IBM makes chip design push with new services unit

Setting its sights on the multibillion dollar semiconductor design market, IBM Corp. created a new services unit called IBM Engineering and Technology Services, it announced Monday.

Chip design work is typically done by small, highly specialized design houses. IBM intends to take advantage of its geographical breadth, technological expertise and IT services experience to create a global services business for the electronics industry, something smaller companies can't offer, IBM spokesman Rupert Deighton said.

IBM Engineering and Technology Services is mostly a new name and shell for work IBM has been doing for a while, but intends to build out significantly, said Michael Baeckman, manager for Europe, Middle East and Africa of the new IBM unit.

"We have been doing this for a couple of years for internal and external customers, what we have done now is label it and put it in one business unit," he said. "We pulled people together from IBM Research, the storage server division, the Asia Pacific technology office and IBM Microelectronics."

IBM's new unit will focus on design services for microprocessor-based products, Baeckman said. Customers it has today include Medtronic Inc. of Minneapolis, for which IBM built a system to review data from certain implantable medical devices, and Sony Computer Entertainment Inc., for which IBM is working on the next-generation PlayStation, Baeckman said.

IBM Engineering and Technology Services starts with more than 600 design engineers, a number it plans to increase to more than 1,000 by next year. This will be done by shifting more IBM people, but acquisitions are also being considered, Baeckman said. IBM expects the market to grow to between US$5 billion and $6 billion in 2007. Dataquest Inc., a unit of Gartner Inc., estimates the semiconductor design market is worth about $2 billion today.

IBM, based in Armonk, New York, believes it is a lone giant among chip designers. "In doing my competitive research in Europe, I have been unable to find anyone with the breadth that we have," Baeckman said. Analysts agree, but say IBM's size might work against it.

"People may be afraid of IBM being their subcontractor. IBM is a very big and powerful company and usually businesses like this done on an equal basis, or even with a less powerful subcontractor. That is why the small companies are doing very well," said Chris Ryan, an industry analyst with semiconductor research firm Future Horizons in Sevenoaks, England.

Jim Tully, chief analyst with Dataquest in Egham, England, agreed with Ryan and spotted another obstacle for IBM because of its size.

"The challenge for IBM, because it is a big organization, is that they must find some very big design contracts to make it a viable business. They have to identify markets where there is projected to be high market growth and where the market is projected to be a big market," said Tully, adding that the telematics market is a likely target.

Although IBM Engineering and Technology Services is "primarily into design services," the unit can also provide other IBM services from consulting and licenses for patented IBM technology to production, Baeckman said. Engineering and Technology Services will also offer IBM's Global Financing options, he said.

Dataquest's Tully sees those added services as a major differentiator when comparing IBM with the "very small companies" working for customers around the world in a "very fragmented semiconductor design market."

"The IBM scale of operations is much bigger and they will be looking to design complete products, not just a chip, but several chips and even complete boards and systems. These small companies tend to have highly specialized skills and are often used to just design part of a chip, while IBM is a generalist," Tully said.

Chip design customers may even use IBM for one job and a smaller design house for another and IBM may in some cases turn to a specialized small design house to get some work done, Tully said.

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