By Mark Danna, Owens Design, Fremont, California, USA

Much has been written recently about the escalating cost of R&D funding required by semiconductor equipment OEMs in order to stay on the IC development trajectory required by the ITRS and Moore's Law. The gap in what is required and what can be supplied, based on the current OEM business model, has shown that this deficit could be as high as $9.3 billion by the year 2010 [1]. Unfortunately, the main focus of conversation has been on the deficit itself with little said about potential solutions to the problem other then slowing down the pace driven by Moore's Law. If we believe this to be an accurate data point, there must be a revolutionary change in the way equipment OEMs conduct business today.

Not only must OEMs optimize the use of their internal resources, they must also look outside their own four walls for innovative solutions; they must learn from the examples of others who have already taken on this challenge and drastically reduced R&D costs by making innovative changes to the way business is conducted. Early attempts at reducing R&D costs, such as the formation of consortia and alliances such as SEMATECH have helped. In fact, it can be shown that SEMETECH has had considerable impact on slowing the growth rate of R&D costs [2]. However, do to the overall size of the gap in necessary spending, this approach has not proven to be the complete answer.

Core vs. commodity technology
R&D spending is 4–6x higher for semiconductor equipment OEMs than in any other U.S. manufacturing industry [3]. R&D spending is one of the last key controllable expenses that have yet to be optimized. Most other operational functions have already been scrutinized and reduced. It has been estimated that as high as 80% of the tasks engineers perform in product development are not directly core technology related and could be outsourced. This includes tasks such as translating prototypes to production, upgrading mature products, quality testing, documentation, manuals, and qualifying vendors [4]. Realigning internal resources to focus on core technology is a huge opportunity for increasing R&D productivity so the required technology pace can be maintained.

Change is possible, as some young semiconductor equipment startups have shown. These companies are taking on a new and radical business model in order to get a foothold in the market and compete with their larger established competitors. Creating a competitive advantage from their lack of established infrastructure, these companies are completely outsourcing all non-valued added infrastructure, technology, and engineering tasks. By leveraging key outside development resources in both hardware and software, startups have been able to rapidly transform proof-of-concept tools into fully functional factory ready 300mm production tools in record time. Starting from scratch, it can take between two and three years to develop a tool ready for the 300mm production, but it has been our company's experience that, because of judicious partnering, young startup companies have accomplished this task in half that time. Outsourcing the non-core development tasks has allowed these OEMs to leverage existing technology and maintain an extremely lean R&D staff whose focus is on process critical core development only.

Outsourcing innovation
In other industries, companies have already taken on the challenge of optimizing their R&D expenditures in very innovative ways. For example, in 2001, Proctor & Gamble recognized that the old business model of conducting all R&D internally was not scalable and would not support all the new product development required to hit revenue growth targets for the future. The company found that applicable and important innovation was being done in dynamic small to mid-size companies [5]. They also found that for every P&G researcher there were at least 200 researchers on the outside just as bright and capable. It was at this point that P&G decided to change their development strategy and tap in to these outside innovation resources. The results P&G obtained: 35% of the company's innovative ideas now come from the outside, R&D productivity is up 60%, and more importantly, R&D cost as a percentage of revenue is down.

In order to be successful, collaborative development requires a strategic approach with a long-term view. The collaboration effort must be aligned with the product and technology development roadmap, it is not an outsourcing strategy where work is merely transferred to low cost regions. It is far more critical to identify key outside capabilities that will enhance and leverage internal resources and core technology. This proactive active process will require changes not only in the way a company operates, but also a change in attitude toward how R&D can be accomplished.

In the effort to bridge the coming R&D funding gap, the semiconductor equipment industry must proactively drive innovative product development through collaboration. Such efforts include not only outsourcing non-critical core development, but also increasing the span of potential technological solutions by actively developing relationships with key outside technical resources. Only in this way will they be able to cost effectively deliver the enhanced R&D capability that is required.

References
1. Ron Leckie, ISS Europe Conference Presentation, Feb. 2006; http://www.infras-advisors.com/whitepaper.html.
2. G. Dan Hutcheson, "The R&D Crisis," VLSI Research white paper, https://www.vlsiresearch.com/public/600201_r&d_crisis.pdf, January 2005.
3. Ron Rubbico, Tim Bowe, Norm Delisle, Hoyt Lougee, "Drive Top-Line Growth in the Consolidating Semiconductor Market," Foliage White Paper, http://web.corp.foliage.com/industries/semiconductor-whitepapers.php
4. M. Kripalani, A. Reinhardt, B. Nussbaum, P. Burrows, "Outsourcing Innovation," Business Week, pp. 86-94, March 21, 2005.
5. L. Huston, N. Sakkab, "Connect and Develop," Harvard Business Review, pp. 58-66, March 2006.

Mark Danna received his BA in marketing from the U. of Utah, his BS in mechanical engineering from the U. of Santa Clara, and has completed graduate studies in advanced dynamics and controls at the U. of Santa Barbara. He is the senior director of business development at Owens Design Inc., 47427 Fremont Blvd., Fremont, CA 94538, United States; ph 510/770-3441; e-mail mdanna@owensdesign.com.