Downstream woes of an upstream slump

Just before the great telecom collapse of 2001, companies like Broadcom and Intel used to boast about the fact that they were talking directly to public-network service providers, in effect bypassing the OEM by learning the needs of the broadband wireline service provider early. The strategy certainly made sense, as most OEMs were hollowing out and becoming little more than ODMs by another name, assembling systems from the reference designs provided by chip suppliers.

The downside of such a tight bond, of course, is that the crashes that impacted service providers would affect semiconductor suppliers more rapidly, a tendency we saw continuously over the last decade. Last Friday (March 19), Dylan McGrath at EE Times provided an example of this trend applied to the FPGA industry. China Mobile’s decision to cut capital expenditures by at least 5 percent would have an immediate effect on Xilinx and Altera, according to Christopher Danely of JP Morgan Chase,  because the two companies relied on the China base station market for up to 10 percent of total revenues.

In the late 1990s, IC vendors worried about an overreliance on large manufacturing companies like Cisco and HP, with 10 or 15 percent being the dangerous edge, because of just such a concern. But it is rare to see this extend directly to the service provider market.

Then again, it’s not too surprising to see a carrier in even a boom developing-nation market succumb to reality. Wireline providers have been in the doldrums for a decade, and all too many are looking to the FCC’s new broadband initiative as a magical source of potential handouts. Wireless operators in the Americas and Europe have had trouble maintaining profitability even with the advent of advanced services propelled by iPhone and other smartphones. China Mobile’s capex decision shows that in a slump this broad and deep, even Asia’s biggest boom markets are affected.

There are not many lessons Xilinx or Altera can learn from this, unfortunately. The FPGA giants need to pursue business wherever it may exist, and could be limited in how broadly they can spread their bets. But the China Mobile announcement underscores the fact that even the brightest semiconductor markets in the 21^st century are not without their downsides.