Reflections on the hardware industry [LWN.net]

Reflections on the hardware industry

Posted Feb 5, 2009 21:31 UTC (Thu) by wmb@firmworks.com (guest, #56512)
Parent article: Reflections on the hardware industry

I think that Harald's observations about what happens are mostly accurate, but I'd like to offer a different perspective on why companies tend to focus on their big customers and why it might in fact be in their best interest to continue doing so.

Harald wrote:

As a chip maker, your first and foremost concern should be to sell as many units as possible.

I'd argue that, as a business, your first concern is to make as much profit as possible. By and large, the companies that don't focus on that are no longer companies, at least not in the cutthroat merchant microprocessor market.

Profitability is related to unit sales, but profit also includes the cost of sales and support, plus the actual cost of goods sold.

Cost of sales is not linear with volume. A customer who takes 10M units probably only costs you, saleswise, 10x what a 10K unit customer costs. It might be even worse than that, considering that to get one actual 10K unit customer, you probably have to go through the sales cycle with a half dozen or more.

The other problem is predictability. Huge customers generate enough individual volume to let you plan ahead, so you can schedule production and secure supplies, raw material, and capital improvements necessary for volume production. In principle, you might be able to aggregate enough smaller customers to get to the same volume, but it's much much harder to get "real" estimates. Smaller customers tend to wildly overestimate their volume - if the didn't, nobody would pay any attention to them at all. And many of them never make it to production at all. (I've seen this effect from both sides...) Planning is absolutely critical for mass production. Getting it wrong severely affects your bottom line, and can easily kill you.

The predictability/planning thing affects the cost of goods sold. You only get the full effects of economy of scale when you get the planning right. That's especially true when you consider that you often have to spend money in advance to secure inventory and fab cycles, but you get paid down the road.

It's quite possible that you might not make any profit at all on sales to small customers. When that is the case, the only time that you (as a businessman) pursue small customers is when you happen to have excess inventory - with sunk costs - that the big customers won't take. And for the next build cycle, you try not to get into that situation again.

The behavior of big companies is definitely anti-competitive. A fundamental result of economic theory is that profits tend to zero in a competitive market. The goal of every big-company capitalist is to be a monopolist with plausible deniability. If you want to have some fun, use the "M" word in a public meeting with Intel or Microsoft people, then sit back and listen to the verbal dancing. (Of course, you might not be invited back to any more meetings...)

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Reflections on the hardware industry

Posted Feb 5, 2009 23:20 UTC (Thu) by jlokier (guest, #52227) [Link] (1 responses)

I'm sure you're right about the rational behaviour of big suppliers paying virtually all of their attention to big customers.

(Being a smaller customer, I know what it's like to receive zero attention from the big supplier, and the middle company who supplies me seems unable span the gap, resulting in chips which are quite capable, but grossly underutilised because the software for them is poor quality and closed to improvements.)

But I think Harald has a point in noticing that the big customers have many downstream smaller customers who want FOSS (and other forms of access) available for the platform, and the big suppliers have many internal suppliers who are ready and willing to provide FOSS (and other forms of access) to the platform, that all this would save everyone time and money, yet somehow, in the middle, the opportunity to connect these desires is lost.

In other words, I think Harald has a point that the rational behaviour of big suppliers and their big customers does not even produce what the big customer's customers what. Somehow the desires pass along the supply chain very slowly.

I suspect that's because most of the work done in this field has a certain "way it's done" which is really hard to change. Harald's observation about the companies in the middle is spot on:

"Those intermediaries (OEM/ODM) typically have very limited skill and understanding about anything related to Software, not even talking about FOSS. They know how to make many boards cheap. In fact, their skill typically is so low that all they can use for their products are so-called turnkey solutions: A full reference board design and complete software stack that they can copy+paste with only the most superficial modifications."

That "turnkey" approach in the intermediaries is probably getting in the way of more innovative and diverse potential downstream customers having their desires aggregated into big contracts at the 1M+ scale.

There's an opportunity in that, but I've no idea how to go about fulfilling it.

(Other observations about "intermediary" companies. 1. If there are significant bugs in the reference design, the small downstream customer is often stuck with them because the intermediary lacks the skill, resources or motivation to fix them, and the small downstream customer has limited access/permission to fix bugs despite often having the technical ability. They may even be prohibited by license from doing so. 2. There's an awful lot of wheel reinvention and working in closed groups. Fixes to kernels don't get mainlined; fixes to drivers remain as patches in obscure private trees, and even trivial board-specific or chip-specific drivers are provided as binary-only blobs.)

Reflections on the hardware industry

Posted Feb 16, 2009 23:55 UTC (Mon) by tpo (subscriber, #25713) [Link]

> That "turnkey" approach in the intermediaries is probably getting in the > way of more innovative and diverse potential downstream customers having > their desires aggregated into big contracts at the 1M+ scale.
>
> There's an opportunity in that, but I've no idea how to go about
> fulfilling it.

The whole situation sounds similar to past ones where IBM was in the position to tell its customers what their best interest were and consequently the market routed around IBM. Same with Microsoft where the very powerful, new, innovative approach to route around the entity blocking the ecosystem through its market monopoly inertia was consequent open source SW.

Open Source HW where innovative end of the chain companies can expand and adapt and fix the HW designs to their need and by feeding them back lower their long-term costs seems like a logical answer to today's deaf chip makers. However whether the opened path will add enough advantage at low enough cost and how long it will take to reach comprehensive market capacity seems unscrutable. ?

Reflections on the hardware industry

Posted Feb 9, 2009 17:21 UTC (Mon) by bfields (subscriber, #19510) [Link]

Cost of sales is not linear with volume.

Yes, of course, but I don't think that's the point.

You certainly can't afford to sell directly to all your end customers. But you might still be able to afford (and benefit from) market research to determine what your customers' customers need.