Big Money in Tiny Chips : LSI Logic Is Mining a New Vein in Application-Specific Computer Circuits
Today’s “smart” weapons of war are packed with bulky electronic circuit boards. So imagine the possibilities if someone could figure out a way to shrink an entire circuit board onto a thumbnail-sized microchip.
Figure that out, and you might even be able to turn a profit at a time of shrinking Pentagon budgets. And that’s just the strategy that a Silicon Valley chip maker, LSI Logic Corp., is counting on to survive in the troubled defense industry.
As the Department of Defense demands reductions in the cost of military hardware, contractors are trying to stay competitive by using custom chips, or application-specific integrated circuits. Known as ASICs, they can replace aging, bulkier electronic hardware.
“The defense budget continues to slide, but LSI’s business is growing at the expense of the older alternatives of packing electronics together,” said Millard Phelps, an analyst at the San Francisco investment bank Hambrecht & Quist.
Electronic hardware used to account for perhaps 5% of a weapons system’s cost, but in today’s sophisticated weaponry that figure can go to 20% or more, said Bruce Entin, an LSI vice president.
LSI, based in Milpitas, makes computerized tools used to design chips and also manufactures ASIC chips itself. Its customers include some of Southern California’s biggest military contractors, such as Hughes Aircraft, McDonnell Douglas, Loral Aeronutronic and Rockwell.
Last year, Hughes Aircraft selected LSI as a partner to supply all of its computer-aided design hardware. Since 1982, Hughes’ Ground Systems Group in Fullerton has designed more than 150 custom chips with LSI’s products, said Alex Lepis, a Hughes manager in Fullerton. The company uses LSI’s chip-design gear to build chips that go into torpedoes, communications equipment, satellites and radars.
“We had one design that shrank from a package of seven circuit boards down to a single chip,” Lepis said.
LSI, which is publicly held, got 10% of its $698 million in 1991 revenue from the aerospace and defense business and hopes to increase that share this year, said Mary Beth Rotermund, director of LSI’s military and aerospace marketing.
“I’ve already booked 60% of the business that we did last year in aerospace designs,” Rotermund said. “Instead of doom and gloom in defense, we’re looking at the strongest year we’ve ever had.”
One reason for LSI’s growth is that its latest design tools and production lines allow as many as 2.4 million transistors to be laid onto a single piece of silicon. The complexity of that task can be likened to putting a street map of North America on a chip.
That’s an important advantage for chip designers who might have to overhaul a faulty design on short notice, Rotermund said.
“It’s an age of specialization,” said Jerry Worchel, an analyst at In-Stat, a Scottsdale, Ariz., market research firm. “In the military, the reason that ASICs are growing is that they are used to upgrade old electronic equipment when you can’t afford a brand-new system.”
Worldwide sales of ASICs were $5.9 billion last year, according to In-Stat. Sales are expected to reach $16.1 billion by 1996, surpassing sales of standard commodity memory chips used in personal computers and other electronics products.
The military share of the ASIC market is expected to grow from $539 million in 1991 to $1.1 billion in 1996, Worchel said.
LSI, founded in 1981, pioneered the ASIC market. Its nearest competitors are Japanese electronic giants such as Fujitsu Ltd. LSI dominates the U.S. military market, however, because the Pentagon is wary of relying on foreign companies for military components, Worchel said.
The company posted earnings of $8 million in 1991, contrasted with a year-earlier loss of $30 million on revenue of $655 million.
LSI’s domestic competitors include Motorola, VLSI Technology and Texas Instruments. American Telephone and Telegraph Co. pulled out of the market a year ago.
LSI is the dominant U.S. supplier of custom chips for the military.
To be sure, computer-aided designs, known as CADs, don’t bring in the dollars for defense contractors that weapons production contracts can. Greg Sheppard, an analyst at Dataquest Inc., a market research firm in San Jose, said that only a few chip suppliers will survive in the aerospace ASIC market.
“CAD tools have been around for a few years, and they won’t buoy the industry,” said Hughes’ Lepis. “But it’s clear that you have to have them to stay competitive.”
John Dowell, program manager for advanced development at Teledyne Systems Co. in Northridge, said the companies that survive in shrinking aerospace business “will rely on advances in technology like this.”
Teledyne Systems, a subsidiary of Teledyne Corp., has used LSI’s design tools for several years to build a wide array of computer components, such as airborne navigation or fire-control computers.
LSI customers flock to the company’s design center in Irvine, one of 50 around the world, where LSI has 15 employees. Engineers consult a library of designs that can be reused like building blocks for custom chips.
“It’s like the old Mark Twain saying,” LSI’s Entin said. “Rumors of the death of the military-aerospace business have been exaggerated.”
Soaring Sales of Specialized Chips
Application-Specific Integrated Circuits, known as ASICs, can condense the information on several circuit boards into a single silicon chip. The technology may help the aerospace industry replace bulky electronic hardware. Below are worldwide sales of ASIC, compared to those of dynamic random access memory chips, known as DRAMs:
Sales in billions of dollars
1996*
ASICs: $16.1
DRAMs: $10.8
* Projection
Source: In-Stat
