
telecom costs as they react to conditions. Consumer spending in the United
States is about 70 percent of Gross Domestic Product (GDP), while government
spending is about 20 percent and business spending is only about 10 percent. So
even with a major broadband expansion, wiring up all the classrooms in the
United States with new telecom gear and services cannot possibly replace the
lost telecom revenues from consumers and businesses. Hence, at the start of
2009, everything associated with telecom is a pig on ice, in spite of any
potential government subsidizing.

Industrial output has been declining across the
world economy for many months as new economic conditions unfold. Many factories
abroad are closing, especially those making products for export to the United
States. That suggests there will be fewer factory automation projects in the
industrialized nations, especially in Europe. That could be bad news for
industrial board vendors, who might find themselves struggling to stay on their
feet. We have already seen severe declines in board product demand from
semiconductor equipment makers such as Applied Materials, Keithley, Kulicke,
and Soffa, who are traditionally large users of board-level products.

As the recession moves from the United States into
the industrial economies of Europe and Asia, demand for board-level products
for factory automation could decline even more. These boards are also used in
public transportation projects such as trains, subways, and airports,
especially in Europe. If those governments try to stimulate their economies, we
might see some increase in demand for boards used in transportation. But again,
those volumes cannot possibly replace the reduction in board demand for general
industrial applications. Also, as governments try to maintain jobs and economic
activity in their respective countries during these tough economic times,
nationalism emerges. Orders for those board products might be earmarked for
local companies, rather than for foreigners. That undermines sales prospects
for large international board makers.

In the face of all this, any board vendor who
launches a growth strategy right now is as foolish as a pig charging onto ice.
World economic conditions simply will not support a growth strategy, certainly
not for the next year and likely for longer. Such strategies are based on one
premise: trading profit margin for market share by lowering prices. These
growth strategies assume that the market is elastic and that the company can
increase its volume by lowering their prices and gaining market share. However,
in these economic times, growth strategies are anachronistic in the board business,
particularly in telecom and industrial applications.

Business owners employing niche strategies are the
horses on solid ground who are watching the pigs on the ice. The primary
objective of a niche strategy is to trade market share for margin: disregarding
market share with a concentration on profitability. Niche players break off
segments of a larger market with innovative products that contain intellectual
value added. In contrast, commodity players employ growth-oriented strategies
in an attempt to leverage their manufacturing as value added. The complexity,
required expertise, and lower volumes of niche products keep the larger
growth-oriented companies out of these market segments. We have seen a number
of companies succeed with niche strategies, mainly those that have developed
I/O and processor boards using cores and FPGAs.

The premier niche market for boards is MIL/COTS,
and the overwhelming majority of that market is in the United States. Every new
military application and platform has significantly different requirements that
do not lend themselves well to commodity-oriented board products and growth strategies.
Every MIL/COTS product demands some specialized expertise (such as advanced
cooling techniques, shock and vibration tolerance, or reliability) that
commodity-oriented, growth-based companies simply do not provide. The volume of
boards used in these programs is small. The MIL/COTS board markets are
nonelastic: Reducing prices does not increase demand. Finally, it takes about
four years of effort to get into the MIL/COTS market. Growth-based companies
cannot stay on the ice that long without freezing to death.

Of course, there are concerns that the new
administration, with different priorities and economic imperatives, might
reduce MIL/COTS spending, effectively icing things up. This would turn MIL/COTS
board vendors into pigs on ice, joining their brethren from the telecom and
industrial segments. Though that is unlikely, some programs will be cut. The
new administration has already stated that they do not like the missile defense
program. The latest Government Electronics Industry Association (GEIA) report
says that Unmanned Aerial Vehicle (UAV) purchases will decline 3 percent per
year for the next 10 years. However, those reductions will be in the smaller
unit-level battlefield UAVs.

The programs for Global Hawk, Predator, Broad Area
Maritime Surveillance (BAMS) UAV, Unmanned Combat Air System-Navy (UCAS-N),
Unmanned Combat Air Vehicle (UCAV), and the Tactical Unmanned Aerial Vehicle
(TUAV) are going forward. Some of these systems are slated for operational
capability by 2019. We will see reductions in deliveries of F-22 and F-35
fighters, and only a few DDG-1000 destroyers will be built. The KC-X program
(replacements for the aging KC-135 aerial refueling tankers) will go forward,
as will the program for 375 Kiowa Warrior helicopters as the Apache helicopter
upgrades are completed. All of those platforms contain very specialized and
sophisticated board-level products.

However, the new administration has also stated
that its goal is to bring the U.S. military into the 21st century, with advanced
tools and capabilities. Future military spending will likely shift from weapons
systems to Signals Intelligence (SIGINT), intelligence gathering, and
intelligence monitoring. As a result, military spending is forecast to be flat,
but not declining like telecom and industrial spending. That bodes well for
board vendors making VME, VPX, VXS, FMC, XMC, and other VITA standards-based
products in the coming years. Companies investing in designs for these
technologies will be the horses on solid ground, watching the pigs on ice.

Existing platforms coming back from Iraq will need
electronic upgrades or refreshes.
That also bodes well for companies making original VME boards. The chassis and
backplane components in those platforms are already VME. There is no performance
or capability advantage to designing and implementing a totally new
architecture in those systems. So, demand for newer, faster, more capable VME
processors, A/D, and I/O products will increase substantially under the new
administration. I expect that a lot of these new products will be built with IP
cores and FPGA technologies to maintain backward compatibility and mitigate
obsolescence issues.

The most obvious pigs on ice in 2009 will be the
semiconductor makers, as they cut and chop their product offerings to try to
get back on a sound financial footing. That means a lot of semi devices used in
MIL/COTS products will go End-Of-Life (EOL), forcing board vendors to put those
functions into FPGAs with cores.

So, ladies and gentlemen, take my advice. Find
sound footing, and watch the pigs on ice.

For more
information, contact Ray at [email protected].