Practical Chip Design

It's a question a lot of engineers have to be asking themselves right now, especially if they have been too up-close and personal with the situation. All over the industry we see giant companies like IBM and Microsoft announce great fourth-quarter and annual results, and then follow up with a layoff announcement. We see smaller companies in the fabless world staying on track on product development, successfully sampling to key customers, and ramping revenue products—doing everything right—suddenly making significant cutbacks, either laying off people or cutting back on projects that lead to layoffs elsewhere. And we see, if we look carefully, start-ups who are on track and meeting milestones just shutting their doors. What gives?

Part of the answer is certainly the herd mentality for which the semiconductor industry is famous. The media are telling us it's time to panic, so we are all busy panicking. And what better response to unspecific fear of the future than to do something traumatic, especially if its mostly traumatic to someone else and it saves a bunch of money?

But there is a more serious answer, involving why this recession isn't like any other in previous memory. This one started not with a sudden drop in demand, but with a global credit crisis. And in many cases, the reason companies are doing layoffs in the face of reasonably good operating results is not that they think demand will fall over a cliff—though the inability to deny that scenario is certainly a factor—but the fact that the credit crisis has continued to deepen and spread to the industrial economy. Lack of credit is no longer just the province of investment banks, insurance companies and hedge funds: it's a fact in the world of real business.

Here's the situation. Part of the CFO's job is to make sure there is enough money to fund operations every month. In normal times, a company's business is cyclic. In some months revenue more than covers operating cash outflows. In other months it doesn't, and the CFO turns to either cash reserves, short-term investments, or the company's credit lines for a month or a few. In the cases of companies with a limited range of products and long development cycles, these credit-funded shortfalls can last for a year or more.

What's changed is that many of the short-term credit markets are closed, or are punitively conservative. Many companies have had their credit lines frozen, had covenants invoked to cancel revolving credit, or have been denied bridge loans that would have been routine two years ago. Short-term corporate paper isn't selling well. And some of the short-term investment markets in which financial officers used to park funds temporarily have all but ceased to function.

That leaves the CFO with a grim situation. Absent the alternative of borrowing money, the company must have enough cash or cash-equivalents on hand to see it through a bad-scenario period of negative cash flow. Since that is a much more conservative requirement than just last year, most companies will not have enough short-term assets on hand to see them through at their current levels of fixed expenses. And with forecasts falling, they are not likely to accumulate piles of cash this quarter, either. So the only degree of freedom left is to cancel discretionary expenditures, delay the delayable, and reduce fixed expenses. That last part includes you and me.

So we see companies that are operating at a profit cutting costs like crazy—making a dead zone in the local economy around them—and even laying off critical employees. It's not panic or even lack of visibility. It's the need to bring worst-case operating cash flows to zero in the bad months ahead because there is no guarantee the company can borrow to cover negative cash flows.

If we look at venture-funded start-ups instead of established companies, the situation is even more dire. Many venture funds have simply locked the checkbooks in the desk. Rumors abound on the street here about funds that have told their companies "no more rounds, no more payouts on this round, no more loans, no nothing." In one case a venture reportedly found out from a leaked internal memo that their VC would not be providing additional funds. They hadn't even been notified. Lacking any alternatives, they simply turned out the lights.

So what to do? The most important thing is to understand your company's cash-flow scenarios and its alternatives. The next most important thing is for all the executives, including the CFO, to consider non-traditional sources of funding. Some people actually have scored help from obscure contacts in the Middle East or China. But a more likely source is key customers. Sufficient bridge funding to keep cash flow above zero may be an insurmountable obstacle for a little fabless semi company, but a small risk for the huge system OEMs to whom the company is important. In fact from the system OEM's point of view, ensuring survival for the supplier of a key component in a promising new product may be a very good short-term investment in their own cash flow. And in some cases, you can build a similar scenario for key suppliers: they may be richer, and have an interest in your survival much larger than the cost of ensuring it.