Inside the Minds: The Seminconductor Industry- Industry Leaders Share Their Knowledge on the Future of the Semiconductor Revolution 1587620227, 9781587620225

Table of contents :
CONTENTS......Page 7
THE HOLY GRAIL OF THE SEMICONDUCTOR INDUSTRY: THE PERFECT MEMORY SOLUTION - STEVEN R. APPLETON......Page 9
PROGRAMMABLE LOGIC: ENABLING THE DIGITAL REVOLUTION - WIM ROELANDTS......Page 28
THE STREAMING MEDIA FUTURE - JACK GUEDJ......Page 58
BUILDING A WINNING COMPANY FORTHE LONG HAUL - IGOR KHANDROS ......Page 80
THE NEXT-GENERATION, SILICON LIFESTYLE - RAJEEV MADHAVAN......Page 92
MANAGING THE PROMISE OF THE FUTURE - STEVE HANSON......Page 107
CHANGING THE DYNAMICS OF THE DATA CENTER - EYAL WALDMAN......Page 122
LETTING THE MARKET DRIVE THE INDUSTRY - BOB LYNCH......Page 144
MEETING CONSUMER DEMANDS FOR HIGH PERFORMANCE - SATISH GUPTA......Page 158

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Praise for Inside the Minds "What C-Level executives read to keep their edge and make pivotal business decisions. Timeless classics for indispensable knowledge." Richard Costello, Manager-Corporate Marketing Communication, General Electric (NYSE: GE) "Want to know what the real leaders are thinking about now? It's in here." - Carl Ledbetter, SVP & CTO, Novell, Inc. "Priceless wisdom from experts at applying technology in support of business objectives." - Frank Campagnoni, CTO, GE Global Exchange Services "Unique insights into the way the experts think and the lessons they've learned from experience." - MT Rainey, Co-CEO, Young & Rubicam/Rainey Kelly Campbell Roalfe "Unlike any other business book." - Bruce Keller, Partner, Debevoise & Plimpton "The Inside the Minds series is a valuable probe into the thought, perspectives, and techniques of accomplished professionals. By taking a 50,000 foot view, the authors place their endeavors in a context rarely gleaned from textbooks or treatise." - Chuck Birenbaum, Partner, Thelen Reid & Priest "A must read for anyone in the industry." - Dr. Chuck Lucier, Chief Growth Officer, Booz-Allen & Hamilton "A must read for those who manage at the intersection of business and technology." - Frank Roney, General Manager, IBM "A great way to see across the changing marketing landscape at a time of significant innovation." - David Kenny, Chairman & CEO, Digitas "An incredible resource of information to help you develop outside-thebox..." - Rich Jernstedt, CEO, Golin/Harris International

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www.Aspatore.com Aspatore Books is the largest and most exclusive publisher of C-Level executives (CEO, CFO, CTO, CMO, Partner) from the world's most respected companies and law firms. Aspatore annually publishes a select group of C-Level executives from the Global 1,000, top 250 law firms (Partners and Chairs), and other leading companies of all sizes. C-Level Business IntelligenceTM, as conceptualized and developed by Aspatore Books, provides professionals of all levels with proven business intelligence from industry insiders - direct and unfiltered insight from those who know it best - as opposed to third-party accounts offered by unknown authors and analysts. Aspatore Books is committed to publishing an innovative line of business and legal books, those which lay forth principles and offer insights that when employed, can have a direct financial impact on the reader's business objectives, whatever they may be. In essence, Aspatore publishes critical tools need-to-read as opposed to nice-to-read books - for all business professionals.

Inside the Minds The critically acclaimed Inside the Minds series provides readers of all levels with proven business intelligence from C-Level executives (CEO, CFO, CTO, CMO, Partner) from the world's most respected companies. Each chapter is comparable to a white paper or essay and is a future-oriented look at where an industry/profession/topic is heading and the most important issues for future success. Each author has been carefully chosen through an exhaustive selection process by the Inside the Minds editorial board to write a chapter for this book. Inside the Minds was conceived in order to give readers actual insights into the leading minds of business executives worldwide. Because so few books or other publications are actually written by executives in industry, Inside the Minds presents an unprecedented look at various industries and professions never before available.

INSIDE

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Inside The Minds:

The Semiconductor Industry Industry Leaders Share Their Knowledge on the Future of the SemiconductorRevolution

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BOOK IDEA SUBMISSIONS If you are a C-Level executive or senior lawyer interested in submitting a book idea or manuscript to the Aspatore editorial board, please e-mail jasonfaspatore.com. Aspatore is especially looking for highly specific book ideas that would have a direct financial impact on behalf of a reader. Completed books can range from 20 to 2,000 pages - the topic and "need to read" aspect of the material are most important, not the length. Include your book idea, biography, and any additional pertinent Information.

Published by Aspatore Books, Inc. For information on bulk orders, sponsorship opportunities or any other questions please email [email protected]. For corrections, company/title updates, comments or any other inquiries please email [email protected]. First Printing, November 2001 10 9 8 7 6 5 4 3 2 1 Copyright © 2001 by Aspatore Books, Inc. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, except as permitted under Sections 107 or 108 of the United States Copyright Act, without prior written permission of the publisher. ISBN 1-58762-022-7 Library of Congress Card Number: 2001118896 Cover design by Michael Lepera/Ariosto Graphics & James Weinberg Material in this book is for educational purposes only. This book is sold with the understanding that neither any of the authors or the publisher is engaged in rendering legal, accounting, investment, or any other professional service. This book is printed on acid free paper. The views expressed by the individuals in this book do not necessarily reflect the views shared by the companies they are employed by (or the companies mentioned in this book). The companies referenced may not be the same company that the individual works for since the publishing of this book. Executives may have switched companies since the printing of this book.

Inside the Minds: The Semiconductor Industry Industry Leaders Share Their Knowledge on the

Futureof the SemiconductorRevolution

CONTENTS Steven R. Appleton THE HOLY GRAIL OF THE SEMICONDUCTOR INDUSTRY: THE PERFECTMEMORY SOLUTION

9

Wim Roelandts 29 PROGRAMMABLE LOGIC: ENABLING THE DIGITAL RE VOLUTION Jack Guedj, Ph.D. THE STREAMING MEDIA FUTURE

59

Igor Khandros, Ph.D. 81 BUILDING A WINNING COMPANY FOR THE LONG HAUL Rajeev Madhavan THE NEXT-GENERATION, SILICON LIFESTYLE

93

Steve Hanson MANAGING THE PROMISE OF THE FUTURE

109

Eyal Waldman CHANGING THE DYNAMICS OF THE DATA CENTER

125

Bob Lynch LETTING THE MARKET DRIVE THE INDUSTRY

147

Satish Gupta MEETING CONSUMER DEMANDS FOR HIGH PERFORMANCE

161

The Semiconductor Industry

THE HOLY GRAIL OF THE SEMICONDUCTOR INDUSTRY: THE PERFECTMEMORY SOLUTION STEVEN R. APPLETON

Micron Technology, Inc. Chairman of the Board, Chief Executive Officer, and President

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Inside The Minds

The Rice of Life On my first trip to Japan in the 1980s, I heard a phrase I never truly understood until many years later: "Semiconductors are the rice of life." This philosophical approach to an entire industry would have a profound impact on most of my adult career beyond anything I could ever have imagined. Rice is the foundation for much of Asia's food supply. Decades ago many Japanese industrialists and government officials compared the importance of rice production to that of steel production. Then in the 1960s and 1970s, as the United States invented and then commercialized semiconductors, it became apparent to most developed nations that success in electronics meant success in semiconductor production. Soon the Japanese industrialists and government officials coined the phrase "rice of life" for their newly developed semiconductor industry. In the early stages, unlike the somewhat disjointed and random nurturing the U.S. capitalist system provided, the Japanese government worked closely with its large industrial corporations to subsidize the research and development, and ultimately the commercialization, of semiconductor products. This "government-targeted" model achieved rapid success and introduced the approach for other Asian countries to follow. And follow they did. Several countries decided semiconductors were one of the primary rungs on the world's economic ladder. 10

The Semiconductor Industry As many countries discovered, however, creating new semiconductor products the world wanted was extremely difficult. In addition, particularly during those formative years, it was commonly believed that dynamic random access memory (DRAM) required the most advanced semiconductor processing technology available. These assumptions, combined with the established practice of defining DRAM specifications through an industry consortium, created the perfect opportunity for new international competitors. Supported by their governments, companies targeted DRAM as their product of choice. Already clearly defined by more accomplished producers, DRAM, the most common chip used in computers, would help them develop the most advanced technology. Japan was aggressive in the early 1980s, driving nine of 11 U.S. producers out of business while capturing 95 percent of the worldwide market. Korea copied the Japanese approach in the late 1980s, gaining market share in much the same way. The American companies worried about the Japanese, and later the Japanese and Americans worried about the Koreans. In the mid-1990s Taiwan entered the race, and American, Japanese, and Korean companies became worried about the Taiwanese - and still are. China will follow in the decade ahead. The Asian companies all used government-funded programs to jump-start their semiconductor businesses, but the most aggressive of these countries to date has been Korea. The Korean government frequently intervenes to distort established market

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Inside The Minds

principles, providing billions of dollars in governmentbacked subsidy programs to protect their own companies. In the early days of the semiconductor business, vertical integration was the standard corporate model. To much of the public, a chip was a chip was a chip, and from their perspective, one chip didn't vary too much from another. In reality, though, it took a complex chain of processes to make a semiconductor. Ideally, each company had to be able to handle everything from the sand needed to make a silicon wafer to the computer system that would use it. A few large, sophisticated companies like IBM and AT&T (Bell Labs) had the technology to execute throughout the vertical chain, and because of their initial successes, the Japanese followed the same business model. Smaller companies like Micron were always trying to carve out a niche, but conventional wisdom held that only the major players had the staying power to compete. In the late 1980s and early 1990s, two things happened that pushed the industry to change the model to one I call "selective expertise." First, the merchant market for semiconductors grew well beyond the needs of the vertically integrated companies. This created opportunities for much smaller players to sell to customers that did not have their own semiconductor operations. Also, a company could now choose to focus on a specific category of semiconductors, so it could develop and introduce innovative products much faster than the vertically integrated companies that were distracted by the total

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The Semiconductor Industry

process chain and driven only by their internal, captive users. These changes accelerated the semiconductor's transition to more complex and specialized products. Instead of being all things to all people, semiconductor manufacturers focused on a single area. Texas Instruments, for example, was now the DSP (digital signal processor) expert. Intel, as we all know, targeted microprocessors. And Micron became the leader in memory. As you would expect, this shift in an entire industry's core business strategy caused splits and separations as companies shed divisions that did not fit into their new specialized game plan. And as we progress through the 21t century, we'll witness a different kind of counter-revolution. Whereas, the model in the 1970s and early 1980s was based on vertical integration, and the 1990s model was based on vertical separation, the semiconductor industry will now migrate toward a "horizontal integration" model, somewhat reversing a decade of specialization. Once again, this adjustment will be spurred by improvements in technology and changes in the marketplace.

Evolutionary Surprises During the last two decades semiconductors have largely evolved by applying more and more of a given capability e.g., higher-speed processors, more logic gates, higherdensity memory - to an increasingly smaller piece of 13

Inside The Minds

silicon. Obviously, new products surface every year, but the large consumption of silicon was simply more of the same. Much of this consumption was driven by the computing world, which was running as fast as it could to catch up with the needs of the marketplace. But we have finally reached the point where people don't simply need more density or higher-speed processors. They need the integration of all of this capability in a single solution. And the consumer wants most of it to be mobile. The primary components of the digital semiconductor world are logic, processors, and memory. Imagine each of them as individual circles. In today's environment, these three circles are moving toward each other. Eventually all three of them will overlap in the center, with two of the three components overlapping in the outer areas. In the center will be the combination of all three technologies what I call maximum integration and what others refer to as system-on-chip, or SOC. In the other overlapping areas, the combination of two of the technologies will achieve some level of integration. In the next decade we'll see product development migrating toward a horizontal integration model. Micron and many of our competitors are already working diligently to develop the capability to integrate all the various technologies. In some cases, our customers are driving us in this direction, and in other cases we are driving our customers. Imagine the performance increases if the electronic signals between different functions have to 14

The Semiconductor Industry travel only a few microns rather than the fractions of an inch they currently traverse. Operating speeds will dramatically increase, and power consumption will significantly decrease. This will allow many applications to be developed that are impossible today - particularly those in the mobile arena. There is no question computing will continue to use a large percentage of the world's semiconductors, despite the prediction by some analysts that the PC (personal computer) is dead. Granted, recent market activity indicates its rate of growth will slow, but the sector still provides many opportunities for improved applications. Furthermore, we probably all agree computing will not be the main driver of silicon integration, even though most of us could not survive without our computers - at least psychologically. Outside the PC space, the number of applications using semiconductors is rapidly growing, and it will continue to expand at a higher rate. Most of these applications are being driven by networking (servers, hubs, routers, and switchers), communications, and mobile and Internet applications (cell phones, pagers, PDAs, MP3 players, etc.).

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Inside The Minds

Long Live the Consumer The vast array of communication technologies has truly made this a consumer's market - and as with every other consumer product, the individual on the street will decide which applications live and which ones die. A good example of this is the evolution of the cell phone. Voice communication does not require much memory, so early mobile phones had little, if any, memory and were often cumbersome and marketed mostly to the business customer. But today, cell phones and PDAs are small, light, and easy to use and are marketed to the everyday consumer. They can store, receive, and transmit data, ranging from contact numbers to weather information, emails, and Internet access. As a result, cell phone and PDA sales have exploded, and their uses are expanding. One of the keys to the burgeoning market for these devices is the availability of low-power, low-cost memory to store the data being transmitted and received. For example, to download data from the Internet to a PDA, memory is used to receive and capture the data and then store it inside the device. Later, memory is again used to retrieve the data from inside the PDA to display it. Bandwidth issues continue to limit the amount and speed of data transmissions, but if you compare today's bandwidth with that of, say, five years ago, it's incredibly broad now, with enough capacity to handle just about any data transfer

16

The Semiconductor Industry

needs. We are moving a lot more bits and bytes (the basic units of measuring data) today, and we will be moving even more tomorrow. As large as bandwidth is now, it's likely only to get bigger as we consumers demand voice, video, and data to be transmitted. The greater the bandwidth, the more data can be moved, and the greater the need for more memory to buffer the in-flow and out-flow of that data. Another interesting development with these devices is that many of them are beginning to have similar features. PDAs now function as cell phones. Cell phones now function as PDAs, and both are adding larger screens and video capability. Semiconductor manufacturers historically have not been adept at predicting which applications will succeed, so our challenge is to make sure we supply silicon to all applications. Whether we call a cell phone a consumer device or a communication device is irrelevant. We must make sure the memory devices we design fit the applications, no matter what they are called.

The Perfect Memory Solution Potentially, one of the most exciting developments in the future of semiconductors will be the integration of the key attributes of all three major memory capabilities - SRAM, Flash, and DRAM - into a single device. It is something sometimes referred to as non-volatile DRAM, and other times, The Perfect Memory Solution.

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Inside The Minds

Presently, DRAM, or dynamic random access memory, is the most common type of memory used in personal computers and workstations. It is called "dynamic" because it requires the storage cells to be refreshed with a new electrical charge every few milliseconds to maintain its high density of information in its small cell size. DRAM allows data to be added, deleted, or manipulated quickly, easily, and inexpensively. Its only negative aspect is that it will lose the stored information if the power is turned off. This is not the case with Flash memory. When you turn the power off, Flash retains its data. Flash memory is used in applications in which you want access to your stored data when you turn your appliance back on after having switched it off. A good example of this is phone numbers stored in a cell phone. The negative aspect of Flash is that it takes much longer to manipulate the data than DRAM. If an application is not cost sensitive and has as its main attribute high-speed data transfer, SRAM (static random access memory) is the answer. SRAM provides faster access and does not have to be periodically refreshed though it stores less information and is more expensive to produce than DRAM. In a typical computer application, Flash memory would take far too long to accomplish what it takes DRAM only a few nanoseconds (one billionth of a second) to do. Meanwhile, SRAM would significantly increase the cost of

18

The Semiconductor Industry

a consumer product, while DRAM requires periodic refresh. The Perfect Memory Solution may be The Holy Grail of our industry and, ideally, something many semiconductor companies hope to develop. Think of the possibilities if we are someday able to combine the speed of SRAM, Flash's ability to save data when the power is turned off, and the low-cost, high-storage capability of DRAM. That's what I mean by the "Perfect Memory Solution": a single device that reads and writes as fast as SRAM, retains its data when the power is turned off like Flash, and drives consumer products to ever decreasing price points.

Survival of the Fittest Semiconductor companies rarely have the opportunity to become complacent or leave their resources unused, at least not for very long. The cyclical nature of the business will simply not allow such a luxury. Every few years, the world of technology experiences a downturn. The economy may be thriving, and you may have just experienced one of your most profitable quarters ever, but then suddenly you're faced with drastically reduced profits, massive inventory stockpiles, and a dwindling market for your product. That's when you have to become a survivor. Only the strongest and smartest will be around to enjoy the fruits of the next upturn. Of course, nobody can control when that 19

Inside The Minds next cycle is going to occur. Even the so-called forecasting industry experts have been humbled by the vagaries of our business. There are just too many variables on both the supply side and the demand side for anyone to foretell the future of semiconductors with any degree of accuracy. The key to survival is how a company prepares for the next downturn and, perhaps more importantly, how it reacts when one occurs. In the mid-1980s, most of the American memory manufacturers exited the business or closed their doors as a result of the subsidized targeting in other countries. Our friends in Asia played hardball in the competitive arena through government or cross-subsidy programs. The general industry wisdom was that eventually we would all be working for Japanese companies. In 1986, when Micron was enduring one of its most difficult periods, we hired an individual from a wellestablished semiconductor company - one of that company's founders - as a Micron senior vice president. I was running production for our wafer fabs at the time. I walked into his office one day to speak with him about the downturn and how we should approach production in such a challenging environment. I wanted to discuss our cost reduction efforts, productivity goals, and other details. But his agenda was a little different. In fact, he saw no reason to discuss the future at all. "Steve," he said, "there's just no way we can make it. It's impossible to compete against the Japanese. It can't happen." 20

The Semiconductor Industry I was stunned. I had never considered we wouldn't be able to compete. Sure, times were tough, but we'd overcome everyone's doubts before, and I was absolutely positive we would do it this time, as well. It was the last time I ever visited his office. Fortunately, our core management group shared my feelings. They were confident and willing to make the sacrifices needed to help the company climb out of the valley it was in. Many of these people are still here, making Micron one of the best semiconductor manufacturers in the world. If there's a pattern emerging here, it's that Micron finds it very exciting to prove wrong those who predict our premature demise. We've not only overcome great odds, but we have also succeeded where the foreign competition has failed. We have outworked and out-innovated others. And that's why we're an industry leader today, not only maintaining an American presence in the memory semiconductor industry, but also being positioned as arguably the leading memory manufacturer globally. One of the foundations of our success is that we have a unique outlook on downturns. Rather than looking upon them exclusively as times of challenge and uncertainty although they are certainly that - we try to find nuggets of possibility in them. There is a much greater opportunity to make our company more competitive during a down cycle than is usually attainable during a period of overall industry growth.

21

Inside The Minds This may sound ludicrous to those who believe prudence demands you pull in your horns, lay people off, and passively "ride it out." And it can be ludicrous if you don't have a plan. You should not expect growth in absolute terms. But if your focus is to improve your position relative to your competition, then, in our view, downturns can offer the greatest potential for success. This is not mere theory. We've proved it works for Micron. Our company grew up in the relative technology wilderness of Boise, Idaho, far from the urban wizardry of Texas and California that fostered many of today's well-known technology companies. Nonetheless, we lifted ourselves from producing just three percent of the world's DRAM supply in the late 1980s to producing nearly 30 percent of the world's DRAM supply in 2001. Even our competitors agree - though not publicly - that this is an impressive

accomplishment. We achieved most of this growth during periods when the industry was in the doldrums. Another key to success is using the up cycle to position your company financially to weather a stunning decline in profits and to outlast your competitors who, more than likely, have done what most companies do when the economic sun is shining. They have taken on too much debt, significantly diluted their value to shareholders, built too much capacity, and positioned the company to handle only a warm and sunny business climate.

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The Semiconductor Industry As I mentioned, cycles in the semiconductor industry are just too hard to predict, and the capacity a company builds to meet today's demand will not come online for one to two years. By that time, computer sales may have drastically declined. New technologies may be slower in developing than expected. Consumers may not fall in love with the newest electronic products. In short, the unforgiving market collapses and penalizes a company for mistakes in timing. Our market environment provides two great examples. The Taiwanese were expanding as fast as possible about two years ago. The market was booming. Like everybody else, they were making a lot of money. Like everybody else, they wanted to make more. So they began building new facilities during the upturn, which everyone assumed, considering the world's rapidly expanding economy, would last well into the foreseeable future. Unfortunately, the foreseeable future ended about the same time the Taiwanese plants were ready to come online. The bottom fell out of the entire technology sector. Dot-coins died. Computers went begging. And the demand for memory was, well, a memory. The executives in Taipei had all this capacity to produce product at selling prices that had declined 85 percent in the prior 12 months. Another case in point involves Hynix Semiconductor, formerly Hyundai Electronics, Inc. During the last several cycles, up and down, Hynix continuously spent large amounts of money on expansion instead of appropriately reducing debt when they had the opportunity. Hynix was

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Inside The Minds out of sync with their capacity expansion programs. They took on too much debt to build manufacturing plants when the market was peaking. They may have thought it was a good decision at that time, but in the end those facilities were not needed when they were finally completed. And because of a short equipment life cycle, they would never be able to recover their investment. Today, Hynix continues to have problems because of their inability to service their debt, with no hope of ever paying it back. In fact, the Korean government has had to provide numerous subsidies, in addition to debt-for-equity swaps, just to keep Hynix from bankruptcy. Another type of strategy is optimizing your options during a downturn. Until the year 2001, mid-1998 was the darkest hour for the semiconductor business. At that time, we were in the midst of the longest downturn in our history. Almost every semiconductor manufacturer in the world struggled to keep its head above water. In fact, many American semiconductor memory manufacturers called it quits. They closed their doors or sold their plants to Asian competitors. It seemed the United States was in danger of losing its remaining semiconductor memory industry to foreign interests. Even one of the strongest companies in the field, Texas Instruments, wanted to get out. Its manufacturing facilities in Richardson, Texas; Avezzano, Italy; Nishiwaki, Japan; and Singapore were for sale. But what company would be crazy enough to make a deal during one of the most serious recessions in the history of the semiconductor industry?

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The Semiconductor Industry

We were. Micron closed the deal on Texas Instrument's memory operations in September 1998. Just about everyone who had an opinion - and just about everybody did - thought it was one of the most reckless decisions they'd ever seen. "Crazy" described the deal in many circles. But in fact, it was a great move. Financially, we had structured it very prudently. We even received a large amount of cash as part of the transaction. From Micron's perspective, it was the right time, the right place, for the right money. TI wanted to get out of the memory semiconductor business, while we wanted to consolidate our low cost position and grow. If we had made the purchase during better times, TI would have held out for an agreement that was far more expensive. And when the better times returned soon after we made the deal, as we knew they would, we were positioned to take full advantage of the upturn. We brought all that additional capacity online at a time when we also sold all the additional output at premium prices. We had everything humming at the right moment, but to optimize the opportunity, we had to take a chance during the semiconductor industry's darkest hour.

World Economies In the early days, the semiconductor industry generated its own economic cycles. The industry was small, and the supply and demand cycles could easily move independently 25

Inside The Minds of the overall economy. Quite often, while the U.S. or world economy was in a recession, the semiconductor industry was booming - and of course, the reverse is true, as well. Today the industry, accompanied by the rest of the electronics sector, is such a large piece of the overall economy that it can no longer be shielded from the world's financial difficulties. In fact, the technology industry has grown to the point that it can affect the economies of a country all by itself. This has been a fundamental shift in our business. Worldwide competition in semiconductors is fierce. A few survival guidelines for the semiconductor business - which aren't so different from most other industries - will go a long way toward steering a company clear of trouble: Keep investing in research and development. Continuously reduce your costs. Never truly believe you're ahead of the competition. In the semiconductor business, there will be more corporate consolidations and more volatile cycles, but the industry will continue to grow at an incredible rate. Unlimited opportunities exist for those strong enough to survive its unforgiving competitive environment.

Steven R. Appleton is chairman of the board, chief executive officer, andpresident of Micron Technology, Inc. Appleton joined Micron in 1983 and has held a series of

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The Semiconductor Industry increasingly responsible positions, including production manager, director of manufacturing, and vice president of manufacturing.In 1991, Appleton was appointedpresident and chief operating officer of Micron Technology, Inc. In 1994, Appleton was appointed to his current position of chairman, chief executive officer, andpresident. Appleton formerly served on the board of directors of Sematech, an industry lead technology consortium, and St. Luke's, a regional hospital. He currently serves on the board of directors of the Semiconductor Industry Association, as a trustee of Boise State University, and as a member of the Idaho Business Council. In addition, he received a presidential appointment to serve on the Semiconductor Technology Council. He received a Bachelor of Business Administration from Boise State University in 1982.

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The Semiconductor Industry

PROGRAMMABLE LOGIC: ENABLING THE DIGITAL REVOLUTION WIM ROELANDTS

Xilinx, Inc. Chief Executive Officer

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Inside The Minds

Revolution: Analog to Digital I was born and raised in Lennik, Belgium, a small town southwest of Brussels. After I earned my bachelor's degree in electrical engineering, I joined Hewlett Packard in 1967 in Belgium. During my 29 years at HP, I served in a variety of positions and held about 15 different jobs in marketing, R&D, and internal management in Belgium, France, and the U.S. I was often given assignments as a troubleshooter at HP. Several of these assignments were to straighten out parts of the company that weren't performing well and needed a change in direction. My job was to take an organization, eliminate problems, and establish a successful strategy. Most of my activity was in the area of computer networking, so my fundamental discipline was there when, in 1983, 1 came to the U.S., where the company had a research laboratory specializing in networking. The organization had some problems, and it was my job to help it move in the right direction. By 1995 I was responsible for HP's worldwide computer systems organization, which was then a $6 billion business and accounted for roughly 20 percent of the company's revenue at the time. When I left HP in early 1996 to become CEO at Xilinx, it was a major change for me. At HP my organization had total responsibility for the company's computer systems, its proprietary Precision Architecture RISC microprocessor chips, the operating system, professional services, and 30

The Semiconductor Industry

sales. So, after spending most of my career in computer systems, I switched to a company that develops and markets programmable logic chips and related products. While Xilinx chips are used extensively in data processing systems, the company itself has very little to do with computers. One of the main reasons I joined Xilinx was that the company represented a tremendous opportunity. I believed then, and I still do, that programmable logic is going to be one of the enabling technologies for the digital revolution we are now seeing. Whether it is the Internet or HDTV, we are clearly moving from an analog to a digital world. Digital allows you to manipulate, to change, to correct, and to "take the warts out" thanks to algorithms: Sound becomes brighter; images become clearer; communication becomes more reliable. The Internet is a result of the digitalization of the world. That doesn't mean analog will disappear, but it does means we will be able to build better interfaces to the real world, which is analog, and then manipulate and transmit that information anywhere instantly. Photography used to be an analog application that used film and paper to capture and produce an image. Now it's a digital application that uses electronics to do the same thing. But now you can take a picture and send it anywhere in the world in seconds. When I joined Xilinx, programmable logic was still in its infancy as a technology, but I realized it was going to have a very bright future. Today programmable logic is one of

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Inside The Minds the fastest growing segments of the chip business, and it's growing faster than the overall semiconductor market.

The Excitement of Being on the Leading Edge Since I'm in love with technology and electronics, it's exciting to be able to work in an area where significant advances are being made very quickly. Xilinx makes some of the most complex semiconductors in the industry, and we are using the most advanced process technology to manufacture them. Our newest chips pack hundreds of millions of transistors into an area the size of a thumbnail. There is nothing like being at the leading edge if you want excitement. Another thing that I like is the variety of challenges at Xilinx. Our value proposition is simple: We help our customers reduce their development cycles, so they get their products to market faster than the competition. Although our main products are based on silicon, Xilinx offers our customers a broad portfolio of products and services that together make up our total solution. First are our memory-based chips - standard parts that can be reprogrammed an infinite number of times. Second are our software tools, which customers use to program those chips. A third part of our solution, and growing in importance, is our intellectual property cores. These are predefined system functions delivered as software modules that customers use as part of circuit design. Cores literally

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can take months off a product development cycle. An equally important part of our offerings is an extensive set of technical support services to help our customers realize their own unique logic designs in Xilinx products. In some respects, then, Xilinx is similar to my experience at HP. When your company provides a systems solution, you're involved in hardware, software, applications, deployment, and support. That breadth of activity allows me to keep my finger on a broad range of technologies, look at the total picture, see what is happening, and decide how we can continue to drive the company forward. Most companies are very good at doing one technology. For example, Intel excels at silicon, and Microsoft does a tremendous job with software. But there is a greater degree of complexity when a company has to master both disciplines at the same time - as we are trying to do at Xilinx. We really are producing some of the most advanced silicon in the world, but at the same time our software teams are also pushing the state-of-the-art with Xilinx chip programming tools and intellectual property cores. We are achieving results on both sides that are mind boggling, and we are recognized as the best in our industry. What's been exciting for me is to see how we have strengthened the different disciplines through collaboration. Before I came to Xilinx, the silicon engineers developed the chips first; then the software people worked on developing the tools to program the chips. Now we have a much more integrated, up-front development environment 33

Inside The Minds where key architects from both sides work together to try and come up with the best solution. While something may be easy to do in silicon, it may not be as straightforward in software and vice versa. By having teams work closely together, they make the best decisions on where to invest the company's collective efforts to come up with a world class solution. The results from this new collaborative process have been phenomenal. For example, five years ago the biggest chip we were developing had 50,000 system gates, which is a measure of logic density on Xilinx chips, and it was running at a clock rate of 20 megahertz. Today we are delivering chips that have about six million system gates and are running at a clock rate of over 200 megahertz. Devices with ten million system gates running over 200 megahertz are on the horizon, and our roadmap calls for devices with 50 million gates in the next few years. This is tremendous progress it's an improvement in logic density of more than three orders of magnitude in five years. While many people often think of Xilinx as primarily a hardware company, in fact more than half of our technical employees are now software engineers. This is evident in the strides we've made in the performance of our software tools. If you think about it, when you double the density of a chip, the software used to compile the design must double in speed just to keep the customer's productivity at par. A few years ago, it took our tools about one hour to compile a design for a chip with 10,000 system gates. But with the

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latest version of our software tools, it takes only 30 minutes to compile a design for a one-million system-gate programmable logic chip. Our goal is to continue to increase the efficiency of our tools by at least 50 percent a year because our chips are getting larger and larger with each new product introduction. This kind of progress is due to a tightly coupled product development system where you look at silicon, software, and intellectual property and put them together. That's when breakthroughs in performance take place. In each discipline alone we could never have achieved these breakthroughs, but by working together, we did. We have extra leverage by managing the overall interactions among the different technologies.

Building a Unique Culture Another exciting aspect of Xilinx is its culture, which is people and opportunity oriented like HP's. At HP I started as an engineer, and then I had an opportunity to become a manager. When I left HP, I was a senior vice president. Along the way the company gave me training in management, economics, and business, knowledge that I didn't acquire at school. I admire that kind of culture very much, and since I've been here, we've been able to take the great culture that Xilinx had when I arrived and enhance it.

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But my goal at Xilinx is to go one step further than the well-known culture at Hewlett-Packard known as "The HP Way." If you look at how companies operate, there are two types. On one side you have companies that treat people well, but in general they are not the first to market and are not the most exciting companies from a product point of view. Nor are they the fastest growing companies because they often have a system of consensus management that slows down the decision-making process. On the other side, you have companies whose management requires people to work 12 or 14 hours a day, and as a result, these companies come out with the first products and often lead their field. However, their people become burned out after a few years. What I've tried to do at Xilinx - and I believe I'm achieving it - is to create an environment and management structure where people are encouraged to be creative and take risks; decision-making is fast; people feel they can contribute; and they are treated well. As a result, our company has consistently come out with the industry's most advanced products, and we have gained significant market share. At the same time, our employee attrition rate is about 5 percent; in other Silicon Valley companies, the norm runs about 20 percent. So you can really build a company where you are very aggressive in technology, are able to be first to market, but treat people well, not burn them out, and allow them to participate in decision-making. We describe ourselves as competitors with heart. I think that's part of the unique culture that we've created at

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The Semiconductor Industry Xilinx. As a CEO, I am very proud that we are able to do that, because I think a lot of people think it is impossible. My management philosophy rests on four basic principles. First, people want to be part of a supportive team, and they need a community in which they can count on the support of their team members. Since people spend most of their time in their work community, it is important to create a supportive environment, both from the company's point of view and from the team members' point of view. This also includes a strong push for diversity. Second, people want to do a good job and want to contribute. They also want their contributions to be recognized as an individual achievement. People want to be proud of the work they have done. Therefore it's important to create work that is interesting and exciting whenever possible. It is also important to let people make their own decisions whenever possible. This requires a lot of communications, so that people understand the company's goals and overall business conditions. It also requires a strong set of values so that employees can act as the "guiding stars" in the decision-making process. Third, people need and want to continue to improve. They also need to be better employees tomorrow than they are today. So a company needs to encourage employees to continuously learn and give them the opportunity to gain the knowledge they'll need later.

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Fourth, when people are owners of the company, they will do a better job and have a more positive mindset toward the company. At Xilinx we encourage ownership: Everyone gets stock options when they join the company, and they also have an opportunity to participate in further ownership through the company's stock purchase plans. I want everybody to start his or her day at work as an owner, not just an employee. My goal is to create a new style of management that endures and that other companies will copy. The key goals are to treat people correctly and to win in the market, not by pushing people to work long days, but by using creativity and innovation and the common wisdom of all the people on the team.

Becoming a Leader in the Semiconductor Industry Leadership really begins with how well you can work with people, how well you select people for a particular job, and then how well you coach them. There's a lot of talk about how being a leader is having the ability to paint a picture of where your company will be in the future. But true leadership also involves developing your skills as a manager and as a steward. For example, a good manager knows how to organize work and put processes in place to get that work done productively. As a steward, you have a responsibility to keep the company in good health. By that I mean not just the company's finances or physical

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infrastructure, but in other areas that require intellectual know-how to work at things like keeping relationships with customers and partners intact and improving continuously. Moreover, leadership requires you to be a good communicator, not only to your employees, but also to your partners, customers, shareholders, the communities where you do business, and the political system. You can have the best ideas in the world, but if you don't communicate them well, you're not being an effective leader. To be a leader in the semiconductor industry, it's absolutely necessary to have a profound understanding of technology to be able to make sound business decisions, especially when you get conflicting expert advice. In addition, it's vital that leaders understand the channels of distribution for their company's products or services and understand that a new product or service may require a different sales or distribution channel. Finally, as a leader you need to understand the power of information technology - computer systems, the Internet, communications infrastructures, and so on. Information technology can be a tremendous way to improve productivity and help people make better decisions. You need to know what these systems can do. If you don't, you may become too dependent on outside consultants.

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Programmable Logic and Remote System Upgrades Over the next five years it's quite possible that programmable logic will become the largest segment of the overall market for logic chips. As a group, programmable logic suppliers have already overtaken gate array logic suppliers. As programmable logic devices move into the realm of 50 million system gates and beyond, they will eventually replace devices made with standard cell technology. In the year 2000, the total market for logic chips was $34 billion, of which 16 percent was for programmable logic, up three percentage points from the prior year. As an industry, programmable logic sales increased by more than 60 percent in 2000. According to the Semiconductor Industry Association, programmable logic is the second fastest-growing segment of the chip business, second only to flash memory devices. So it's clear that the trend is well underway; programmable logic is experiencing tremendous market acceptance as we continue to push the technology forward. One of the most promising and exciting developments taking place in the programmable logic industry today is the move toward using networks, including the Internet, to remotely upgrade the digital hardware in electronic equipment already installed at a customer's premises. Note the word - hardware. Updating software remotely with new enhancements and bug fixes is fairly common in the electronics industry. Remotely updating hardware in this same manner might seem slightly more challenging

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The Semiconductor Industry because the system hardware is typically a fixed entity that until recently could only be updated by manual replacement of circuit boards. The enabling technology for remote hardware upgrades is the field-programmable gate array, or FPGA. Electronic equipment manufacturers have been using FPGAs for 15 years to create their own unique integrated circuits. A software bit stream programs SRAM-based logic elements inside the FPGA to perform basic binary operations. Customers literally "rewire" FPGAs any number of times during the design process until they perfect their circuit; then they use the final bit stream to program as many FPGAs as they need for a given production run. Once this was done, customers seldom changed the final logic design after the final system was installed. The question Xilinx has been asking is, "Why not rewire FPGA-based equipment that's already installed in the field?" Researchers have been investigating the concept for years, and a few forward-looking companies have begun to deploy FPGA-based products that can be reconfigured from afar. IBM, for example, currently markets an ATM switch whose FPGA-based logic can be changed over the network to bring it into accord with the latest changes in the ATM standard. While such reconfigurable hardware is not yet mainstream, a number of customers - including large communications companies building the next generation of wireless communications systems - are very much interested in the idea, and a few are well along the way

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with major designs efforts. They expect to be able to bring products like the wireless base stations you see along freeways to market even while communications standards are still being ironed out. Yet when those standards change, the communications equipment companies will be able to upgrade the installed equipment remotely over a network. That will bring new efficiencies in system uptime and drastically reduce their cost of maintenance; instead of having to send crews all over a service area to physically change hardware, it can be done instantly by sending a reprogramming file electronically over a network to the base stations. I believe that remote field upgrades of hardware will become more and more commonplace. For example, the ability to remotely update hardware with new features or the latest bug fix can accelerate the time-to-market, extend the useful life of existing systems, and significantly cut production, maintenance, and support costs. Many of today's systems already come with some form of built-in communications or microprocessor interface, making the addition of remote field update capability a simple matter. If designers consider doing remote updates during the initial specification and design process, their systems can easily reap all the benefits of being updated remotely. With product lifecycles getting shorter, we are reaching a point where manufacturers can no longer afford to change their equipment that quickly. With product lifecycles getting down to six months to a year, programmable logic

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offers manufacturers the opportunity to extend life cycles with upgradable equipment. This capability provides a solution for our rapidly changing world. What do you do with your obsolete PC? It is becoming a question we ask ourselves more and more frequently as new technology comes to market faster than ever. By building upgradable equipment, you can slow down that cycle and still have the latest standards without having to build a new box. We see a growing use by our customers of these exciting new capabilities. Creating hardware that can be upgraded in the field can significantly increase the useful lifetime of a system. The ability to add new hardware features and fix existing ones without sending a technician out to the field can add up to considerable maintenance and support savings over the entire life of the system. And imagine the implications for satellite-based communications equipment. Designing systems that do remote upgrades can also provide new revenue prospects. After the initial product is released, equipment manufacturers can develop new hardware features, then sell and distribute those features to existing customers, just as software developers do today. Or a standard off-the-shelf application can be developed so features can be swapped in and out, depending on what the end-user purchases or needs. The types of systems that could benefit from being field updateable are wide-ranging. Almost any system that has

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some type of connectivity to the "outside world" could potentially benefit from being designed to support field updates. Typical products include network appliances, settop boxes, security systems, network equipment, cellular base stations, and satellite communications systems. Other likely applications are HDTV, video and image processing, encryption, military communications, surveillance, radar, and sonar.

Dynamically Reconfigurable Systems More exciting than field upgradable systems is the related area of dynamically reconfigurable logic. What this means is that a single programmable logic chip can become, in essence, an infinite number of chips when reprogrammed on the fly inside a system to do different jobs. One chip instead of several reduces systems cost, power requirements, and space, all important aspects, for example, of future portable devices. Imagine a palm-sized electronic device that one minute could be reprogrammed to be a cell phone that operates anywhere in the world, then in the next minute reprogrammed to be a personal digital assistant or a global positioning device. BusinessWeek recently identified this capability as one of the "Ten Technologies that Will Change our Lives" (BusinessWeek's Best 50 Performing Companies in the S&P 500 Index, Spring 2001). The enabling technology will be programmable logic. Clearly, electronic equipment manufacturers who begin to think about the benefits of remote hardware upgrades today will 44

The Semiconductor Industry be the ones who lead their markets in the not-too-distant future.

Business and Technology Challenges The semiconductor industry is the only one I know of that continuously increases performance and lowers cost at the same time. Most industries cannot achieve that. To increase performance, it's necessary to increase cost. In our industry, every year we offer our customers more logic density and higher performance at a lower cost. That makes it an exciting place to work and is the reason the semiconductor industry is doing so well. The industry's compound growth rate through good times and bad times is about 17 percent per year, and semiconductor content continues to increase all the time in markets such as automotive, home appliances, and consumer electronics. Most other industries would be happy to have that kind of growth rate. However, this kind of progress is going to become more difficult because we are now approaching some of the limits of current semiconductor manufacturing technology. At some point we are going to reach the absolute limits of the laws of physics. Although this is still several years away, it is clear that by developing deeper and deeper submicron technology, we have completely new challenges that are coming up, such as transistor widths that are smaller than the wavelength of light. At the same time, we

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are moving from eight-inch to 12-inch wafers. That means the cost of building a wafer foundry, or "fab," is multiplied by a factor of two or three now. Not only are we at a phase where the technologies are becoming more challenging, but the economics are also changing. As a "fabless" company, Xilinx does not have its own manufacturing facilities. Instead, Xilinx outsources its wafer manufacturing to independent fabs. As the current chairman of the Fabless Semiconductor Association, which is an industry consortium of chip companies that outsource their manufacturing to independent wafer foundries, I fundamentally believe that the fabless model will be the business model of choice, going forward, for many semiconductor companies. We are going to see fewer and fewer companies that are vertically integrated and have their own fabs. While very large companies like Intel or IBM Microelectronics can justify the multibillion-dollar capital investment required to build a single modem fab, more and more companies are moving to the fabless model because the cost of new fabs is too high. Moreover, the number of wafers that come out are more than most companies need to satisfy their own sales objectives. Therefore, it is going to become less sustainable for companies to own their own fabs. So there is not only a technology challenge moving forward, but there's also a business challenge driven by advanced manufacturing capability and the newer generation of 12-inch wafers.

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A Cyclical Business The semiconductor business has always been cyclical, and it's likely that it always will be. Down cycles can happen for two reasons. The first reason is a general economic slowdown. Semiconductor companies are component suppliers to equipment suppliers. When business is growing fast for equipment makers, they not only have to buy more parts to handle the increased business, but they also tend to increase their inventory of semiconductors to ensure they can keep up with production demands. This creates a positive "bubble" affect for semiconductor companies that can result in annual revenue growth rates often in excess of 50 percent. Of course, such growth rates are not sustainable over the long run. But when business slows down for equipment suppliers, they often have huge inventories of semiconductors, and that creates an immediate slowdown in demand. The second reason the semiconductor industry is cyclical is that it takes about two years to build a new wafer fab. When the industry is in a steady state, suppliers build fabs at a rate that matches consumption. But when business improves, suddenly there is a demand for more fab capacity. A fab is a very expensive proposal, and if it is not properly utilized, people start lowering prices to attract business, which contributes to the down cycle. Since it takes two years to bring a new fab online, the industry will experience under-capacity, which keeps prices high and prevents customers from benefiting from the normal price

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Inside The Minds reductions they're used to. At the same time, semiconductor profit margins are higher, which leads more suppliers to build more fabs and take advantage of the up cycle. But by the time the new fabs are ready to begin production, there is more capacity than is needed. Compounding this problem is the growing fragmentation of the supply chain. In the past, equipment makers did their own manufacturing and bought directly from semiconductor suppliers. Now more and more equipment makers outsource manufacturing. Those contract manufacturers in turn purchase components from distributors, who buy the semiconductors from suppliers like Xilinx. Xilinx, in turn, buys its wafers from independent wafer foundries, and it contracts out the job of putting the chips into various packages and testing them. With more players involved, there is less visibility into the future and more of chance for something to go wrong. And when it does go wrong, I compare it to a long train hitting a wall: For companies like Xilinx, which are at the end of supply chain, it takes a while to realize there's been a major catastrophe. For these two reasons, cycles are unavoidable in the semiconductor industry. They have happened in the past and will happen in the future, and there's not much we can do about it, except make sure that we maintain a very lean structure. That is another reason the fabless model will be the preferred way of doing business going forward. If you look at history, fabless companies are weathering the down

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The Semiconductor Industry cycles much better. At Xilinx, for example, manufacturing is a variable cost. We don't invest in big fabs that have a lot of fixed overhead. Instead, we buy wafers. When the industry slows down, we buy fewer wafers. When it speeds up, we buy more. If our business is at zero, we buy zero wafers. There is no residual to pay. However, if you own a big fab, and your business goes to zero, you still have to pay for the operation of the fab. The fabless model is going to become much more dominant in the future because it really adapts itself better to a cyclical industry than the vertically integrated fab model. Additionally, the fabless model creates more financial stability. In a down cycle, companies that own and operate fabs tend to lose money. Xilinx, on the other hand, has never had a period of negative profitability since it was founded in 1984. Many other companies are beginning to follow our lead; large so-called "integrated-device manufacturers," such as IBM, Intel, Motorola, and Texas Instruments, already are beginning to move toward a "fablite" model, under which they subcontract with independent wafer foundries for some - but not all - of their chip production.

Semiconductor Skills in Demand In addition to managing a company that's in a volatile industry, finding the right people that will allow us to continue to grow our business is going to be another major

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challenge. One of my main concerns is that universities are graduating fewer engineers. One statistic I've seen shows that the number of graduating engineers is about 5 percent lower than a few years ago, not only in the U.S., but also in Europe. So the question is, "How will we find the next generation of engineers?" What we need are more engineers who are knowledgeable about specific application areas, such as telecommunications, networking, digital signal processing, or image processing. A couple of years ago, most of our engineers were chip designers. Now we have application engineers who have expert knowledge of the capability of our chips and who can build the unique circuits our customers need. Xilinx customers are driven by time-to-market; they need to reduce the time it takes to develop their products, which use our chips, and they are looking for ways not to have to develop everything themselves. For example, they want pre-designed, pretested examples of circuits that they can simply copy. As a result, the number of application engineers is growing more rapidly than the other engineering talent at Xilinx. At the same time, we see a growing need for software engineers. The programmable logic industry is one of the few industries that develop both silicon and software. Unlike Intel, which has Microsoft, we don't have an independent software industry working for us. So we have a growing need for software engineering talent. To find this pool of talent, Xilinx recruits worldwide. We have strong engineering organizations in Ireland, Scotland,

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The Semiconductor Industry and France. We also have various development sites around the United States. For example, most of our software tools development takes place in Boulder, Colorado, and we are in the process of moving that operation to a new and larger campus located in nearby Longmont. In Albuquerque, New Mexico, we have teams that design our low-power programmable logic CPLD. While we don't have a research and development facility yet in India, it's a place we are looking at. Xilinx employs many educated technical engineers from India who were educated there, so we believe it may be a good source of talent in the future. Another trend we're seeing is that people are less willing to move to where a company is doing business. The time when the only option open to people was to pack up and move their families cross-country to take a new job is definitely behind us. People now say that they want to live in a certain type of environment, and if we cannot offer that, they won't join us. That's another reason Xilinx is becoming more geographically distributed. If you want to attract talent, you have to open offices where the talent is. Also, the cost of living - especially housing - makes it very difficult for many people to relocate to Silicon Valley, where Xilinx is headquartered and has its biggest presence. As a result, we are allowing engineering and R&D to take place in different locations. For example, as a result of recent acquisitions, we now have engineering teams located in Ames, Iowa; Minneapolis, Minnesota; Austin, Texas; and Columbia, Maryland. Instead of moving these people

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to Silicon Valley, we decided to keep the teams intact where they are. In addition, throughout the U.S., many Xilinx employees work from their homes because they like where they live. Our philosophy is that even if Xilinx doesn't have an office in that city, we need to employ these people because of their valuable skills, so we allow them to work from home. Thanks to technology such as fast networks and collaboration tools, it has become easier for a design team to be situated in different places around the world and still work together as a team. That's a trend I expect to continue. While the day of huge campuses with thousands of engineers is not going to disappear overnight, it is going to become less common. Xilinx now has four large campuses. "Large" in our case means a few hundred engineers, but we have smaller campuses with five to 20 engineers, and we have about 50 people who work from their homes.

The Importance of Intellectual Property Licensing Some of these teams and individuals concentrate on the development of a key Xilinx technology - intellectual property cores. A team in New Mexico, for example, is working on cores for our high-end FPGAs. In the past, customers were content to buy just our "blank" programmable logic devices and software programming

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The Semiconductor Industry tools and develop their circuits by themselves. But that's changed with the advent of multimillion system gate programmable devices. Now customers are looking increasingly at our intellectual property cores. Xilinx develops many of these cores; we buy some from independent developers; and we also partner with thirdparty developers who sell and support their own cores that operate with our devices. The whole idea is to reduce our customers' time-to-market. This is critical as our chips become not only larger, but more complex with additional functions. Our early FPGAs consisted of basically little more than logic gates and an interconnect fabric to create the circuit. Now we are building FPGAs with built-in microprocessors, clock managers, transceivers, and blocks of memory. That requires small teams of specialists in these areas. Intellectual property works for both sides. It allows us to buy technology from the outside, and as a result, our chips contain more diverse technologies. At the same time, these cores help reduce development efforts and time-to-market for our customers. We estimate that today about 80 percent of the designs that use Xilinx chips incorporate intellectual property cores of one kind or another. Five years ago, when we introduced our first core, it was zero, so we believe we are on the right track by offering this technology to our customers. Within the next five years, more than 95 percent of designs will use cores.

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Inside The Minds The Effects of Government It is clear that one company alone cannot develop all the technology it needs to succeed in the market. What we'll see is that newer technologies will be developed by government-sponsored research or industry consortiums. What I expect is that the government will continue its support of basic research. Basic research is difficult for most companies except the largest ones, such as IBM, that have labs. Research is difficult because smaller companies are driven by short-term financial results. Companies realize that they may not have a long life before they are acquired or merge with someone else, so it's difficult for them to engage in a basic research project that may last many years. Companies cannot afford that, so it is certainly one thing I hope the government will continue to fund, especially in the physics area, which is essential for the semiconductor industry. The government should also allow companies to create consortiums where advanced and risky research can be done together for the industry. Another role for the government is to stimulate interest in science and technology among young people so that more of them will choose a career in engineering. I'm not the only one in the semiconductor industry who is alarmed by the declining pool of engineering graduates. Engineers will create our new technologies and products; without them, we will be worse off in the future.

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Consolidation in the Industry Only a few big companies will be able to afford their own wafer fabs in the future. On the other hand, we're likely to see far more fabless semiconductor companies working with independent wafer foundries because the capital investment to have a state-of-the-art fab is becoming prohibitive. A fab using one micron technology requires about a quarter of a million-dollar investment. Today's fabs that are manufacturing submicron parts on eight-inch wafers cost about one billion dollars. The next generation of fabs that will use 12-inch wafers are expected to cost more than two to three billion dollars or more. So the shift to the fabless model makes sense. A few years ago, you could have said the only way smaller semiconductor companies could survive would be through more consolidation because only the biggest companies could afford a fab. The fabless business model is just over 15 years old, and yet today there are more than 600 fabless companies around the world whose silicon is built by fewer than ten independent wafer foundries like United Microelectronics in Taiwan. Of those, 450 are located in North America. The Fabless Semiconductor Association in the U.S. has well over 300 members. Similar associations are expected to be formed in Japan and Europe. This very different business model makes it easier to create a semiconductor company because you don't have to worry 55

Inside The Minds

about building or financing a fab or mastering the technologies involved in chip manufacturing. Instead, you can really focus on the product and let somebody else build it for you. I believe that five years from now there will be maybe ten companies that have their own integrated fabs, but there are going to be probably a thousand fabless semiconductor companies. It is exploding. This is healthy for the industry because the more new companies that are being created, the more creativity, innovation, and stimulation will occur. This growth will foster the fast development of new chip companies, since they will require a relatively small amount of capital. They'll focus on the design and marketing. It's a model that has proved its capabilities and is more stable than the traditional model in a cyclical industry.

Advice for New Start-ups If you want to start a new semiconductor company, go fabless; it will provide you with an advantage. My experience is that a company can be really excellent at only a few things. As a company, you cannot be the best everywhere. The fabless model really allows you to focus on a few things and be good at them, and not waste management talent on building and running a fab. The industry will be stronger, because different companies are focusing on different things. That's why Xilinx is a fabless company, and I think our history, profitability, and growth

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The Semiconductor Industry rates have proved it is a model that works and is viable - in fact, more viable than the other model.

Wim Roelandts has served as presidentand chief executive officer of Xilinx since January 1996. He is responsiblefor formulating the company's overall strategy, vision, and focus necessary for Xilinx to continue its pace of rapid growth and expansion. During Roelandts' tenure at Xilinx, revenue had tripled to about $1.65 billion by the end of the company's 2001 fiscal year. Today Xilinx is widely recognized as one of best managed and most financially sound high-technology companies in the world. In 2000, Business Week ranked Xilinx the sixth most profitable company in the magazine's listing of the top 100 information technology companies and among the top 50 performers in the S&P 500 Index. Fortune recently ranked Xilinx 14'h in the magazine's coveted list of "The Best 100 Companies to Work For." And Forbes magazine now includes Xilinx in its list of America's "400 Best Big Companies." Under Roelandts' leadership, Xilinx has also become the leading supplier of programmable logic chips, one of the fastest growing segments of the semiconductor industry. Market researcher Gartner/Dataquestnow ranks Xilinx as the fifth largest supplier of custom logic chips in the world. Since joining Xilinx, Roelandts has played an increasingly active role in industry affairs. He serves on the board of

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directors of the Semiconductor Industry Association and the Technology Network, and he is president of the Fabless Semiconductor Association. Roelandts also frequently acts as a keynote speaker at industry conferences and trade shows.

Roelandts joined Xilinx after a 30-year career in management at Hewlett-Packard Co. In his last position there, he served as senior vice president and was responsible for all aspects of HP's then $6 billion worldwide computer systems business, including research and development, manufacturing, marketing, professional services, and sales. Roelandts was born January 4, 1945, in Lennik, Belgium. He earned his bachelor's degree in electrical engineering from Rijks Hogere Technische School in Anderlecht, Belgium, in 1965.

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THE STREAMING MEDIA

FUTURE JACK GUEDJ, PH.D. Tvia, Inc. President

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Inside The Minds Stimulating Growth Our products are designed for Internet appliances, broadband set-top boxes, and digital TV, consumer devices that enable streaming media to reach all of us. We all have an opinion about how we should be receiving and accessing information - the optimum user interface, killer applications, main usages, and quality of audio and video. It is really an industry where you can touch and feel and hear and see the result of the technology developed. The broadband streaming media market is fun and involving. The portion we are addressing, which we call the streaming media gateway processor, is the funnel where all the rich media information is filtered and processed, including audio, video, voice, text, graphics, and animation. Then we do all the display processing and formatting of the information to provide an enhanced television experience. The market is large and growing, since we are addressing not only new systems, but also the installed base of television, more than 900 million units worldwide, so that is pretty exciting. What attracted me to the company is the premier position it has with operating system and applications software suppliers such as Microsoft, WindRiver, and Liberate Technology. Also, the company has a very good history of teamwork. A lot of the original employees are still with the company. There is a very good environment where information is shared at an equal level no matter what your 60

The Semiconductor Industry title is. Finally, the company has a first-class engineering team, and the high-bandwidth and flexible product architecture was an excellent match for this evolving broadband Internet/interactive market. Having spent a number of years in sales and marketing related to broadband communications, consumer, and video/digital media processing products, I understand the broadband Internet/interactive market quite well. I helped our company develop, as a team, our strategic planning and vision. Additionally, I have a very strong engineering background that facilitates communication and management of our strong engineering group. My technical and sales and marketing background is also helpful for developing close relationship with our customers. Originally, the company was mostly financed by Asian funding. Over, the last year and half, we shifted funding to U.S.-based venture capital. In August 2000, we took the company public and raised over $62 million in the public market.

Interactive/Internet Broadband Market Drivers The Internet has clearly taken a dominant place in the industry. It exceeds 250 million users worldwide and it's still only at the tip of the iceberg. People have demonstrated that they are interested in accessing further information. At the same time, there are only so many

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Inside The Minds hours during the day that you or I could spend watching TV, reading, or using the Internet. The average time a person spends on the Internet in a day, as reported by AOL, is a little less than an hour. This is time that AOL users are not spending anymore in front of their TV sets. The broadcasters are reacting to this by adding Internet and interactive content to retain consumer eyeballs and ensure that people stay in front of their TVs. This is critical for broadcasters to continue to get the revenues from advertising services they have provided over the years and the subsequent revenue from that. Another factor affecting what we do is the broadband infrastructure. The consumer is used to clicking on the remote control and instantaneously changing channels to get information quickly and seamlessly, wherever it comes from. Broadband is a big part of being able to provide that information instantaneously to the consumer. However, broadband involves more than bringing rich media content information to the home using high-speed lines. It is critical to enable the consumer to access and tap in on this information in real time without processing delay. Our streaming media gateway processors have high-bandwidth architecture, so they can process, in real-time, multiple streams of rich media content and unleash this interactive broadband experience. Also, we can process many rich media content formats to provide the consumer with seamless access to information, regardless of the source.

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Exciting Developments There has been a tremendous increase in bandwidth in the last few years with optical fiber and optical switching. Now we can communicate through higher bandwidth, anytime, anywhere, not only through wires, but also through wireless applications. If you are traveling internationally, and visiting a country you haven't been to in five years, it is a totally different picture. Everybody has cellular phones. It is mind-boggling. Moreover, the networks are upgrading to digital. Any kind of rich media content such as audio, video, voice, data, text, graphics, and animation can be integrated along with the Internet and made available to the consumer. The consumer market is also driving to digital, which gives so much ability to expand existing platforms. The digital revolution has happened in the audio industry with the audio CD, the audio/video industry with DVD, and now the television industry. The consumer can now get better audio and video quality and at the same time, interact with any kind of rich media content streams. For example, with a digital video camera, you can instantaneously share pictures with someone ten thousand miles away. It is great for consumers to be able to access the information of their choice when they want it. However, it creates a tremendous challenge because this rich media is put on the network in its original format, and when the consumer receives all that information, the streaming media 63

Inside The Minds gateway processor has to make sense out of it and present it to the consumer in a user-friendly way. This is why, at Tvia, we have really emphasized putting a lot of flexibility into our solution that provides millions of potential configurations. Our customers exercise that flexibility all the time to fine-tune or optimize their systems to process new content by downloading new software. This was not possible with analog-processed signals that were very rigid and could not be changed via software upgrade.

The Ultimate Technology The key to success for the semiconductor industry is to have some unique, differentiated technology - for example, special analog functions that are key to providing stellar audio or video quality. Or you need to be able to address the heart and key elements of the system. More and more now, you have to be able to provide a system solution. The more of a system you can address with a single chip or a chip set, the better your position in the market. Moreover, with the integration level that can be reached today, with 0.18 micron technology and 0.15 or 0.13 micron in the next couple of years, virtually the entire system can be put on a chip. You really have to understand how the system is configured, and in many cases in our business, there is a lot of customization, so there are many ways those systems can be optimized. From that, you have to make the best system

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The Semiconductor Industry partitioning and feature-requirement conjunction with customers.

decisions

in

The benefit of putting more of a system on a chip is that you can reduce system costs and simplify manufacturing on the entire process. The problem is that once it's on the chip, that's it, and you can't change it. That's why, at Tvia, we have emphasized putting a lot of flexibility inside the chip, so that we can go in and reconfigure any section of the chip by software programming. This is great, but the question is, "How is the chip programmed?" There are two ways. The most direct way used by most of our competitors, is to have a table that says what each register bit is doing and then figure out all the combinations possible. On our chips, there are millions of combinations, and it can take a while to figure this out. That's not the right way to address the software programming. The key in the semiconductor industry - and I believe this is going to be more and more important - is to be able to provide with the chip a software development kit to make the device easy to use, operate, and reconfigure. I think a lot of semiconductor companies have focused on hardware development and will have to come up to speed with the increasing importance of software. At Tvia, we have invested very much in software development. We will shortly have more than 100 software engineers, which is roughly half of our engineering team.

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We have produced software development kits that people can use and compile into their existing platforms. This enables them to quickly port our software in multiple customer platforms that often use different microprocessors, broadband interfaces, operating systems, and applications software. We support more than 15 different operating systems. In addition, we have support for a variety of applications software. It is really up to the semiconductor provider to provide the software that will gel all of the system together and make it easy for the customer to develop or modify their platform. With the reduction of product life cycle, short time-tomarket is increasingly important, and our software is key to reduce the development time of our customers' systems.

Sustainable Levels of Performance for Chips Performance depends on market demands. We have witnessed the PC market, where processors have gone from the "186" to a one-gigahertz Pentium III processor. It is the same thing for the broadband network. There has been a tremendous improvement in bandwidth, although I must say that in the late 1980s, when I was working on multigigabit communications, some of that technology already existed. Our current market is really more stable than the PC market was then. The consumer doesn't want to have to buy a new 66

The Semiconductor Industry platform every six months. In fact, if you look at the negatives of the PC, as I found out during our focus group surveys, some of the consumers do not want to buy a computer at all, especially if it is a large expense relative to household income. And they particularly do not want to bring it home and show it to the neighbor who remarks, "Well, this is an obsolete platform. You should have bought..." That is a fear for many consumers. So the platforms that we are developing for now are of slightly higher performance than needed but do have a longer life cycle, typically five years. Both the manufacturers and the service providers want to make sure they have platforms that can sustain five years in the market without an expensive "truck roll" that require sending a technician to your home to change your set-top box. Part of the short life-cycle of the PC market is due to the standardization inside the system that lets you put a system together very quickly. Consumer platforms are quite customized. Many OEMs use this customization as their competitive advantage for a unique "look and feel." As a result, the design cycles are relatively long. Companies cannot afford to make a vast change on the platform; that is a huge investment. This is why software upgradeability is critical.

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Inside The Minds Emerging Applications Clearly portability is a trend. At the CES 2001 (Consumer Electronics Show), I saw more and more portable consumer platforms. Things that existed only on fixed platforms before are now also available on mobile platforms. This shows the insatiable need for access to information and communication anytime, anywhere. For example, when I am talking on the telephone, I am providing information. This experience could be enhanced if, by streaming rich media content over the network, I could actually show someone what we are discussing or point them to Web sites that would provide additional information. Anything that facilitates communications and access to information has a bright future, especially if it includes entertainment. That goes for the infrastructure all the way to the consumer platforms.

Cyclical Nature of the Semiconductor Industry Any time you have an industry that requires multi-billion dollar investments for wafer fabrication, you are going to have cycles. Each time a "fab" becomes operational, or goes online, you get a tremendous injection in capacity. But it is a Catch-22. When the semiconductor manufacturers and their OEM customers start fearing that the capacity for production is

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limited, they place double orders to ensure supply. At the same time, as wafer fabs come online, these capacity restrictions are relieved. Once assured of plentiful capacity, OEM customers cancel or push back their orders, and semiconductor companies sit on their inventories and work in process. It is difficult to optimize. Look at the Federal Reserve interest rate. They are doing the same thing by trying to forecast future economic conditions. Maybe we should have an Alan Greenspan (Federal Reserve Chairman) for the semiconductor industry who would come and give warnings so that we can smooth things out. The Fed has to take a position ahead of time, based on its own predictions. If the reaction is after the fact, then it takes a while for it to settle down and take effect. The second factor recently affecting the semiconductor industry is the general economic conditions. In our market, slow-downs are partially driven by consumer confidence and the slow-down in spending by the service providers using our customers' systems. That said, however, I don't think the semiconductor industry is moving as a whole anymore. You have to look at it segment by segment, especially for specialized products.

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Strategy in a Downturn During a downturn, having the sustaining power to weather the storm is key. At Tvia, we raised enough capital in the last up-cycle to not only sustain but also accelerate our product development. I believe this is going to be vital in helping us emerge with a stronger leadership position when the market picks up. Knowing that there are peaks and valleys in our industry, it is prudent to plan ahead and sit on sufficient capital to sustain an unexpected downturn.

Increasing Chip Size The cost of tape-outs, because of the technology going down to 0.13, is escalating through the roof. A tape-out is a very expensive proposition, which is important to note because it is going to make the life of start-up companies more and more difficult. You have to have a lot of resources for tape-out and advanced CAD (computer aided design) technology. With the increasing cost of tape-outs, it is increasingly important to have reliable CAD tools to ensure first-time working silicon. In the industry, the number of transistors doubles every two years, according to Moore's Law (Gordon Moore, founder and chairman emeritus of Intel). In my mind, that rate is probably slowing down. However, I am sure the pace of increase will continue to be quite fast, since there are new technologies being exploited.

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than in the past because a lot of things have to come together to make this possible.

Finally, as you have more and more transistors available on a piece of silicon, you need to develop or acquire more and more intellectual property (IP) to fill it out.

Importance of Understanding Your IP The importance of IP licensing is a tough issue to address. On one hand, it is clear that it is difficult to develop all the IP internally that are needed to fulfill your applications requirements and timely product development. That is clearly something that we really promote. Whenever we can go out and access technology, we do it. We have done that a number of times. We pick the areas that have core differentiations, and we develop them internally. Proven technology is usually something we try to access as much as possible. We want to put our value where it is most important. But that's a difficult thing to do. Licensing technology is difficult. You have to understand what you are licensing. If you are licensing a block that is peripheral to your chip, and you haven't dealt with it before and do not understand it, then it is hard to determine what the best IP is for you or which IP company is best for you. The level of expertise

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Inside The Minds that you have internally is important to make assessment.

that

Presumably, if you are licensing IP, you don't have a large level of expertise in that area. That's the first challenge, and you might make the wrong bet. A lot of the challenge involves trust, and I advise exercising due diligence and conducting a reference check before acquiring an IP. The second challenge is that, in addition to the risk in receiving a non-performing IP, you also need to integrate that IP. IP transferred within a company is difficult enough, and IP transferred across companies is even more difficult. You are getting something that has been thought of and written in a certain way, and you have to take that information, process it, and integrate it with the rest of your chip. You face your third challenge when you put the chip out on the market. The first customer uses it and exercises the chip in a different way. Now you are trying to figure out whether this IP can do what they want, and if there is a problem, how can you solve it? Clearly, if you have designed the product, you have a much better feel for what the product does and how it behaves. So the challenge is to be able to service the customer after you put the product out. I don't know that there is any miracle recipe. A lot of people are working on a grading scheme for IP suppliers. There are initiatives in terms of providing

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The Semiconductor Industry complete IP packages for integration, such as the Virtual Silicon Initiative (VSI.) We all have different ways of viewing things, and that will be reflected in the design. I don't know how you can change that and make it so that anyone from a different background or coming from a different angle can take that IP and process and integrate it into its design seamlessly.

Consolidation in the Market There is a lot happening in acquisitions, and I think it will continue. It is a good thing. You get a small company, place a bet early on an emerging market, and develop innovative technology for this market. The bigger you get, the more difficult it is to do that because the decision process takes much longer. As a big company, you might face a situation in which you have to acquire a company, or you can't play. I think it is a good thing that small companies go out and take calculated risks and develop outstanding technology. On the technology side, when you acquire a company, you are acquiring not only the technology but also the team. You also are acquiring the people who know what they're doing. We have talked about a lot of these issues in terms of IP licensing, and integrating these engineers from the acquired company solves a lot of them. That may be one of the answers to licensing technology and providing more system-level semiconductor products. However, the

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Inside The Minds challenge is to integrate the team from the acquired company with the rest of your organization. On the business side, by acquiring a company, you may also be able to access their marketing channels, which may have tremendous value. I think acquisitions are a great thing, and I hope they continue and do not become hampered by government policies.

The People Factor Qualified engineers, marketing people, business development experts, and sales people are very much in demand right now. It is a challenge to recruit people today. This may change, depending on the industry, but at this point it is hard. The difficulty is compounded by the fact that we want not only someone with the right skills, but also someone who fits into the organization and the company culture. It's not about one person coming in and just doing his or her job, but someone coming in and working with the other people in the organization as a complement to the existing team.

Signal Processing Intelligence in All Products The industry is evolving in the direction of processing intelligence - the ability for a chip or system to process incoming information, learn, and react to it. A number of

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toys incorporate these kinds of artificial intelligence (AI), such as the dog robot developed by Sony. You can tell it something, and it will react and start learning. We are definitely expanding in the Al area due to the capability of plugging more and more transistors onto a chip. But the capability is at a very low level at this point, and we are far from the ability to replace the brain. The brain is an amazing machine. To get to the complexity of accessing and processing information as fast as the brain can is an enormous challenge. Focus for Success I think there are two types of companies: general-purpose semiconductor companies - for example, analog building blocks, such as operational amplifier or voltage regulator, and digital, such as memory or standard logic - and applications-specific standard products (ASSPs) semiconductor companies. For ASSP companies, such as Tvia, you can't go out and try to incorporate every feature possible. If you do, you might have a sub-optimized device for any sub-segment of the market or a device that is not cost effective. Therefore, it is important to sub-segment the market and optimize your devices for your sub-segment. You cannot be all things to all people. At Tvia, we are addressing the Internet appliance, broadband set-top box, and digital TV markets, but only for 75

Inside The Minds

convergence systems that provide Internet and interactive content on television. We are very focused on that. This means that we are not addressing the "plain audio/video" set-top boxes, for instance. The market is so big, and the number of challenges, improvements, and system partitioning/system integration that we can make are so great that I don't see us being able to do that correctly and three other things at the same time. I think you really have to pick your application or market segment and focus your efforts on addressing that application as well as possible.

Government Policies and Public Markets The Fed's decision to lower interest rates always helps in terms of capital expenses - not only the semiconductor industry, but also any type of capital-intensive industry. How the current administration will help our industry still remains to be seen. I would like the government to provide loans that are very attractive to the semiconductor industry or the technology industry in general. Overall, I would like them to continue driving the effort on technology, facilitating access to information, and making the information available on the Internet for the consumer in a user-friendly way. There is information on the Internet, and the user interface has improved quite a bit. However, there is still a long way to go to make it friendlier to mass consumers. I think that 76

The Semiconductor Industry

Internet content will have increasingly more audio and video content, for which Tvia is positioned. Some of us are readers, or rely on reading for information, and the Internet is a place where you can read and access information. Others prefer watching or experiencing audio or video programs. This is where Tvia can shine - by providing an enhanced experience for streaming rich media content. It's difficult to comment on the effects of public markets. In my mind, there is no way I can control the public market, and so I can't predict what that market will do. My philosophy is that I should really focus my effort on what I can control. What we control as a company is our product development, customer engagement, and sales process. At the end of the day, whatever the public market does is going to help or hurt us, and all of our competitors, in a similar fashion. However, if we are addressing the right market with the right product and have solid revenues and are profitable, we can build a great company independent of the public market. This is where I focus, more than ever in a down public market.

Advice to Semiconductor Start-ups If you're planning a semiconductor start-up, pick an emerging market segment or an emerging technology in an existing market. You don't want to get into an area where 77

Inside The Minds

there are already ten different players, and you are coming in with a product that is going to bring an incremental type of improvement. It is best to go out, do your market and competitive landscape homework and take a risk. Be forward-looking. Obviously, not all start-up companies make it, but that's the name of the game. The second thing of prime importance for a start-up company is putting together a first-class team. The environment in a start-up is very dynamic, and a lot of decisions have to be made in real time. This is where a sound and experienced management team greatly improves the odds of success. Also, the management team is the one making the calls to change or modify the course when appropriate. The technical team is also of prime importance. It is better to have fewer but more qualified technical experts. Separate from the ability of the team, it needs to be just that: a team. In a start-up, there is no place to hide, and you have to be able to work as a team during good times as well as bad times. Therefore, there needs to be a bond between the team members, which usually comes partially with the right chemistry, complementary expertise, and, in any case, mutual respect. At Tvia, we started very early in the Internet appliance market and placed our bet, after due diligence, on delivering Internet/interactive content on television to enhance the television experience. Getting early into an

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emerging market is one way start-ups can stay ahead of the pack. When we started, the Internet wasn't very developed, and some people asked why we would address a market that wasn't there. You have to come early on, do your market analysis, and make the decision to address a market before it emerges; otherwise, it's too late. When you have a giant dominating a market, it's difficult for other companies to play. Take the example of the PC market. Microsoft and Intel, two giants that define the market, dominate it. Moreover, it has been standardized for many years, so there is no guessing in terms of product definition and system partitioning. Being a player there is a very tough proposition because you get whatever sockets these giants decide to leave available on that platform. Additionally, you have to fight for these sockets with many competitors on a level playing field. That's why, especially for startups, it is preferable to get into a sufficiently large niche market without a lot of standardization. This makes it more difficult for giants to come in and dominate products across the board. In our case, there is no standardization. Our customers use different microprocessors - it could be an x86, but it could also be an SH, ARM, MIPS, or PowerPC processor, different operating systems such as WindRiver Tornado, Microsoft Window CE, Linux, Microware OS-9, or QNX Neutrino, and different 79

Inside The Minds applications software, such as Liberate Technology, OpenTV, PlanetWeb, or EnReach.

Jack Guedj has served as Tvia president since May 1999. From February 1997 to April 1999, Dr. Guedj was president of HTMC, a consulting firm specializing in advising start-up companies. From June 1996 to February 1997, Dr. Guedj was vice president of sales and marketing for Faroudja, Inc., a manufacturer of video image enhancement products for the professional home theater, broadcast,and consumer markets. From June 1994 to June 1996, Dr. Guedj was director of Digital Media/Broadband Strategic Market Segment at National Semiconductor Corporation. Dr. Guedj received an MBA from the University of California, Los Angeles and a Ph.D. in electricalengineeringfrom University of Paris.

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BUILDING A WINNING COMPANY FOR THE LONG HAUL IGOR KHANDROS, PH.D.

FormFactor, Inc. President and Chief Executive Officer

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The Semiconductor Push I think semiconductors are responsible for the progress of humanity. At any point in human history, there is always a dominant force. Food goes up in price; clothes go up in price; everything goes up in price. There will always be something that fundamentally changes the equation and provides this inflation-inducing force in society. Price for performance of computing and information processing is a key example. Semiconductors are a huge enabler of computing and information processing and have been for a long time. They manifest themselves in many things, not in just how fast your PC runs. We all worry about communication bandwidths through the wires and cable. All of this is enabled with semiconductors. Semiconductors are the single most important force that society has. As we start curing disease actively and putting genetics to work, that will be an important force. Right now, I think semiconductors are the main force. We have a very unique opportunity to watch their impact on computing and communication. They give life to the Internet. It's all built on them. Semiconductors are the best things to happen to humanity in the past 50 years.

The Holy Grail of Technology The semiconductor industry has a big problem. The semiconductor pipeline consists of a front end and a back 82

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end. The front end is where you put transistors on wafers. The back end is the entire system, where you process the wafers into the final application - whatever it is. The back end normally delivers these as little packages that you just plug into systems. The rule of thumb is that the back end is one-third of the semiconductor industry. The front end is conducted in such a way that the wafer itself is the standard processing unit. You take a pack of wafers and plug them into a piece of equipment. The moment it leaves the front end, as a first step you singulate, or cut up your wafer into individual pieces. This forces the entire semiconductor back end to measure itself on a single chip basis. The problem with singulation is it's hard to scale with the advances of the front end (which, through die shrinks and wafer area increases is flooding the back end with more and more devices per wafer). Simply put, you're stuck with processing one chip at a time versus many chips at a time. There isn't a good logical reason why people should put transistors onto single pieces of silicon. Yet, the back-end industry is conducting its business by putting everything on single pieces of silicon instead of whole wafers. My vision is to move that entire semiconductor back-end pipeline to using wafers as a standard processing unit. Having wafers as the primary processing unit throughout the whole semiconductor pipeline is the "Holy Grail" of technology. Once you do that, you've made a positive impact not only on the manufacturing cycle time, but cost, how quickly you 83

Inside The Minds feed information into the front end, and how the front end itself will be conducted in terms of design and methodology. It certainly has implications for how silicon is delivered into cell phones and computers. That to me is the biggest opportunity in the semiconductor industry.

Sustainable Levels of Performance by Chips I believe we will be able to sustain current chip performance levels as long as there are creative people who come to this country from far-away places. I remember discussions when IBM was considering building an X-ray photography facility. I remember when sub-micron transistor sizes were theoretically impossible, but then phase shift, OPC, and shorter-wavelength steppers all emerged and have taken us to 0.12 micron today. I think the semiconductor industry has enough steam to carry us for a long time very aggressively. The back end will become the biggest productivity bottleneck issue.

Avoiding a Downturn In a market downturn, the semiconductor industry doesn't do anything as a whole. Individual companies have their parochial interests. There are companies that plan well and companies that don't plan so well. They all order equipment from the same people. I think we will see more

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and more outsourcing as the ante is upped on fabs. Three hundred-millimeter fabs are expensive. Required expertise will be going up. We will probably see a different position; it will be less and less vertically integrated. People will focus on what they are good at. As you see that happening slowly but surely, you will see improvement. I can't tell you that there will never be a period with downturns. I think a lot of it is driven just by predictably, poor planning and a structure in the industry where everybody runs at the same time to order equipment. Some of the people plan well and some don't. We are partly in the business of providing wafer tests and consumer polls. It is easier for us to avoid the cyclical nature. But even here you can see that different people plan differently, and that can have an impact on the whole industry. I think outsourcing is your answer to that. More outsourcing will lead to better planning for the whole industry.

Skills in Highest Demand It is crazy to have any limits on bringing people into the U.S. That's why Silicon Valley is the center of the world. Paris used to be the place you went to study art. If you didn't study and practice art in Paris, you probably were not among one of the great artists. You couldn't name one great artist who didn't live in Paris. 85

Inside The Minds Silicon Valley is commanding this same type of talent. It is central. In Silicon Valley, nobody cares where you came from. I came from the East Coast, and that was a bit ethnic. Silicon Valley is truly communist. It's a dream. Nobody cares who you are, how you speak, or where you come from. The U.S. should keep on doing that, not just for the sake of the U.S., but also for the sake of the world. People who come here to succeed do so because they cannot in other places. They can't become great artists in Kansas; they have to go to Paris and see Van Gogh and Picasso to do those things. For us, in technology, that's Silicon Valley. To limit it in any way is crazy. The big priority in skills is education. We all know how bad the process is in this country for electing officials and presidents. We have all witnessed that. Napoleon had two good years; the rest he was fighting some place in Russia. In a couple of good years, where nobody was bothering him, he changed Europe for two hundred years. We've had presidents for eight years who were the undisputed dominant leaders on Earth in a time of relative peace. Did they establish things we will see for 200 years? The question is, "Shouldn't we make the move that will not give us brownie points in two years, but for the next 100 years by starting a different wave of education?" Without a lot of pain, we have to help people get out of old industries that are dying and take them into new ones. No single person has the right answer, but what is not happening in

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The Semiconductor Industry the partisanship is anything but constructive. This is the chance to set things in place that will exist for a long time. I don't have the right answer, but maybe what we need are more people from Silicon Valley running for office. I can't run for president because I wasn't born in this country!

Changes with the Bush Administration I really don't know much about President George W. Bush. I like some of his appointments; I don't like others. I don't know yet. The question is: Which president will form a team of 50 bright people and empower them to point the president in a direction to push through? Look at what the previous president (Bill Clinton) did and what his wife proposed two months after he took office. I read an article about the president having lunch with Cindy Wile, who runs City Groove. After that lunch, he supported all health care businesses. You can't change the world that way. It's hard with all the lobbyists, but you need an administration that will take a careful look. It's not a function of a very bright president, but one who understands it's important to leave the legacy for the next 200 years.

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Future Technologies I think wireless bandwidth is by far the biggest bang for the buck for humanity. You will see a lot of effort there. Infinite bandwidth will not come through cable; it will be through wireless technology. Once we have infinite bandwidth, wireless technology will create a different society. For the next couple of years that is going to be the big area: How to enable more and more communication bandwidth through wireless technology. I don't think signal processing intelligence will be possible in the next couple of years. There will be a lot of things possible in the next 50 to 100 years. What you will see on the horizon is a lot of interplay between semiconductors, life extension, and health care. You really will see progress being made in extending a youthful and active life - not enabling people to spend another 50 years hooked up to a life support machine, but really making sure we can live to 120 and have an active and professional life. Semiconductors are much faster than neurons. That to me is going to be the biggest thing. People will spend any amount of money to be able to live youthfully. I would love to work until I am 120 years old. I don't know that I will get that opportunity. Certainly you will see a lot of semiconductor technology going toward health improvement and prolonging the quality of life.

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Licensing Intellectual Property We are partly in the intellectual property licensing business. I see change because of some things that have happened in the market. I think IP licensing without providing very long term economic added value will be very difficult. You need to sustain that. To me, it is not just about being in the IP licensing business, but being in the IP business plus providing solutions. In our case, we make products not only because this is a terrific business to be in, but also because it lets us continuously improve technology so that we can license it to much bigger markets. We can keep using this technology engine, but we keep adding value forever. That's the way you have to look at it. When you start thinking about how you add that value, and as outsourcing becomes more important, there will be more companies that will not have had a 20- or 30-year legacy of developing internal ways to do things. They will be looking for more solutions. This combination of having strong IP, adding value to it, and becoming good at being a solutions company are all key.

Future Trends You can operate a profitable business in any market segment. We walked into an area where our competitors are 89

Inside The Minds not making that much money, but we walked in with new technology; we have saved people a lot of money on capital investments; we have improved the semiconductor yield; and we are adding value. When you add value, people are willing to share with you. You can conduct a profitable business in any market segment. I see the long-term outsourcing trend continuing, not necessarily consolidating. You will see consolidation and outsourcing as a part of the semiconductor industry. I see an existing trend of a lot of companies being created that focus on creativity and productivity. A few guys with a great idea bringing something to market and getting rich is the only model that works. You will see a lot of semiconductor companies, but they are not going to be vertically integrated. You will see consolidation of people who are very good at putting transistors at 0.07 micron and 300 mm wafers. A lot of new companies will be created that bring new products and techniques to market. As long as you consider them semiconductor companies, the number will be growing.

Advice to Start-ups: Think Long-term Starting up in the semiconductor industry is a grinding process! When you get into this, you had better make sure your family buys into your decision. It's a cosmic experience. It takes complete commitment. You have to

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The Semiconductor Industry have your own ideas. If someone runs in one direction, you can't run with them. You can't react to the local ups and downs. That's how you conduct a business. You absolutely need top notch venture people, and you need to have a similar view with them. You cannot succeed unless you think long-term. If people think of doing this for three years to make a lot of money, 99% of them will be disappointed. But if you think of this as a way to leave a legacy, you probably will get rich if you're successful. And if you are willing to dedicate a portion of your life to this, it will be very rewarding in the end. When you choose the team of people that come in, you must focus on excellence and long-term thinking. Those to me are critical. Not a lot of people behave that way. I think what is going on in the venture community with Internet start-ups has been very harmful. When you sit here, working hard for the long term and watching all these people starting companies and going public in six months with no management team or plan, you feel you are missing out. But if it looks wrong, it probably is. It turned out that way. You cannot look at those things and worry about them. There is no other recipe than being committed to this as a long-term experience. You have to think for the long haul.

Dr. Igor Khandros, president and CEO of FormFactor,is the principalfounder of FormFactorand inventor of the

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MicrospringTMcontacts. This is the second start-up he has founded. Earlier, at IBM, he developed semiconductor packaging. Dr. Khandros holds a Ph.D. in material sciencesfrom Stevens Institute of Technology, and a M Sc. from Kiev Polytechnic Institute in Kiev, Russia.

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THE NEXT-GENERATION, SILICON LIFESTYLE RAJEEV MADHAVAN

Magma Chairman of the Board, Chief Executive Officer, and President

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Inside The Minds Exciting Developments in the Semiconductor Space I think the semiconductor industry is going through very drastic but positive changes. It's sort of a "chicken and egg" syndrome. In the past, it took massive mainframe Goliath computers to create semiconductors or chips. Then as the computer and EDA technology improved, the chips became more sophisticated. We were able to create smaller, more efficient workstations, which in turn enabled largescale production of chips. Soon we will move to even more powerful, faster computers that will enable the massive production of highly complex, smaller, faster, more powerefficient chips, and so it will go. As a result, I think life in general is going to change. Even today, computer chips are in many things that people would not expect them to be in. They're not just in PDAs (personal digital assistants) or small computers. More and more, silicon will be in things, and we won't know it. We are entering a highly passive mode of silicon adoption that will change our lifestyle. Your normal, everyday systems, from refrigerators to washing machines, are going to have more silicon content and begin to work together and be controlled in a more intelligent fashion. People will notice this significant change less and less, until they come to simply expect more silicon-enabled capabilities. Manufacturers of everyday items will have to incorporate silicon to meet these expectations.

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The Semiconductor Industry For example, my kids - who are small - don't know what life without computers is like. But when I was growing up, there was very little silicon - I saw my first computer in my final year of graduate school. My kids are perfect examples of the next-generation lifestyle, brought about by silicon. Some people compare the silicon industry to the automobile industry. I think our implications are significantly larger than the automobile industry. When you get into a car, you know you are getting into a car. The silicon industry is going to have an impact on your day-today, minute-by-minute operation and in ways you don't even know are happening. What the general population can do today with the Internet and global positioning systems, and so on, is impressive, but I think we have just reached the cusp of merging communications and computer technology. Things are going to happen fast in this space. We are living in a very interesting time.

Meeting Future Market Demands Human beings in general want everything to be as fast as possible, but for the majority of applications, high speed is not needed. Does an average person using a Walkman really need a 1.2-gigahertz processor? Probably not. We have been focused on microprocessor speed with faster and faster throughputs. Now we will focus on integrating the functionality of multiple chips onto one chip. I think there will be a class of microprocessors designed just for

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specialized applications. The market is going to be split between highly integrated chips and high-end, mixed applications where every megahertz counts. Our market is cyclical because we are unable to accurately predict supply and demand. The state of the semiconductor industry today is largely due to our inability to properly anticipate certain changes. Four years ago, the semiconductor industry focused on building infrastructure, and now there is oversupply. The market predictions that drove this didn't anticipate that many of the graphics vendors would go away. In the graphics market, we are now down to two or three companies from 15 or 16. What has happened is a shift to communications. Similarly, the reduction in that high-end niche was never forecast properly by anyone. How can we correct the supply and demand problem? We can correct it only by taking better measurement of the consumer market because it will be considerably larger. In the last few years, everybody made predictions on the growth of communications - and communications grew. But nobody foresaw the other spaces would be shrinking. I think the current market correction is good. Semiconductor companies are realizing the consumer market is very important. We are going to see the market move to two areas of specialization. One is consumer goods, where we will integrate very important, multiple functions into a single 96

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device. The other will be heavy-duty, high-end applications. There will be a clear, black-and-white line between those two markets. Once, when I was working at Nortel, there was a fear that we were not going to get enough ASIC supply and that the demand was going to be far greater than we could meet. Today, the demand for those high-end communication chips is extremely high. There is only one supplier. IBM is the main supplier of most of the chips for the leading communications space. Silicon adoption by the consumer is going drive a lot of drastic changes. Computers and communications are going to become one and the same, and wireless communications will become the new technology. Data and voice will be carried through one port, and so will media. The ability to see people while you are talking on the phone has been talked about for decades; now it's a reality because the bandwidth is becoming available. Breakthrough applications in that domain are going to be huge. I absolutely believe that signal processing will play a significant role in our day-to-day life. Signal processing allows you to give more voice-oriented commands to systems rather than having to go in and type things on a keyboard or control pad. Voice control makes electronic devices seem less like computers - another example of how we will be in a passive mode of silicon adoption. I do believe that the next wave of tools and systems will

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combine network intelligence with communications. In the next ten years we are going to see a lot of applications that bring those things together.

Skills in Demand We are now demanding more diversified talent and skill from engineers. Like integrating several functions onto a single chip, we are demanding engineers who can do it all. Integration is everywhere. Today, chip developers must have an understanding of many aspects of the design. For example, if you are looking at chip architects, understanding communications protocols and heavy-duty work to define that architecture is necessary. Even in the EDA industry, traditionally separate processes are being integrated into one system. At Magma, we are looking for people who know logical and physical design people who can define the logic of the chip's architecture and who can understand the physical implications of that architecture. At the last EDA company I founded, we focused only on logical design; we didn't have to look for people who knew physical design. Now we need engineers who can do both.

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The Future of Intellectual Property Licensing One of the implications of technology integration is industrial integration. No one company will be able to do it all. This means that companies are going to have to license their intellectual property - between the electronics giants and the smaller start-up companies in the business. I can create this IP; you can create that IP; and Tom can do a specialized IP that puts it all together. That's going to be the model. There will be two tiers - the IP provider and the system provider. I give something; you give something; and somebody else puts it all together. He uses my value, and then that value gets passed to me. Because of this, the industry will have to learn how to do IP licensing correctly and quickly to make money properly. This is a big problem now because it can take longer to work through the legal aspects of IP licensing than it takes to develop, sell, and supersede the end product. But people are very creative, and in the next two years, as integration demands it, we will all sit down with our lawyers and come up with workable IP licensing models. If we don't do it soon, the market will not evolve as rapidly as it should.

Biggest Problems Facing the Industry While preparing a speech in 1965, Gordon Moore, cofounder and now chairman emeritus of Intel, made a

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stunning observation that has since become known as Moore's Law. In graphing data on the growth in chip performance - that is, the number of transistors per integrated circuit - he noted each new chip contained about double the capacity as the one before it. If new chips continued to be released every 18-24 months, and if the trend continued, computing power would increase exponentially at brief intervals. Moore predicted the trend would continue through 1975, but it remains accurate today and is the basis for performance forecasts by planners throughout the industry. In the past 30 years, the number of transistors on a chip has increased more than 18,000 times, from 2,250 on the 4004 in 1971 to 42 million on the Pentium 4 processor. We've proved we can integrate more on a single chip. Now, time to market is definitely our biggest challenge. Companies must balance the amount of functionality incorporated in a chip with how fast they can get the chip built and into its electronic device. Market pressure is increasing exponentially, too. Compare the market windows of the black-and-white television and the DVD. It took 25 years for those television sets to reach the million-sold milestone. The DVD took six months to get there. That means that a month - or even a week - in

the typical design cycle is now extremely costly.

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People have said that Moore's Law will soon be surpassed. How can semiconductor developers and suppliers make use of all that silicon and get the product out? Again, there's the chicken and egg issue. If we don't get more advanced chips out, then we can't use them to make the next better chip, and we'll have an oversupply of sub-optimal chips that we can find little use for. This cyclical aspect needs to be better controlled. The industry needs a lot more talented engineers and more advanced tools and technologies. That challenge is not understood by consumers or the investors in the semiconductor market. I think ultimately there will be a new class of semiconductors that combine computer and communication functionality on a single chip. That class is going to dominate the market. And there will be two kinds of suppliers in this market - those who put the design or system together and those who make the IP or components. This means that some of the companies that today are strong on either the computer or communications side will clearly be affected.

Government and the Semiconductor Industry In the U.S., we need to make sure that the stock market is moving in the right direction. The stock market has significant implications on the semiconductor industry. I don't think we have actually had as much of a downturn as the media have portrayed. But everyone is over-reacting, 101

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and the market isn't encouraging the creation of nextgeneration semiconductor devices or helping to spawn start-ups that might deliver the really hot next-generation technology. I think the industryneeds more economic encouragement from the government. The Fed should further cut interest rates to give more confidence to investors in the stock market. Fifteen years ago, most people in the country had very little of their assets in the stock market. That percentage has grown significantly. People are looking at the government to give them confidence. For its part, the semiconductor industry needs to better control time to market, supply and demand, and forecasting. But we also need to make sure that the government is encouraging the confidence necessary to make funds available for the growth of the industry. I also believe the government should assist with immigration. We need more open policies. Many lobbies and organizations have clamped down on H-Is and immigration policies in general. My company has been affected by the INS's ways of making it difficult to get personnel. When we make an offer to someone outside the U.S., sometimes it takes up to nine months for the person to be able to join Magma. In the early days, this affected our product delivery schedule dramatically. Sometimes we are trying to hire key people. Small start-up companies feel these effects even more acutely. When Magma had just 15 people, we hired a designer to do our timing analysis tool. 102

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He had to wait nine months for his green card. I complained to the INS every day, but nothing could be done. The time I spent trying to help him get his green card probably caused Magma a delay of three months - and that's just one example. Right now, in Magma, there are probably four or five people waiting for H- I s. If I can find a strong candidate in the U.S., I hire him or her. But often I can't find enough people here, so I have to go out of the country, where the talent is. That six- to ninemonth delay is not acceptable. We have to reduce that process to a few weeks. The number of visas granted has gone up, but not by a huge margin. Also, expiration dates have often been extended. There has been some help, but it is not sufficient.

Consolidation and Globalization As the industry continues to grow, I believe there will be a few major players at the system level, which integrates the computer, DSP, and communications into an electronic device. There will be a few of these giants at the top. They have the capital to build up supply and have the distribution channels. They will account for the majority of the dramatic silicon proliferation. There will also be significant activity in the number of start-ups that supply the IP to the system providers. The

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companies that provide intellectual property may come from start-ups in different places. One of the things that has helped the semiconductor industry in the U.S. grow is that we have had a monopoly on the start-up industry. I think that's about to change. When I came in 1993 and did my first start-up, one of the great things that stood out in the Valley was that I didn't need a big IT organization. There were 20 consultants I could hire who could get things organized. I could get the connection up and running. Now those capabilities are available all around the world. The proliferation of computers and communication devices has made it much easier for people in other countries to execute business plans much faster. We need to differentiate on our intellectual property, creation rights, our own knowledge base, our speed, and our higher growth rate. I think we have some cultural advantages here: We are an aggressive and capitalistic society. People are inherently aggressive. Many countries now have a better environment for start-ups than they have had in the past. If they try to model after the U.S., they will create stiff competition for us. We haven't had much of that. We clearly have had a monopoly on start-ups.

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Profitability in the Semiconductor Space If the consumer market continues to expand, then the systems companies will do well; the IP providers will do well; and so will the silicon providers and all industries that supply each of those sectors. If the systems providers don't do well, then the price they'll pay the IP provider will fall, and so will the price of silicon, and on and on. This space has seen many companies take the lead for ten or 15 years, but inevitably another company takes over. The last few years we heard of giant names in communications or computers. With the merging of these applications, things will change. Dynamic companies able to adapt to aggressive changes in technology and lifestyle will prevail. That means companies have to acknowledge that a product that's highly profitable now probably won't be in a couple of years. They need to be prepared to kill it and do something new. That's tough for big, established companies, but I think it's what's needed, and it needs to happen more and at a faster rate. If the culture within a company is married to the product, rather than to profitability, then change is tough. If you build a culture that says the product is not as important as the talent and possibilities in your company, then your company will be all right. Again, the public market has a significant impact on the entire semiconductor industry. If the public market is not 105

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there, then the systems providers can't make it; the small suppliers in the IP food chain can't help the systems providers get to market faster; and the silicon providers won't be able to fill their foundries or make a profit. This is a good time to do start-ups. The market is down, and you can recruit people right now much more easily than ever before. The days of having whimsical business plans, however, are gone, and there is no longer any point in being the third player in many of these markets. If you're planning a start-up, be careful; choose your niches in areas that have the most potential with the least opposition. People did not pay attention to that in the last few years. They thought that "me too" companies could work. But the nature of business is that the first- and the second-ranked players dominate, leaving little for the rest of the field. Ten years ago I said to a friend of mine that we were going to see a lot of changes due to computers. I was right. Now I am really eager to see the changes in the next ten years, because we haven't seen anything yet. That's the bottom line. We are about to see monumental changes in our industry, our culture, our lifestyle - our world.

Rajeev Madhavan, one of Magma'sfounders, has served as its chief executive officer, president, and chairman of the board of directors since its inception in April 1997. From July 1994 until February1997, Madhavan co-founded and served as president and chief executive officer of Ambit

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MANAGING THE PROMISE OF THE FUTURE STEVE HANSON

ON Semiconductor President and Chief Executive Officer

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Thrills and Challenges in the Semiconductor Industry The semiconductor industry is limited only by the bounds of physics. The dynamics of the industry are built on innovation that moves toward the laws of physics. Because of this, everything is new every day. Having the ability to set a winning direction within that environment, and motivating people to follow that direction, is the most exciting aspect of this industry. In the future I look forward to our industry creating information availability in every shape and form you can imagine. We're very pervasive in the way we solve communications issues in the world today, and because there are so many areas that are untapped, we have tremendous opportunity for improvement. We haven't even scratched the surface on the full potential of semiconductor innovation, so there is an opportunity for new start-ups to have a very focused success around a developed core competency. The industry itself will continue to consolidate now and into the future. Size and scale get to be big factors in established markets that are mature and that will encourage companies to take advantage of consolidation to get that size and scale. The complexity and source of challenges of our industry are tied to several things. First is the ability to attract enough of a resource base of knowledge talent. Second is the high capital investment necessary to be successful in I10

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the industry. Third is the ability to evolve technology rapidly enough to drive cost-efficient next-generation solutions. Fourth is to understand and perform around your own value proposition. The challenges in the supply chain are a tangible example. As the industry matures, we are seeing consolidations, and we also are seeing additional inflection points in the supply chain. The most recent development is the emergence of contract manufacturers, Selectron, Flextronics, Celestica, and Jabil, to name a few. They are an added feature in the supply chain. But as we inject different features that bring new value-added characteristics to the supply chain, we have to be careful not to overcomplicate the global supply infrastructure. The supply chain is faced with two challenges: the inability to accurately forecast the growth trends of the industry and the inability to accurately forecast the growth trends of the consumer. Too many players in the supply chain want to step out of their own value-added proposition to the supply chain and become something different. That causes them to make it complex in that each of them wants control of their own inventory levels and working capital. When you do that without people focusing on their core competencies and value-added solutions, you get inefficiencies in the way we manage and run the supply chain.

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Inside The Minds Growing Opportunities with Standard Semiconductors When I entered the semiconductor industry 30 years ago, I was cautioned not to go into the standard-semiconductor side of the industry because it was fading and going to be replaced with high levels of integration over a short period of time. Thirty years later, almost 50 percent of our business is built around those standard products and technologies. We get more efficient, moving toward the laws of physics, and have found solutions - but also more problems in the industry. For example, you cannot violate the laws of physics in integrating two or more unique, discrete solutions onto one single piece of silicon, thereby integrating them, simply because their performance characteristics and their manufacturing processes are distinct and unique from each other. As we get more capable in our manufacturing and our material-type usages, we have suddenly discovered a major opportunity to integrate some of those discrete parts, not to a more complex system on a chip, but to smaller microintegration approaches. Today, in a typical cell phone, about 60 percent of the board space is taken up by passive and discrete components. The other 40 percent is occupied by three to eight integrated solutions. If we can continue down this new and innovative micro-integration path of

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semiconductors, we can take anywhere from two to 50 standard parts and integrate them with newly discovered manufacturing techniques. That will enable better performance, smaller size, lighter weight, and more cost efficiency. Standard components have taken on a whole new thrust in the industry because we have evolved to a point where we can take advantage of new techniques and methods that weren't available 30 years ago or even five years ago.

Exciting Things Coming to Market Analog power management has been around for a long time, but it has never been appreciated or considered a critical element of the system. As we face the power crisis in California and elsewhere, we face the challenge of having to become more efficient in the way we use power. The whole arena of power management is going to rapidly move to the forefront of critical issues in the industry. As a point of reference, one of the biggest issues today is "leaky electricity." The majority of electrical appliances never really get turned off when you hit the switch - they go into standby mode. In standby mode, the average appliance uses five to 15 watts of power. That applies to PCs, fax machines, battery chargers, telephones, clock radios, and set-top boxes. The 113

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list is endless, and it happens in virtually every electrical product, every day. We have the technology and are producing the products that will get that consumption down to less than one watt in the standby mode. The total electricity lost in the U.S. in 2000 due to leaky electricity equates to five, five-gigawatt power plants. By applying some basic power-management semiconductor solutions to this problem, we have the potential to avoid building additional power plants. Broadband is another source of opportunity. It is the heart of the issue of information capacity. Our ability to move more information in a shorter period of time from point A to point B is imperative. As we get on the Internet today, there are roughly 400 million users around the world. If you were to make a query in the Internet, it might take 15 seconds to get a response based on the infrastructure we currently have in place. If we do nothing to improve the bandwidth and performance of the telecommunications infrastructure over the next five years, as the number of users increases exponentially, that 15-second query is going to grow to several minutes. This is of course, unacceptable. The future of the Internet will depend on our ability to increase broadband performance in the speed and accuracy in which it moves data.

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Killer Applications That Can Transform the Industry There have certainly been killer applications in the past. In the 1970s, people thought calculators were killer applications. Cell phones, PCs, and the major advancements we've made in automobiles are all killer applications. In the future, I think there will be two fundamental areas we can emphasize in produce applications that will change our lives. Portability is the first, because everyone wants more capability from smaller and lighter electronic devices. This implies lower power consumption, more efficient use of the battery, smaller scale, and innovations such as microintegration. Connectivity is the second. We want to be connected everywhere we go. The world is definitely going to an infrastructure that will enable the person on the go to have virtually the same access to information as the desktop-bound user. The application of semiconductors is now getting to be so pervasive that it's not likely that we're going to see one unique innovation that's going to drive the market, as cell phones did in the late 1980s or PCs did through the 1990s. That pervasiveness will help us mature as an industry, but it will also drive us to be a lot more innovative in how we solve the issue of new applications.

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Non-Standard Use of Materials in the Industry When I started in the industry, germanium transistors were accessible, but they were displaced by silicon. Now, that material is getting displaced by silicon germanium, indium phosfide, and gallium arsenide, and we're again only scratching the surface. Thousands of materials are yet to be explored. As we begin to approach the wavelength of the electron, our ultimate limitation, numerous materials will evolve and add their own unique characteristics to the industry. In the next ten to 15 years, the industry will become much more diverse in the types of materials we use. Silicon will probably still be a mainstay in this industry, but multiple material types are definitely a way of the future as we push the envelope in performance.

The Role of Government in the Industry The government has an obligation to drive free trade for economic growth. This is probably the most important single effect it can have now and in the future. For example, China needs to come into the WTO. That will continue to allow the industry to innovate and provide product solutions around the world, in very advanced countries such as Western Europe, the U.S., and Japan, or in evolving countries such as Western China, East Asia,

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and Africa. All these people will one day be using cell phones. Certainly the government plays a key role in environmental concerns, as well as in the safety of products, but that role is pre-established, understood, and mature. The government also needs to be attentive to what technology can do to help solve problems in, for example, energy conservation. In terms of intellectual property, the government has an important role to play in ensuring that protection issues are addressed and mitigated and that there is a level playing field around the world. As we do business on a global scale, the intellectual property issues of the Western world today still are not embraced in developing countries. China is fairly slow in implementing intellectual property protection in support of multi-nationals who may be serving the market. Those kinds of issues will be addressed country by country and be resolved as free trade encourages it.

Success in the Semiconductor Industry Every company needs to focus on its core competency. They need to know and understand what they do best and build their strategy and value proposition around that core competency. Companies today, especially publicly traded companies, have to make sure they pay attention to the 117

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balance sheet. They have to move fast, and they also have to have contingency plans prepared. The best way to succeed and to manage is to communicate, communicate, communicate. If people know and understand their situation and its critical issues, they will respond. If you can't convince your own employees of your company's goals and vision, then you've just broken a very important rung on the ladder. Communication is a two-way proposition. It requires us to listen to employees and customers to gain their perspectives on the situation. There are customers today who will drive economic recovery or bring some level of stability to connect with them as we work through a difficult cycle.

Privacy Issues for Companies Security of data and information is obviously a big concern for any industry today. Semiconductors are at the forefront of that issue because tremendous value is locked into the intellectual property a company creates. It's imperative for employees to be aware of security issues around their company's critical information. Most companies go through a considerable amount of employee education and training in that area.

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Leadership and Success Clarity of thought and direction is what I admire most in a leader. If a leader has this attribute, he or she is able to formulate strategies, motivate employees, and mobilize an organization toward a common goal. Listening is a critical leadership skill. Listen a lot. Become a master of delegation and let people do their jobs. The business environment today has a tendency to capture the negatives. To lead in any industry, try to steer away from that negativity. An organization thrives on and is driven by rewarding success and celebrating every possible win you can. Establish trust to build a successful team. The team members have to satisfy the skill sets or functions of their particular roles so they can perform as a team. No individual is irreplaceable, and no individual can do it all. Team members have to have valuable time together to ensure that they not only bond initially, but that they continue that evolution.

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Keeping an Edge I spend as much time listening to people as I can, whether it's customers or employees. It's important that formulation of the vision is constantly communicated and reinforced. I evolved my thinking by reading certain publications and listening to people, whether it's technologists or employees on the line. I strive to understand them and reinforce the company's core competencies. In terms of the industry, I have relationships with CEOs of several competing companies. We find opportunities to challenge each other and brainstorm at times, though probably not as much as we should. I do spend a reasonable amount of time on weekends and at night reading industry publications so I can keep abreast of current events. But the majority of what I learn about the trends and direction of the industry I learn by listening to customers.

The Importance of Setting Goals Establishing long-range goals focuses all of the company's resources in single direction. It sounds easy, but a lot of thought and consideration go into this decision. The establishment of that direction spawns numerous strategies to get all of the required functions and processes in sync.

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We have a continuous process of reviewing our goals for the organization. We sit down and analyze where we are, develop action plans, and respond to deficiencies.

Golden Rules of the Semiconductor Industry He who gets there first wins. Speed of execution is the key strategy and rule. The second rule is clearly that the customers come first, whether you're serving them from a production volume standpoint or trying to help them solve their technical problem.

Future of the Industry Historically, the industry has shown a compound annual growth rate of 17 percent, and the industry is maturing. There are areas that are untapped in terms of new products, but the growth rate will continue. We have not solved the cyclical nature of the industry yet, so we are not over our illnesses. We are, however, working on it. Look for an evolution, not a revolution, in this area. The industry will continue to have a reasonable number of players because the pervasiveness of technology in applications is going to enable diverse technical solutions

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As president and CEO of ON Semiconductor, Steve Hanson directs the day-to-day operations of the worldwide organizationfrom the company's headquartersin Phoenix, Arizona. Before assuming his role as president, Hanson was the senior vice president and general manager of the Semiconductor Components Group for the Motorola Semiconductor Products Sector (SPS), a position he had held since June 1997. Before that, Hanson was corporate vice president and general manager of the SPS European Semiconductor Group. Hansonjoined Motorola in 1971 as a senior managerfor Process Engineering. While at Motorola, he held management positions in engineering and manufacturing operations. In the late 1980s and early 1990s, he assumed the role of corporate vice president and general manager of the Analog LC. Division and later the RF Products Division. Hanson's career includes six years in general management in Geneva, Switzerland and three years as a manufacturing operations managerin Scotland.

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Hanson earned his bachelor's degree in electrical engineeringfrom Arizona State University. In the past, he has been involved in the Boy Scouts of America and has served in numerous leadership roles within the organization. Hanson is an active member of the Greater Phoenix Leadershipand is a member of the boardof directorsof the Dean's Council at the Arizona State University College of Business.

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CHANGING THE DYNAMICS OF THE DATA CENTER EYAL WALDMAN Mellanox Technologies, LTD Chairman of the Board and Chief Executive Officer

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Opportunities Three key elements are integral to the semiconductor industry. They are the ability to communicate, the ability to process information, and the ability to store information. Those are the areas that Mellanox is focusing on, but you can find semiconductors absolutely everywhere, so opportunities in this market are abundant. Semiconductors are at the basis of almost everything we do. Without realizing it, people are surrounded by tens of millions of semiconductor transistors every day. They are in our PDAs, our telephones, our laptops, our cars - they're everywhere, even in our refrigerators. They are woven into the fabric of today's society.

Changes Ahead Three key elements are changing. The first is the CPU. This is the component that processes the data. The CPU connects and communicates to everything outside the CPU in its own small surroundings. CPU technology is being advanced by microprocessor companies. They are producing CPUs with higher and higher performance and higher frequencies. Basically, Moore's Law accurately predicts the ongoing process of improvements in architecture and technology that enable microprocessor companies to continually make smaller and more powerful CPUs. 126

The Semiconductor Industry The second element is memory. Memory stores data so that the CPU can process this data as required. We are getting denser and denser memory with very low cost because of ever increasing demand. We are constantly improving. A year ago you could put just one bit per cell, and now or in a year or so, you will be able to put two bits per cell. There are all sorts of technological advances in the semiconductor space, and you need to keep your eye on all of them. It is never obvious which advance is going to be really significant and become mainstream. The third element is the input/output (I/O system). The purpose of the 10 is to get to a better cost/performance ratio. You need to get the data where you need it, at the time you need it, and at the right price. The challenge is that there are multiple standards and industry groups trying to solve how to move data. Technology is creating new users who demand lots of data - things like cellular phones, web browsers, and PDAs. Getting the data to these users requires solving issues of how servers communicate among themselves, with the storage in the data center, and with clients over the wide area network, the local area network, and the system area network inside the data center. This is a big challenge. There is a huge area for innovation and development to solve the entire problem of getting data from where it is to the users who want it.

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Competition Competition in the semiconductor space can be brutal especially for commodities, such as memories or other mass volume chips. A new company like Mellanox definitely doesn't want to compete in a space already crowded with competitors, where the only way to gain market share is to compete on price. You want to go after a market that is new, without entrenched players, that provides significant value to customers, and that is not something simple or straightforward. We recognized early that the InfiniBand market had those characteristics and moved aggressively to achieve leadership. For state-of-the-art silicon, such as our InfiniBand chips, the barrier to entry has gotten higher because of the complexity of developing such complicated system-on-a-chip (SOC) devices. You need to understand not just implement, but understand - the underlying technologies, how they work, and how to best use them. The barrier to entry has risen and will continue to do so. One example is the cost required to tape out a state-of-theart chip. A tape-out is the culmination of a complex process from design to manufacturing. In 0.18-micron technology, it might cost $400,000, and a tape-out in 0.13 might cost double that - $800,000. I remember a 0.25 tape-out was only about $150,000. The reason the costs increase so much is that the technology used in making the mask with smaller and smaller dimensions is much, much more 128

The Semiconductor Industry expensive. All the equipment costs more. This is a financial example of why the barrier to entry into the semiconductor industry is growing. We are working now with 2.5 gigabytes per second on the 10. Everything is more sophisticated: the tools, the testing equipment, the CAD tools that allow you to tape out such a device, and the library development. Another example: In 0.8 microns the most important element to be made to reach the correct speed is gate delay. Today the RC propagation delay of signals (due to parasitic resistance and capacitance of the microscopic wires connecting the gates), has as much effect as the gate delay itself. Noise is another issue. When you worked with technologies of 0.6 - 1 micron, the supplies operated at five volts, and it wasn't that important. Now we're working with 3.3-volt, 2.5-volt, and 1.8-volt, and suddenly noise is very important. You need to simulate and make sure that noise and crosstalk do not interfere with your logic. Crosstalk, inductance, and other second-order characterization equations and factors that we did not need to take into account when we were working on the 0.5 and 0.6 microns are very important in making the right decisions today. I believe that five years from now we will need to take into account things we're not even thinking of today, like magnetic fields and emission from fluorescent lights that are surrounding us. The more you delve into

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deeper and more advanced technology, the more factors you need to take into account to get a production-worthy device out into high-volume manufacturing. Those are the real challenges. There was a time when we didn't have to think about or simulate these second-order effects. Now we need new technology and new CAD tools to solve these problems. I anticipate that when we reach smaller geometries and even other materials, we will have new problems, and we will have to create new CAD tools to solve them. We'll need new technologies to find the problems, identify them, and resolve them. Although these are some challenges of being in this industry, I don't see any big obstacles in the progress of the semiconductor industry. It's one of the biggest sectors of the economy because it's so vital in building nearly everything we use. People have been predicting for a long time that Moore's Law will run up against some insurmountable physical barrier, but it just hasn't happened. The problems become more complex to solve, but there are a lot of really smart people making sure that chips keep getting smaller and faster. I see a continuation of the improvement of the process of getting better densities and smaller dimensions with less power required.

Standards in the Semiconductor Industry Standards are very important. Let's look at the PCI bus. Before PCI there were multiple busses competing to be

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The Semiconductor Industry used as the 10 bus in the PC. There were different proprietary busses - VME, EISA, etc. PCI came along and became very widely adopted because it was a standard. I was amazed at the pace at which the standard was adopted in the early 90s - it took only four years for PCI to become nearly ubiquitous. Indeed, there was preliminary work that was being done before that - our VP of operations, Shai Cohen, and I reviewed the PCI architecture back in 1989. He was on the 10 side, and I was on the logic side. It took a few years until 100 percent of PC mother boards had PCI parts in them. We're talking about millions of them. That's a great pace for adoption. But it didn't stop there. PCI was defined for PCs and servers. What happened then was that the PCI architecture found a niche in the embedded market - by that I mean routers, switches, printers, whatever is not a PC. It took the

embedded

market about two years to start asking

themselves, "Why are we doing our own proprietary busses? If we use the same standard that was invented for the PC, we may not have all the best features we want, and we may need to compensate for certain things, but basically it will be a standard, and we will be able to leverage the availability of off-the-shelf devices and benefit from the associated economies of scale, and that will compensate for everything." Thus the embedded market became a pretty big niche! So what you have seen is a significant penetration in the embedded market, as well. Now many routers, switches,

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load balancers, and even printers are based on the PCI bus. This just shows how important it is to have an industrybacked standard. The same thing will happen with InfiniBand. Standards are the only way to go. Why was the PC so successful? Back then, Digital had a PC called a Rainbow. The main reason the PC succeeded and prevailed and beat everything else is that it was a standard, an open plan, and everyone could design to it. It's the same thing with semiconductors. If you have a standard, people will use it and adopt it. They want something that they know they are not the only ones using because, as I said before, it is getting too expensive to develop every chip you need by yourself. You want to get chips from multiple vendors. From the management perspective, if you need to invest resources and engineering, then you're much better off to use standards than to invest in your own proprietary technology. Take InfiniBand, for example. The best in the world in our industry have worked on this standard. No one company has such resources. For example, people from HP, IBM, Agilent, and Tektronics developed the electrical/mechanical spec. Compaq, Dell, IBM, Intel, Microsoft, and Sun - all of those companies have put resources into solving this problem, so creating a standard is significant. You have many more resources than one company can bring to bear. You have the expertise of multiple companies solving the problem from different angles - all the key players from the server and storage industries working together - that's something.

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Look at the thoroughness and completeness of the standards. If the committee and the technical representative do a good job - and I think InfiniBand has done that - you can definitely get a faster time to market with a standard. Some people think standards delay things, get bogged down in committees and so on. I think if you manage it correctly, then you get a very good, comprehensive, thorough, and robust standard, and you don't compromise the schedule. With InfiniBand, the merger of NGIO and FuturelO occurred in August 1999. The Rep 1.0 spec was released in October 2000. It was completed in one year and three months. That's quite an achievement. That we achieved interoperability with Intel from day one shows how complete and thorough the standard is, and a lot of credit belongs to the trade association. Standards are very important, and if you manage them correctly, you can get very good results. When it is done correctly, I don't think there is a single company that could pull together so many resources with the best minds in the world to match a trade association in developing a standard.

The Ideal Role for Government I would advise against government participation in developed countries, like the U.S. and Europe. I don't think the government needs to play a role. I think the industry is strong enough and knows best what's required. I think government intervention may just interfere.

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In developing countries - and I think the best example is Taiwan a few years back - I definitely think the government has a role to enable such a market to develop. Nearly everything you use today that has a semiconductor in it has at least one piece that's been made in Taiwan. The reason is that the government decided they were going to invest and open foundries there, so they helped fund TSMC and UMC, and there's more out there. Taiwan became a center for foundry services, and it didn't stop there. Once you open a foundry, you also need an assembly and a test plant, and then you need some design capabilities. Now they're moving up the chain, providing additional services, like the PC OEM business and communications products and so on. They have created a foundation. They started with very strong government support for foundries because they are so capital intensive, but then it really developed into a very big industry in Taiwan. This has been fruitful for the Taiwanese people. In Israel the government helped develop very good design centers. The next step was that the people in those design centers could now, with experience in the high-tech industry, learn how to design things and become good professionals and good managers and could start their own companies. The second wave was start-ups in the high-tech industry, which took more of the burden off the government in Israel.

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I don't think the government should have a role in the semiconductor or high-tech industry in large or wealthy developed countries, except for defense, where they need to take a role. I think the government needs to enable and establish the foundation in developing countries and then help nurture its development, making sure there are enough resources and infrastructure to allow business to succeed.

Effects of the Economy on Industry It takes millions of dollars to develop a single chip. If one of the big foundries wants to build a new fab, it's billions of dollars. The equipment is very expensive. To raise the funds, hire the people, and invest in the future, I think it's very important to enable companies to have a ready source of capital to be able to progress. Once companies like ours develop, we can become profitable and successful manufacturers. I definitely think the public markets are where you can raise funds; they enable you to get the market recognition needed. Mellanox Technologies was founded in March 1999 and has raised more than $33 million to date. Those funds have enabled us to get where we are. Young companies in high technology will need to raise more money. The numbers are getting bigger and bigger because of the investment required, thus the higher the barrier to entry. I think it takes more funds, and the public markets can really help companies achieve those goals. 135

Inside The Minds Good Teams Keep an Edge The key to keeping an edge above others is to work very hard. It also helps if you have a good team - I can't stress that enough. I enjoy seeing the young people, who sometimes start as students or new college graduates, and develop into very professional engineers. They are very savvy because they are so interested in what they are doing. They really try to understand everything that's going on. To become successful and maintain current knowledge, you need to first understand everything that is going on. You have to understand the problems you are going to face in the next generation, in the next year, and in the next technologies. We are constantly looking ahead. We always have a small team that's already working on the next process. They are deciding where we are going, both from architecture and from logic, and technology and design information. I think that's the most important thing: to keep looking ahead and understanding the problems, the obstacles, and the solutions you'll be able to offer to your customers. Next, keep things simple. I think being straightforward and simple and understanding what you're doing are the most important things. Timing and choosing the right market and the applications you are going after are also very important. Lastly, it's also important to understand that your customers will need things that sometimes they don't even see today. You need to look ahead not to what they're asking you for today, but to think of what they will need or

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what they may be asking you for two to five years down the road. It is important to look ahead with them, as well as by yourself, at the next hill and try to anticipate where they will want to go.

Bandwidth and Internet Data Centers Mellanox is a fabless semiconductor company, and our targeted technology is InfiniBand. Why InfiniBand? Data centers today are complex meshes of different interconnects that are hard to manage, and it's difficult to keep them running 24 x 7. The solution: Create a single interconnect that allows for quick and easy upgrades and uses the natural technology curve to improve performance. The obvious solution is to create a scalable "FABRIC" designed specifically for the data center, with RAS (reliability, availability, scalability) and interoperability as goal one. This solution is called InfiniBand (evoking the idea of "infinite bandwidth"). The IBTA (InfiniBand Trade Association) was formed with the goal of creating a new data center interconnect that would simplify the data center while improving upon the reliability, availability, scalability performance (or improve bandwidth), based on a fabric. And do all this while making sure that all the devices interconnect and interoperate between vendors. An impossible task? Not really. A steering committee was formed by all of the top server companies: Compaq, Dell, HP, IBM, Intel, Sun

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Microsystems, and Microsoft. In October 2000 they released the specification that could meet the required goal. Other members of the IBTA include all the major companies from clustering, OEMs, storage, and many other disciplines software, communication, required to build the data center of the future, based on InfiniBand. Some of the key features that IBTA defined in the specification are: There are three sets of links defined by the specification: IX, 4X & loX or 2.5, 10 & 30 gigabits per second, respectively. It is a point-to-point full duplex interconnect made up of only four wires (per lX). The aggregate bandwidth is really twice what is stated, since this technology allows the wires to both send and receive simultaneously. Therefore, the aggregate bandwidth of a 4X link is really 20 Gb/sec. And InfiniBand uses an 8bit/10bit model to move data. The clock is imbedded into this signal; therefore the IBTA quotes baud rates, but the datarate is actually 80% of the baud rate. RAS: As mentioned, the InfiniBand architecture was designed from the ground up with RAS in mind. A fabric enables scalability by just hot-plugging in new storage devices, more servers, or other devices. Extremely high reliability (99.999% up-time) can be achieved with the help of redundancy. HCA (host channel adapter) can be designed to be dual port, so connecting it to two switches

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creates a fully redundant network. InfiniBand includes both managed and unmanaged failover in hardware. There are many other features to achieve a new level of RAS. QoS: Virtual lanes allow the implementation of QoS (quality of service) and enable independent networks on the single fabric. These features allow vendors to support multi-protocol services and offer customers guaranteed service level agreements (SLAs) at different performance levels. These various SLA levels are important, as they can translate directly into revenue. The InfiniBand architecture is also designed to be on a logic board or backplane and be used over multiple media: FR4 (logic or PC boards), copper wires or fiber optics. InfiniBand copper links can span up to 17 meters over copper and kilometers over fiber. Copper is a key to controlling cost, as both the transceivers and the cables are much less expensive than fiber optics, and the 17 meters of copper can span most data centers. It's important to note that 1OGigabit Ethernet, which isn't scheduled to have a final specification till 2002, is currently planned to support fiber optics only. It is also designed with the transport in hardware. This means that the logic to move data is supported in hardware and does not require significant host processing cycles to operate. This is unlike TCP/IP (or Ethernet), which requires extensive software support from the host processor to move data.

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With the rich feature set, the InfiniBand architecture is designed to be the single fabric (or interconnect) for Internet and enterprise data centers. InfiniBand hardware is designed to replace the many buses within the data center: IPC (inter-processor interconnect, or clustering cards), Ethernet (within the data center) and fiber channel (for storage). It is important to put some perspective on the currently available 4X or I 0Gb/s InfiniBand bandwidth. Most worldclass data centers contain many Pentium II and Pentium III dual-processor server designs that enable 6.4 Gb/sec to 8.5 Gb/sec of bandwidth between the processors and between the memory sub systems, but this bandwidth is limited to inside the box. As mentioned, InfiniBand architecture 4X aggregate bandwidth is 20 Gb/sec, over the fabric. It will reach all the way from the processor inside the box to the last end node on the InfiniBand fabric. This amazing bandwidth is not just processor-to-processor, but processorto-storage, switch-to-switch, and the fabric-to-external communication. It spans the entire data center. With InfiniBand architecture, the data is delivered very efficiently and where it is needed most - to the application running on the server. It is delivered directly into system memory with little overhead by using RDMA (remote direct memory addressing), enabling block transfers of data directly from the disk-to-server memory and from server memory to server memory. InfiniBand sets up a communication link (called a queue pair, or QP for short) 140

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that makes a connection from user memory space to user memory space. InfiniBand also features safeguards in the form of protection tables and protection keys to ensure that the "correct" memory space is allocated and reserved for RDMA transfers without stepping on anyone else's data. This is another of the many RAS features included in the architecture. And as previously mentioned, InfiniBandenabled servers are not running the TCP stack on the host processor, so almost all of the processing bandwidth is now available for applications to use. In today's n-tier data centers, the implementation of a fast and efficient connection between the many application servers, data bases, and load balancers is vital because every hop in the n-tier costs latency and compute power. Most of today's data centers are connected with 100 Mb/sec or 1Gb/sec Ethernet; InfiniBand 4X links will offer 100 or 10 times the bandwidth between each tier, without the burden of running TCP on each server. Another way to understand the impact of the InfiniBand architecture on the data center is to examine how bandwidth changes as a function of distance. In 1998 through 2000, Intel's Pentium II and III offered world-class performance at 6.4 and 8.5 Gb/sec for processor-tomemory access, but the overall design of the data center limited the processor bandwidth to just "inside the box," and the further the data traveled from the processor, the lower the bandwidth became. The PCI bus dropped the bandwidth to 4 Gb/sec, IPC or the storage area network

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Inside The Minds (SAN) dropped to 2 Gb/sec, until more than an order of magnitude of data bandwidth was lost from the processor to the LAN or WAN. Most data centers, until recently, communicated to the world at only 100 Mb/sec. In 2000 and 2001, with the advent of the Pentium 4 and improvements to all of the data center sub-systems, data center bandwidth improved, but the equation remained the same. The Pentium 4 offers 25 Gb/sec; PCI-X offers -8 Gb/sec; IPC and SANs offer 4 Gb/sec; and communication was at 2 Gb/sec with 1 Gigabit Ethernet connections. In 2002 the InfiniBand architecture will begin to change this equation. Bandwidth of 20Gb/s (aggregate) can be maintained from the processor to the edge of the data center. InfiniBand enables "bandwidth out of the box," meaning the IBTA has designed a technology that takes greater than Pentium III bandwidth and moves it all the way to the edge of the data center. This should really change how the industry views and plans data centers. InfiniBand provides a means to truly take advantage of new processing bandwidth, all the way from the processor to the edge of the data center (and do it without the overhead that TCP loads on every server). For 2003 and beyond, InfiniBand 12X will continue to improve data center bandwidth with new technologies to 60 Gb/sec aggregate bandwidth. InfiniBand will change the dynamics of the data center as no technology before it has.

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Not only does the InfiniBand architecture improve bandwidth within a data center, but it also improves the cost of ownership. Today's data centers are complex meshes of different interconnects, or what some refer to as the "spaghetti net," or a group of too many interconnects, too many cables, and multiple switches that do not scale well and that make high reliability hard and expensive to achieve. An InfiniBand architecture solution cleans up the mess by implementing a single fabric where redundancy is achieved (as previously mentioned) by simply adding another switch. Fifteen to 20 years ago, it would have required a full room of equipment to store a machine that contains the data that the average person now has on a PC. Today, many servers that operate at over 1 GHz can be housed in a rack that is smaller than a closet. What you see is a continual process of being able to package higher computing power and greater storage power into a smaller area with less power.

The Future of the Industry Some day I would like to see semiconductors that have intelligence, though I do not think I will exist to see that. But that would be my dream, to create a device that would think what you want and give it to you at the right time with no cost.

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People are starting to understand more and more the neural network model that shows how the brain works and what it may be possible to do with semiconductors. There are actually projects that have tried to understand how intelligence is created. We can understand how algorithms are created and implement them and have machines solve algorithmic problems, but that's not intelligence. We need to figure it all out and program it into the machine. But what I'm looking for is a device that can actually generate algorithms. That is what I think would be the ultimate semiconductor device. Now, considering the economic future of the industry, the reason we're experiencing such dramatic cycles is human nature. You create the market, and there's a big wave of requirements, and people want to anticipate what the market is going to do. They buy more, which creates a shortage, so they buy even more, and it creates a bigger shortage, and so on. They create a huge demand for everything, and people build more fabs, more foundries, and so on. But because people are building on top of reserves, eventually everything collapses, and you see a downturn in the semiconductor industry. People suffer for a period of time, and then you see the process start to pick up again. The cycle is caused by human nature. Humans anticipate a problem and want to solve it up front in cyclical ways. How can that be resolved? I heard that from Walt Bailey, CEO of PMC Sierra, when we were on a panel together. He said

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The Semiconductor Industry if you let one person see the whole channel, the whole food chain, the entire supply chain from mask to production to inventory at the OEM - if one person can manage this whole chain, which he cannot, then maybe the problem can be resolved. We only see a portion of that chain. We have visibility down the line, but not up front. If we could have visibility from the beginning through to the end customer, we might be able to solve some of the cyclic behavior in the semiconductor industry.

Eyal Waldman, chairman of the board and chief executive officer of Mellanox Technologies, LTD, was a co-founder of Galileo Technology, Ltd., and served as the vice president of engineeringfrom March 1993 until February 1999. In this role he was intimately involved in the definition, execution, marketing, sales, and customer supportfor all of Galileo's products. He was responsible for growing the organization, starting with a small team and ultimately building a highly productive engineering team of 160 employees. He was responsible for the development of state-of-the-art design methodologies, resulting in production-worthyfirst silicon successes. Before Galileo, Waldman workedfor Intel in Haifa, Israel, from August 1989 until March 1993. During this period he led the logic design of secondary cache controllersfor the 50MHz i486, i860XP, and the 66Mhz Pentium. He participated in defining the architecture and microarchitectureof Intel's next-generation x86 microprocessors

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Inside The Minds and the architecture of Intel's next-generation Massively ParallelProcessing (MPP) computer. In 1991, he earned the highest distinction awarded by Intel, the Intel Achievement Award,for the 82495 cache controller design and was recognized as the Israel Design Center Employee of the Year in 1992. Waldman has one patent on the synchronization mechanism of Intel's future 64-bit architecture and three patentspending. He holds a B. Sc.E. E. (Cum Laude) and an M.Sc.E.E. from the Technion in Israel.

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LETTING THE MARKET DRIVE

THE INDUSTRY BOB LYNCH

Nitronex President and Chief Executive Officer

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Excitement in the Air The day I've anxiously awaited for the last 20-plus years is finally here, and it is exciting! Back when I started in semiconductors, we all looked at the periodic table and asked, "Based on the elements' physical properties, what will be the ultimate in semiconductor technology?" We knew it would be something that was already known about, even if only theoretically possible. Back then, we suspected it would either be diamond or gallium nitride. Today, it looks like gallium nitride is winning out. Throughout my career, I have worked hard to help bring to fruition what we believe gallium nitride to be - the "Holy Grail" of semiconductors. Recognizing that we will be playing an instrumental role in commercializing GaN technology is one of the most fulfilling aspects of my job. With the widespread commercialization of gallium nitride comes an opportunity to explore new applications and avenues beyond the current wireless communications and optoelectronic devices we're working on today. Nonetheless, you can't put the future before the present. One drives the other, and I can see that today. For instance, the next generation of wireless systems - third-generation (3G) networks - is being delayed due to the current semiconductor technology's limitations. There has been a lot of vision and a substantial amount of money spent on securing the spectrum for the next generation of wireless systems, but the semiconductors in today's cellular base

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stations cannot handle the increased power and signal requirements. We can solve - and have solved - the biggest part of this

problem by proving that gallium nitride semiconductors can work, and work well, in wireless communication systems. Gallium nitride provides manufacturers with a semiconductor compound capable of handling the increased power and bandwidth requirements that 3G communications entail. By integrating gallium nitride onto silicon substrates using our technology, manufacturers eliminate the need for a massive redesign of a customer's manufacturing process. Recognizing the needs of an industry is one of the critical components in developing a successful semiconductor business, and it holds true for any business. The key is understanding what the market wants. You have to have an open dialogue with the rest of the industry. Listen to people outside the company who know the industry, and compare their thoughts with your core competencies. Leverage those core competencies in that direction, and what you don't have, go out and get. It's a matter of being everywhere and anywhere - of making the rounds and listening to what the markets want. In our case, wireless infrastructure manufacturers are searching for an alternative to today's semiconductors that can meet their needs - namely increased power and bandwidth-handling capabilities.

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Thriving and Surviving Especially today, people are always asking how companies expect to survive in such a turbulent economy. For a wellmanaged company, it should be fairly easy - business as usual. A well-managed company recognizes that one of the keys to success is taking advantage of what the market provides - regardless of how big or how little. It also involves taking some risks. A lot of it is just having the vision of where things are going and then heading off in that general direction; however, it is essential to be versatile and have alternative strategies if the situation warrants. Just face it: Every business activity has some risk attached to it, so it is not necessarily knowing which risks to take or which to pass on that is important. Rather, it is the ability to gather and analyze information as you go along, making strategic and informed decisions and adjustments when needed. And, finally, it involves being both a good leader and a good follower. The mark of a true leader is the ability to generate excitement, even in turbulent times. It is about committing to a vision and getting others to commit to that same vision. It is about being able to build on that enthusiasm and turning it into tangible results. It is about succeeding in the eyes of industry leaders, peers, and employees. All of the above culminate into what it is really about - trust in employees, trust in the purpose, and trust in oneself.

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We have just closed on an excellent round of funding in what has lately been a very unfriendly venture-raising environment. How? By not deviating from what we started out doing. We have constantly monitored our target markets and are very aware of the challenges they will soon face. Regardless of the economy, those challenges will still be there; they may just take longer to manifest. We realize that, as do our stakeholders. While we may have to tighten our belts a little and make a few adjustments, our overall goal today is the same as it was two years ago and the same as it will be two years from now. I have received numerous bits of advice during my career some better than others. One of the best pieces of advice I've ever received is to never be afraid to walk away from what looks like a great deal. Do the research and shop around. The great deals will still be there when you go back. Without exploring other options, one will never know for sure if it was indeed the best deal available. We work by three simple, yet powerful, rules at Nitronex, and they are the three that have pretty much guided my career: Be the first to market. Don't solve what doesn't need solving. Guide the technology - don't let it guide you.

The first two are self-explanatory, but it's the third one that tends to catch people's attention. A case in point is the PC

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Inside The Minds industry, which has traditionally been the harbinger for the semiconductor industry. It is a prime example of developing for development's sake. Computer processor manufacturers have attempted to drive the market by developing chipsets with clock speeds in excess of 2GHz, markedly faster than what most consumer applications require. In a way, they have adopted a Field of Dreams mentality - build it, and they will buy. But consumers are not buying. For the first time in years, sales are flat, if not decreasing. Consumers see no reason to upgrade a perfectly good two-year-old computer that still meets their needs. By trying to drive the market, these companies have outrun it.

Branding an Industry So, where is the semiconductor industry today? We feel it is on the brink of a monumental change in thinking - a shift from a technologically-focused industry to a marketingfocused industry. Today, the technology branding among semiconductor companies is such a minor part of what the industry is about. For the industry to really take off and avoid the periodic cycles and the downturns, it has to make the shift from focusing on the technology to recognizing the importance of marketing and branding. What is the value? Think about it: You're at the edge of physics when you're in the semiconductor industry. In fact, you are pushing physics to its limits. You're working around physics, and it becomes your life.

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But to the consumer, the object of your devotion is nothing more than an electronic part - the little "thing" that makes the big "thing" work. There's a big chasm between the people who are building semiconductors and the people who either are using them or will be using them in the future. A company's marketing strategy can serve as the bridge between the two. What will this shift mean for the semiconductor industry? The biggest change will be increased attention to marketing and branding. No longer will semiconductors be nameless components amidst a sea of parts. Rather, companies will try to create brand awareness for their devices, much like Intel® has for its processors. (Talk to the VP of marketing at many semiconductor companies, and most likely his or her goal will be to make their company the "Intel Inside"® for a particular market or application.) In the end, it will become a marketing-driven business, as opposed to a technology-driven science experiment, especially as the industry concentrates more on actual end-users. For this to work, though, the semiconductor industry will have to let the market drive it, rather than letting it try to drive the market. If that happens, then both companies and end-users benefit. As is the case most of the time in our industry, it is not so much an actual product we have to sell, but the vision of how we believe everything should be. There are a number of different avenues we've explored to share our vision, and one of our most successful outlets is public relations. 153

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Nitronex is focused on gallium nitride, a technology that has existed for years but never made it out of the lab into commercial applications. Because it has been on the back burner of the public's consciousness for so many years, we found an untapped interest in information on gallium nitride, its applications, and its benefits. Nitronex is well on its way to becoming the "Nitronex Inside" for wireless and optoelectronics applications. How? By educating the semiconductor industry and our customers about gallium nitride and the applications it enables. As 3G wireless communications dominate news headlines, Nitronex is able to move outside the technical world to speak to consumer audiences about the impact GaN will have for wireless users worldwide. By doing this, we are able to show that GaN-on-silicon semiconductors are more than just those "little things" and, in fact, are instrumental in people's everyday lives.

Redefining an Industry The definition of "semiconductor" is about to be rewritten. Whereas semiconductors have traditionally been defined by their elemental constituency and have favored specific electronic applications, the next big breakthroughs are probably going to come from using other materials, such as biological compounds. This will open up many new areas and cause a radical rethinking and reshaping of the

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industry, while increasing the importance of companies' intellectual property. Once again, one of the keys to success that Nitronex operates by is being the first to market. If a company gets into a new semiconductor material or finds the ideal combination of compounds before everyone else, it has an advantage. They gain about two to three years of fruitful profit margins, in addition to creating an extremely valuable IP portfolio. Investors tend to be very interested in the advantages that companies have with their intellectual property positions, as well as how well they use that knowledge to their benefit. Whereas the government has never been too interested in intellectual property, investors realize these portfolios can definitely affect their ROI. A solid IP position is important in the semiconductor industry today and will be essential in the coming years. Licensing agreements have also become very important, especially when companies are just getting started. But licensing IP does not mean a company can wait around for the money to start pouring in. In fact, IP licensing can end up being a very costly proposition if it is not handled correctly. Granted, Wall Street loves to hear news of new licensing agreements, and it can help in securing a new round of funding. But in the end, licenses are nothing but signed pieces of paper. Success will depend on execution. The industry, too, is going to become less cyclical as semiconductor applications become more widespread and 155

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more market-driven. One of the big changes in the semiconductor industry that I've noticed over my career is the shift away from the military. For decades, the military drove much of the industry development by providing the seed money for forming companies. It was very hard to get a semiconductor company started without the backing of the military and a few government contracts. Today's semiconductor industry is driven in large part by the PC industry, but as semiconductor technologies advance, there are going to be more ways to spread out the demand in more sectors than there are today. Semiconductors will be sitting in practically everything in a house, even clothing. It will touch virtually every other industry in some form or fashion. Public markets will become increasingly important, as well, especially given the capital-intensive nature of semiconductor manufacturing. If the markets continue to falter, they could definitely hamper the development work that is under way. The only way I can see the proliferation maintain itself should that happen is if companies are willing to use existing resources that may not be located under their own roof. There is no other way around the issue. One of the biggest challenges semiconductor companies face right now is the tremendous expense associated with building a fabrication plant. The solution is actually pretty simple, but it will require a marked change in a company's line of thought.

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The Semiconductor Industry There are a number of quality fabs that are already built, which in most cases have idle capacity. Rather than invest capital and time in building a new plant, why not partner with a company that has the infrastructure already in place - perhaps even a competitor? Semiconductor companies, especially those in the early stages, have a tendency to be overprotective of their technology. But having the technology without the infrastructure to manufacture it is useless. It goes back to one of my golden rules - be the first to market. A company may have to make a few compromises along the way, but if its business model is sound, the market will be there to support it.

Reinventing an Industry What is unique about the semiconductor industry is its need for disruption. Without disruption, the entire market risks becoming commoditized to the point where there are no profits to be made. That's why companies focus on being the first to market or try to best each other's IP portfolios. It creates disruption. The same holds true for semiconductor applications. For example, seeking to combine two seemingly disconnected fields - such as semiconductor development and biology creates disruption, which shakes up the status quo. That

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Inside The Minds shakeup leads to new solutions for new problems and new applications of old solutions. I'm seeing more and more small companies that have some tremendous niche capabilities, sometimes thinking of and working on applications that larger companies have yet to consider. When that knowledge becomes public, it creates a disruption in the industry - sometimes reshaping it, if not creating a new industry entirely. In a way, this helps the industry to keep reinventing itself. Nitronex is a good example. The benefits of gallium nitride are becoming better known. Nitronex, however, took this a step further by being the first to deposit GaN crystals on silicon substrates. The end result is a semiconductor that combines the unique advantages of GaN with the cost savings of silicon. After years of stagnancy, this market disruption suddenly propelled our sector of the semiconductor market forward.

Keeping an Edge I'm like a sponge when it comes to information - I try to absorb all I can. I read a prolific amount of material that runs the gamut from classical history to quantum mechanics. Sometimes, you have to look outside the box to get a better understanding of what may be in it.

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I try to keep a pulse on every place where there may be an application for semiconductors and try to get a feel for what the next five years may hold. Naturally, what catches my eye is anything that could be done more easily with a chip. It's amazing what some of the possibilities are. In many cases, it's not coming up with a new use for a chip, but rather ways of eliminating them. My "dream chip" would combine high-power and highfrequency capabilities with digital signal processing - all on one chip. There are actually several significant cost and functionality advantages to having one chip do the job of several. It is only a matter of time before this becomes a reality. With the advances being made on combining different semiconductors, like gallium nitride and silicon, into one package, tomorrow's chipsets will be smaller but exponentially more powerful than those we have today.

Bob Lynch, president and CEO of Nitronex, brings 22 years of wireless/RF industry experience to Nitronex. He specializes in transitioningfundamental technologies built around gallium arsenide, gallium nitride, silicon carbide, silicon germanium and indium phosphide into commercially viable manufacturingprocesses. Before joining Nitronex in January 2000 as president and CEO, Lynch served as the director of worldwide operations for Digital Microwave Corp., a $400 million wireless infrastructure equipment manufacturer. He and his team 159

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implemented systems and processes that enabled the company to successfully manage its revenue and cash flow activity. He was also responsible for the creation and development of the company's merger and acquisitions integration team, resulting in the company's successful incorporationof two acquisitions. Before Digital Microwave, Lynch spent four years with Cree, Inc., during the company's transitionfrom a start-up to a high-growth semiconductor company. As the vice president of operations,he helped the company move from a government-sponsored,research-basedorganization to a product-focused, commercial company that increased its product revenue by 600 percent in two years. Lynch also held variouspositions at M/A Com, a developer and manufacturer of RF and microwave semiconductors, for nine years. During his tenure at M/A Coin, he cofounded Microwave Research and Development, an electronics manufacturing company. He also worked in semiconductor manufacturing at Raytheon Co. for four years. Lynch earned an executive MBA from Babson College in Wellesley, Massachusetts, and a bachelor's degree in chemistry from Massachusetts State College in Framingham.

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MEETING CONSUMER DEMANDS FOR HIGH PERFORMANCE SATISH GUPTA

Cradle Technologies President and Chief Executive Officer

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Excitement in the Semiconductor Industry The most exciting part of the semiconductor industry is the relentless innovation that continues to challenge the inventive minds. There's never a dull moment. The root cause of this treadmill of innovation is the steady pace at which the number of available transistors on a chip continues to grow. The number of transistors is expected to grow from about 50 million now to over a billion before the end of this decade. We have so much available in a single chip in terms of transistors, that what you can do with a single chip just keeps increasing. As a result, we never cease to invent new things - multi-media products, the photo-realistic visualization of images, real-time interactivity, worldwide video conferencing. All of this is fundamentally feasible because of the semiconductor industry. Everyone is craving these applications at the right cost. Right cost is exactly what the semiconductor industry is about. Continued growth in size and performance of chips can take us from picture visualization to analysis of the human genome in real time. The availability of necessary computing capability to handle real-time human genome analysis will lead to a whole new set of demands for semiconductor products to be deployed in healthcare, which we can barely begin to examine.

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Areas of Growth There is no doubt we will continue to see deployment of semiconductors across a broad set of applications. In the near term, I believe the communications area is going to remain explosive. We have an insatiable demand for people to interact and communicate in real time, with as realisticlooking picture, and as perfect-sounding voices as we can affordably support. Almost everyone wants handheld devices to deliver photo-realistic video, consume little power, and be available anywhere, anytime. They want their telephones, televisions, and videoconferencing environment to get more and more realistic, and they want instant real-time interaction in terms of communicating with the rest of the world. They want the pictures to be real; they want the motion video to be real; and they want instantaneous connection to people all over the world. I don't think we are anywhere near that. That is one of the areas that offer the highest potential for semiconductor technology to deploy solutions. The second big area that we are just beginning to enter is the computing challenge offered by the biomedical industry. We're just beginning to figure out how to catalog the genes. People are just beginning to imagine the potential we have at hand of solving problems by deploying a thousand or a million times more computing power to that problem than we have now. I think those two areas offer the most significant application growth.

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Current Focus Our company, Cradle, is based on a very powerful shift in the industry that is in the making. This is based on three observations. The first is that the requirement for higher and higher performance and more and more functions is relatively insatiable. We see an open-ended demand. The higher performance you can give people - our scientists, programmers, and innovative equipment builders - the more they are able to use. Thus, they become capable of creating a more entertaining entertainment experience, or a more communicative communication experience. The first element of this troika is that the requirements of the demands are relatively insatiable. The second element is that the technology continues to progress, so the demand can be met cost effectively. We are into geometries that even the experts never believed feasible. We make 0.18-micron and 0.13-micron design chips today. There's no real end in sight. People predict we can continue to make that progress for another ten to 15 years. That says that people are predicting we may end up with a half a billion to a billion transistors available on a cost-effective chip. That's ten to 100 times more than we have today. That means we have the cost-effective way of deploying that much more function and performance on cost-effective chips.

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The Semiconductor Industry The third element is that you can actually engineer solutions cost effectively, given there is so much available to you, if you know how. The industry is facing a challenge there: To engineer a complete system today on a chip with all the capabilities that are available from manufacturing, to create the highest-quality picture and the highestperformance solution, is becoming extremely difficult and time-consuming using standard technologies. The design complexity increases much more rapidly than the available transistors. If we double the number of transistors, the complexity will increase by a factor of four. We have very sophisticated engineering tools available today from companies such as Synopsys, Cadence, and many other electronic design automation companies. Even with these tools, the most brilliant engineers in the world find it very difficult to engineer a product in a reasonable amount of time that can use that level of complexity and deliver that much function to the market. This is a breakdown right now that is crying for a shift in paradigm. The rules of the game need to be changed. The way we change the rules of the game is by first recognizing that we need to do many, many things on a single chip. The only way to do this is to have many, many processors on the chip. No longer can you afford to design a unique chip for each solution because it's very complex to design. Right now a 0.13-micron manufacturing process for one chip design costs $750,000 to just submit a design for manufacturing. That number is going to reach multiple

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millions of dollars in the next few years as technology becomes more sophisticated. What we need to do now is design a chip that is capable of going into many, many applications. We are engineering an architecture that allows us to take a single chip, and by programming it, we can implement a collection of sophisticated functions on it by using many processors on this chip working in parallel. We can take the same chip, and in a matter of months, instead of years, using fewer engineers and not performing any of the chip design, we can deploy it in many, many different applications. For example, if you design a router that requires that we implement high-speed encryption, among other things, it will require three to five chips today, and it is projected that this router will require even more functions going forward. You may want to have video and audio flowing through this router. You have to have secure transactions for privacy in this router. If people continue on this path, they cannot leverage the processing technology that's available in the semiconductor industry. They will end up with many, many small chips, and they will not deliver the performance required. Alternatively, they take a chip which has many processors on it, and by using all these processors, they can program all the functions they need of the router on the chip. Since these guys are experts in routers, they don't have to deploy a team of engineers designing the hardware of the chip that has to be manufactured in a foundry like Taiwan Semiconductor

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Manufacturing Company in Taiwan. They can do what they re good at, i.e., implement router functions. Once the chip is there, they bring the router to the market focusing on their core skills. Second example: The same chip that went into the router goes into a box that is going to receive video from the cable or the satellite or the Internet. You put it on the television, distribute it at the home on whatever television you want and wherever people want to take this technology, which is what the customers want. They can use the same chip that we just talked about on the router and build a "set top" box (a box that sits on top of your television set and delivers all these magical functions). This company that specializes in making "set top" boxes doesn't need to know anything about engineering the chip itself. They can do that in software, and they can do that in months instead of years.

Holy Grail Technology A technological "Holy Grail" product would be one that is very easy to use and gives very high performance, that people can take out of a box and just plug in and make it function the way they want. In the 1980s, when the PC industry got started, a sort of Holy Grail product appeared. A lot of people were building machines such as word processors from Wang systems. These word processors were hard-wired; calculators were hard-wired; and then this microprocessor came about. We took the right software, 167

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and suddenly people went out of the business of designing this hardware and started to write software, and word processors and database engines and PowerPoint and all the multimedia happened. We exploded the imagination of the people who created a product that had a very simple deployment in applications that no one had imagined. This greatly accelerated the deployment of new products and, in turn, the demand of semiconductor products. I believe a similar breakthrough is required where we can find a solution through a generic chip with the capability of cost-effectively rendering all the application-specific functions to be designed in software that runs on it. The chip is available off the shelf; the programming environment is there; everything will be available. So anyone who has an idea to do something can in fact say, "I can do it, and it doesn't cost me a heck of a lot of money. I can do it in my garage if I want," just as people today build PCs in their garages. I believe with good software tools, chip products based on this fully programmable chip platform can be cost-effectively deployed in many, many applications without a major capital investment. So we open up the creativity that is available to people worldwide, in India and China, for instance. Countries such as India and China, where the education level is very high, have more or less been unable to participate in the equipment business that is gated by the chip industry because they have to buy very expensive software tools for design. It takes tens of millions of dollars to design a chip. 168

The Semiconductor Industry If we had this product that I described earlier, a person living in China could create a functionality that they like with practically zero capital investment. If they have a new algorithm for protecting security, they can actually implement it on our chip or a chip of this kind and deploy it in their marketplace, and the cost will not be prohibitive. They won't need millions of dollars for this deployment. And you have opened these opportunities to millions of people who heretofore would not have been able to enter this "club" that required tens of millions of dollars.

The People Problem Like any other highly innovative industry, it is getting harder and harder to engineer chips. We are talking about geometries on a piece of silicon that are truly incomprehensible. No one believed we would get to the metal lines that are on the order of the wavelength of light, and we continue to find some very clever ways of doing that, but that requires very sophisticated engineering and very sophisticated talent. Even though our universities continue to create talented people, it's not clear that more and more of the talent is going into this industry, which is now grown and mature in many ways, from an engineering point of view. Even though the education of physics and the education of hard electrical engineering principles continue to be there, there is only a finite number of engineers being produced.

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Fortunately, the whole world is producing this kind of talent, and this talent will continue to come in from other parts of the world. We have a flow of people from Asia and from India who are learning these engineering skills and are participating in this area, but this is hard work. This is tough engineering that takes years of experience. If anything, I think talent is the bottleneck for the industry, going forward.

Golden Rules My golden rules are: There will always be better times. There will always be worse times. All the semiconductor people should know that. I do believe that one of the golden rules is that whatever you are working on today is likely to become obsolete sooner than you think. To me, this is the industry that is most rapidly outdating its own products. Whatever you're working on, there will be something better that's going to come along. I go by the rule that if you're working on something that you think is great, chances are you don't know that there are 40 to 50 other companies working on it. There is no shortage of brilliant people, and good ideas travel fast. One has to be totally aware of that.

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Biggest Areas to Evolve The industry has been around for over 30 years, since the transistors came about, and integrated circuits were invented. From the invention of the integrated circuit, the basic areas of semiconductor process have, in some sense, been set, but some new segments have come into play and are primarily driven by two areas. One is optical communication. We will see a lot more integration for people integrating optical with the silicon semiconductor process, so they can have faster and faster optical communications. The second area that I believe is going to be evolving is wireless. We are at the very early stages of using wireless capabilities. The available spectrum for wireless communication is likely to continue to grow for the foreseeable future. What I see most likely is that these two areas will be driving new development in the semiconductor industry. This will require smaller and smaller devices, lower power, and direct interfaces to the highest performance communication channel available, which is the optical fiber channel. In the future, there will be some opportunities to interface with the biological constructs, the real-life organic and living self. There is some work going on in what they call Nano technologies, but that is probably 15 to 20 years out. 171

Inside The Minds I believe the handheld devices and what people call "wearable computing" are now popular because semiconductors are inexpensive, and you can produce these products cost-effectively. People are no longer fascinated that my PC can do 50 things. They would rather have 50 little devices that could do 50 things and that are so easy to use that I don't have to worry about seeing the screen, which is so complex and sophisticated. I believe we are going to see a great transformation and that all the little widgets in our lives - watches, PDAs, cell phones, home telephones, writing pens, whatever I am using - will have the intelligence necessary to make that product offer me more because it doesn't cost me very much. Handwriting recognition, speech recognition, facial recognition, thumbprint recognition - there are so many features for us to deploy in devices as they become more sophisticated in their performance. I think it is an open-ended demand that continues to be fueled by our ability to make these devices ever so cheap and ever so powerful. We can continue to put the power of a mainframe in PCs. We can take them down to the head of a pin and use them to do whatever we want them to do.

Major Issues in the Industry I think the major issues in the semiconductor industry are the same as in other industries. The intellectual property protection challenge remains a big issue for the high-tech industry, and it's only getting tougher because we are

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making it so much easier for knowledge and information to flow through the world. Our principal corporate jewel, the design of our chip, is captured on a disk or a tape, and anybody can quite easily copy this and walk out with the entire intellectual property of our company. So as the assets become more portable and more easily pilfered, the challenge with intellectual property becomes even more and more difficult to deal with. We find it a challenge, when we send our chip to be manufactured in Taiwan, that we must have a solid legal and contractual relationship with our manufacturer to ensure that our intellectual property is not going to be stolen. As we shift our engineering intellectual property from chip to software, and as we build more and more applications and specific designs in software, it becomes even more easily stolen by anyone else. If you design a complex, sophisticated router or set-top box or a camera, it's conceptually very easy for people to steal it. Because it has become easier to steal, the challenge of protecting intellectual property has become more difficult. The laws have to deal with things that can be easily copied. We faced this challenge when copiers came about, and people could easily make copies of books and papers. Somehow the industry survived that. We are now going through that in the music space today, where people are able to copy music. We have companies like Napster deploying a technology for copying music, and other companies are creating similar and even more clever technologies. We have some serious challenges when 173

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people are able to easily copy other people's intellectual property. We need to establish what kind of laws we need and what kind of enforcement we need to guarantee the inventors a fair return. I believe that challenge remains, and it's not specific to the semiconductor business, but certainly very real for the high-tech industry at large. Turnover is another issue and a major challenge. By turnover, here, I mean the speed at which companies start and fail. As with any other highly innovative industry, there is huge turnover. It is a Darwinian evolution of our business that, to me, means many, many companies are involved in creating innovative products. Many of the solutions die quickly, and the brilliant people who created them get redeployed to create another brilliant idea. I expect that process to continue just because the pace of innovation is continuing. When you see companies failing in the semiconductor business, it is not because of any obstacle in the industry; it is because out of ten or 20 brilliant ideas, only two or three really mature or are practical. That's the nature of the business we're in.

Standards Standards are absolutely crucial where people need to interoperate or exchange things. I think in terms of communication process and communication devices, communication standards are extremely important and will remain the bread and butter standards we need, going

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The Semiconductor Industry forward. In many other areas standards are used as a diversion. Everybody talks about them, but nobody takes them seriously. In many ways, the standards get in the way of innovation. For example, when we talk about people inventing the best way to interface on a display and create a better and better picture, we will talk about standards, but in reality we don't want too much standardization here. The second area is where there is no need for people to operate and be dependent on each other. You want the freedom of innovation. In display or audio quality improvement, for example, I wouldn't want any standards. There's no need to have the standards on LCD displays, for instance. Fortunately, the industry is very aware of that, and standards don't exist there. You want people to continuously improve quality by deploying the technology. At the same time, if you and I are going to have a video conference, we need to have some kind of standard so we can communicate. I think we will always be balancing between the standard and innovation, and I think the industry has done very well. The standards have to be in place, and new standards are invented so innovation continues. I think the communication area is very crucial, and almost anywhere else, the standards add a marginal value to the semiconductor industry.

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The Role of Government The government has fortunately managed to draw a very good balance. They need to more or less stay out of the way by not imposing undue barriers to innovation and the interchange of ideas. To some extent, where you have intellectual property across the world, you'll find the ideas are easily exchanged amongst people. The role government should continue to play is to moderate the monopolies. Without picking on any companies, it is inescapable that when one company becomes a dominant player, innovation invariably becomes a problem in that industry. They become a big barrier to the new companies that start up based on innovative concepts because the cost of their entry becomes higher. They cannot reach the customers because of the security and the force the monopoly provides. I think the government needs to continue to be very vigilant in not having the industry become overly dominated by one or two interests that no longer need to be innovative. In that aspect, I think the role of government is critical in making sure the competition is fair and fertile. There also needs to be an investment environment, a tax environment, where it is worthwhile for people to take risks. Today people very much watch the few successes that happen. When a company goes public, and a few people make millions and millions of dollars, everybody notes them with envy and says, "There's something not 176

The Semiconductor Industry right with these individuals' unusual riches." People don't recognize the efforts of the hundreds of other people who are taking the risks based on the great significance of the prize. Those prizes need to be worthwhile, so these investment opportunities - the stock options and the compensation for the people who succeed when the innovation succeeds - need to remain the high incentive. I believe this is at the heart of innovation, especially in Silicon Valley. We should not get distracted. When people succeed in innovation, they seem to get very rich. I don't believe there is anything wrong with that. We need to realize that for every ten successful people, there are 90 people trying who will eventually succeed. They would not keep trying if the prize wasn't good enough.

Wall Street's Importance Availability of capital that is willing to take a risk is the blood flow of this industry. Talent needs to be fed by money backed investors taking risks on them, betting on them to succeed. That does not happen without Wall Street and would not happen without the whole venture capital industry - simply, the mechanics of making money. It's very simple. They take bets; they invest in the talent and on the whole; the risk pays off; and they make significant amounts of money if the company succeeds.

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Inside The Minds That's how it is supposed to work. We haven't seen it really work that way for the last two to three years. There are occasional years of perversity that distort that story, but at the core of it is what I call the "physics of money," and Wall Street is fundamentally important at the heart of creating the dynamic where the money is available so the talented can continue to innovate. I don't know if we would be here without a very strong liquid and well-regulated market.

Leading the Company Through Turbulent Times The management challenges are unique in the high-tech industry because we have a highly talented workforce. As a result, that workforce is very easily marketable. If the market becomes turbulent, it is very important to have the team stay together. Fortunately, in any highly innovative company, there is a relatively modest core of talent that accounts for its success. A company may have ten to 15 people who are really at the heart of the company and who need to stay together and drive the company to success. A couple of key elements drive these people. I think the first is the passion for what they're doing. A fairly large number of companies have a very significant vision: the passion of trying to do something important that will change the world in a significant way. People who participate in these companies have the opportunity to make a huge impact on the industry. In many ways this is

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no different from people making contributions in other ways. They may contribute in social environments or teaching environments. These people, in their hearts, believe they are making a contribution to the world by bringing their innovation forward. It will be an everlasting contribution. That element of motivation has to be present and must be made visible and inspirational to the core people in the company. Of course, you can't feed vision or passion to your kids. These people have to have some way of seeing the rewards for their work. They end up working extremely hard. They need to survive the turbulence, when the market is going up and down, when companies are succeeding and going under. I believe the stock option mechanism, which is present in the U.S. and which is the envy of the rest of the world, allows people to participate in the success. When they take this passion and apply their hearts, blood, and souls, there is enough reward when they do succeed that they stick to it. Everybody sticks together. When things are tough, they stick to the vision. When they are good, everyone shares the joy. It becomes a family or group endeavor, and that's the only way to motivate the employees in this environment.

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people to go beyond the normal call of duty. When you are able to create a small team and work in harmony, the results are much, much greater than individual parts could make. Being able to face adversity and see the world that is not visible to everyone else - that is the call of a leader. A leader shows the vision and gets everyone to buy into that vision and go beyond the call of duty to deliver it. On the other hand, in my opinion, the role of the manger is to manage the team whose goals are relatively self-evident. The goals are often easily recognizable by the people, and the jobs are such that people have a very finite view of what they need to do to accomplish their roles. Their jobs are very clear, in the role and the goal at task, and then the manager can deploy many of the management practices for measuring people. It takes a certain amount of talent, and I believe those sorts of skills and disciplines are more frequently studied and more easily understood. Although leadership skills are studied quite a bit, I'm not sure the disciplines are easily understood. I admire leaders who are able to inspire the team with a fundamental element of integrity so that at no point does anybody on the team feel they have to be compromised from their human values. There is never a need for that. It is hard sometimes to continue to tell the truth when times are tough. It is hard to make promises and commitments when life is uncertain, but integrity is about making commitments and keeping your word. When you don't keep your word, you must tell the truth, and everybody faces that reality on a day-to-day 180

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and moment-to-moment basis. They continue to pursue with honesty and commitment the results that they are pursuing. First and foremost, it is the element of integrity in the leader that I most admire. Second is the ability that I believe is extremely hard to develop. I envy leaders who have it. It is the ability to be empathetic - to empathize with all the members of the team, which comprises a variety of people with a variety of needs, temperaments, and skills. It is only the leader who needs to empathize with each member of the team. In some sense, the manager needs to resonate in terms of communication, understanding, and actually sharing the vision in communicating in almost a different way or different language with each of the members. A leader who can do those things will succeed, regardless of whatever else they have. They tend to persevere and survive because integrity gives them all the strength they need, and empathy gives them all the emotional stability they need to lead the team and survive the challenges ahead of them. Unfortunately, leaders not only have to keep an edge from an industry, mechanics, and economics point of view, but they also have to keep an edge from a technology point of view. This is true because you are dealing with some fairly talented people, and you need to understand what they say and what they mean. I think being in a place like Silicon Valley allows you to be constantly challenged because you're constantly engaged with people who have brilliant ideas and agile minds. That's the way to keep your edge.

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If you're in the leadership position, you're lucky. Whether you want it or not, ten people are going to tell you something, and sometimes you will not understand it. You have this constant source of education from people surrounding you. It's up to the leader to leverage that, so the most important thing is to know what you know and know what you don't know. Don't be confused when things happen by luck. Don't give yourself credit and think it happened because you're brilliant. One day I'd like to hang a sign in the office here that says you should never confuse luck with brilliance. Being modest about your knowledge and open to education as it comes to you is the best way to keep in shape. Keeping on top of this is a matter of engaging the people around you and constantly listening. I think that is easier said than done.

The Future of the Semiconductor Industry We will see a major shift to more and more software-based intellectual property development. There will be much more engagement of talent that is outside the United States in countries that have been left behind because of high capital requirements. Perhaps more diffusion of capital into smaller and more regional solutions will make it equally feasible for companies to find solutions less expensive and more localized. Perhaps they will then be able to deploy their local intellectual property to more personalized

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The Semiconductor Industry solutions and to applications that are relevant to them instead of one big behemoth company like Cisco, which supplies routers all over the world. For example, there are already products available in China. China has a recordable video industry that was created locally and that is not available in the rest of the world. It's called Super Video CD. This is a technology that distributes movies on CD and, as a result, is very affordable. I believe you're going to see more and more of those kinds of products that don't need to be made worldwide, or by the tens of millions to be cost effective. Going forward, they can be made and cost-effectively deployed in more modest numbers because the dynamics of our processes are changing.

Satish Gupta is the president and CEO of Cradle Technologies. For the four years prior to founding Cradle in July 1999, Gupta was vice president of corporate planningfor CirrusLogic Corporation.He was corporate sponsor for several key partnerships, including Microsoft and JVC, and was the executive championfor the research projects that eventually became the universal microsystem. From 1991 to 1993, Gupta was vice president of strategic marketing and development for Media Vision, which became a $150 million technology and market leader in high-qualityPC audio and multimedia products.

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Inside The Minds Before joining Media Vision, Gupta spent 23 years at IBM in engineering, marketing, and general management roles, which spanned mainframe, minicomputer, and microcomputer lines. Gupta had P&L responsibilityfor a telecommunication product line and pioneered IBM multimediaproducts into the personalcomputer market. Gupta has a BSEE from Birla Institute (India), an MSEE from Massachusetts Institute of Technology, and an additionalMS in engineering and economicsfrom Stanford University. He co-authored the book, Mainstream Multimedia, in 1993. Gupta is a board member of InterTrust Technologies and UME Voice.

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ASPATORE Executive Business rnteffifgence

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