The Embedded Hardware Market a Year Into the Recession:How Has the Market Shifted and What is the New Course?

Embedded Hardware & Systems PracticeEric Heikkila, Director Embedded & Hardware SystemsCh i R d E ti Vi P id tChris Rezendes, Executive Vice President

Recording Available

These slides are from a webcast presented on 11/11/09These slides are from a webcast presented on 11/11/09.

A full audio recording is available for download at:

http://www.vdcresearch.com/market_research/embedded_hardware/freeresearch.aspx#Webcast

VDC Research

Other complimentary insights & marketing data on the embedded hardware market available at:

www vdcresearch comwww.vdcresearch.com

Today’s Speakers

• Chris Rezendes, Executive Vice President

18 years experience as an analyst, consultant, advisor or operator in embedded, industrial, defense and a number of niche IT technology markets

Operating experience in the embedded markets as VP/GM at Industrial Computer Source and Kontron GmbH

Prior experience: Deloitte & Touche Harbor Research (‘Smart Services’ firm) DARPA CD&R (private equity) Prior experience: Deloitte & Touche, Harbor Research ( Smart Services firm), DARPA, CD&R (private equity)

Harvard University

• Eric Heikkila, Director – Embedded Hardware & Systems Practicey

5 years experience covering the embedded hardware and systems markets

Managing a team of 3 focused on every aspect of the embedded hardware and systems markets

Lead/ support analyst on every VDC Research EHW syndicated or proprietary engagement since 2005

Bucknell University BSEE

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Agenda

VDC Introduction

Market Definition & Segmentation

Market Estimates & Forecasts

Customer Requirementsq

Market Share

A Look into the Future

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VDC Research, Embedded Practice

• VDC Research was founded in 1971.

Continuous, profitable operation since.

Staff of 30 in Boston, Chicago, Los Angeles.

Focus on embedded platforms, power management, a number of niche IT markets

• Over 20 years covering the embedded systems markets

• Driven by extensive and constant primary research

Supply side – component, processor, board, and system suppliers (00s of telephone interviews annually)

Demand side – OEMs & integrators (000s of telephone interviews and web surveys annually)

• Syndicated & custom engagements with clients in the embedded systems market

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Market Definition & SegmentationTh lti l l l h i i tti li t d d d dThe multi-level value chain is getting more complicated – and more crowded

Distributors/VARs & Other Channels

11 The ‘traditional’ industry has beenfragmented, but linear

Component

CPU DSP FPGA

SW PlatformSuppliers

Embedded Board & Integrated System

Suppliers OEMs

Component Suppliers

End Users

Growing Value, Frequency, Intensity

Of Technical and CommercialRelationships Between

ECM/ ODM – IT Vendor And Others

CPU, DSP, FPGA Suppliers

IndependentSystem Integrators

ODM/ ECMFirms

IT InfrastructureVendors

Platform standards have allowed ODMs/ECMs to enter the

ISVs

33 Standards migration will create moreopportunities for these third-parties

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22Platform standards have allowed ODMs/ECMs to enter the market; IT vendors have been in segments for a long time, but some are expanded their footprints driven in by slow growth of IT during the recession

pp p

The Effect of the Global Recession on Industry Growth2009 fl t it i f t t t b tt i 2010

Current VDC ForecastC C & *

2009 was a flat year; it is forecast to get better in 2010

2007-2012 CAGR: 5.48% 2007 2008 2009 2010 2011 2012

Market Size $4 694 8 $5 087 3 $5 111 2 $5 305 9 $5 629 6 $6 103 1

Total Merchant Computer Board Market, Current & Projected Market*, 2007-2012(US$ in Millions)

• Consistent 8-10% growth per year was average for the merchant boards & systems market

Market Size $4,694.8 $5,087.3 $5,111.2 $5,305.9 $5,629.6 $6,103.1

Growth % 8.36% 0.47% 3.81% 6.10% 8.41%

from 2002 to 2007.

• The worldwide recession flattened the market from 2008 to 2009.

Certain verticals were hit worse than others – industrial & communications contracted; mil/aero grew.

• VDC currently projects that the embedded merchant markets should start to grow again from 2009 to 2010, however, the return to pre-recession rates will be slow, and that pace of growth is not projected to return until 2011 to 2012.

• The damage to some of the traditional markets caused by the macroeconomic recession is

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accelerating some of the already existing market shifts/realignments.

Levels of Integration Are Growing Even FasterOEM t i t li t t k t t f th th h hi h i t ti l l

• Integrated systems and solutions together l d t f l h lf f ll h t

OEMs are turning to suppliers to take cost out for them through higher integration levels

already account for nearly half of all merchant embedded products.

• Under heavy pressure – operating expense management, capacity constraints, differentiation migration -- OEMs are turning to their embedded suppliers to reduce their costs by taking on increasing levels of integration for them.

• Suppliers are pushing to do greater levels of integration themselves, in search of higher margins.margins.

• The appropriate definition of ‘standard support’ –scope, timing, etc. -- remains one of the key issues as OEMS refine their value propositions in standards-focused market place.

• The result for suppliers of merchant embedded computing platforms – including systems and solutions – is grow in the number and complexity, opportunity and risk.

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Levels of Integration Are Growing Even FasterOEM t i t li t t k t t f th th h hi h i t ti l l

• As with many other industrial, embedded and l t d h d k t Chi h i i

OEMs are turning to suppliers to take cost out for them through higher integration levels

related hardware markets, China share is growing rapidly

The community of indigenous suppliers in China is growing

Their development skills are accelerating

Customers and partners in many regional markets are searching them out

• However, when one regards the migration of revenue, a number of questions should be posed:

What types of products and projects are most likely to migrate? Is it the standard boards?

What types are most likely not to? Is it the custom solutions?

• Perhaps the key to continued, robust demand, if smaller share, in developed markets is the rise of Tier 2 and Tier 3 OEMs, and ISVs developing the next generation of standards-based solutions, who need also, some level of service that they might not be able to source so well in other markets

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markets

Emerging Verticals Becoming Even More ImportantN d i ti l t ill d i th t ti h t diti l t t ll

• Industrial automation and control has been perhaps the hardest hit embedded segment and

New and emerging vertical segments will drive growth at a time when some traditional segments stall

perhaps the hardest hit embedded segment and is unlikely to return to healthy growth in the next two or three years.

• Newer applications such as digital signage, infotainment, digital surveillance/security, and energy/power will become the high growth areasenergy/power will become the high growth areas across a number of verticals

• Military & Aerospace has been the most solid vertical segment through the recession and will continue to be as many of the programs that h b id ifi d hi h i i f D Dhave been identified as high priority for DoD spending in the latest budget announcements, will require lots of embedded computers – think UAVs, ISR, and other troop support platforms.

• Embedding connectivity in the field, at the outer g yedge of current networks, is a driving force for much of the growth in many of these verticals.

• Higher performance processing still drive growth in medical imaging, 4G communications, digital security analytics, and robust military

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digital security analytics, and robust military applications.

User Product Selection CriteriaWh OEM ti i t t t h t d t ?Why are OEMs continuing to convert to merchant products?

• Time to market acceleration will continue to be the primary reason that OEMs will choose to outsource their compute platforms.

It is consistently rated by end users that we ll th t i t t l itipoll as the most important value proposition.

• Saving development time is the real cost saver – more so than a low price tag.

• Requirements such as extended lifecycle, reliability, quality, etc. have become table stakes.

• Embedded suppliers absolutely must pp ybe able to accelerate time-to-market and/or take cost out for their customers.

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How Will Some Firms Take Market Share in the Current Environment?

• By aggressively defending their core, and conservatively seek out new ways to support customers:

Moving new platforms to merchant boards/systems is one way to do this

Differentiating services could be another – logistics, platform integration, value-adding stack elements

B f ll t ti ti II/III OEM i thi t i t ti 1 l d• By successfully targeting tier II/III OEMs in this current environment – tier 1s are already over served and are likely to take longer to fight their way out of the downturn

• By taking cost out for their customers

• By listening to customers’ technical requirements – and creating roadmaps that balanceBy listening to customers technical requirements and creating roadmaps that balance now-term ROI and potential for longer-term sustained competitive differentiation:

Reducing SWaP – this is often the number 1 technical requirement we are hearing from customers across vertical markets and one that can be a major differentiator.

Providing the best processor solutions for the application – from the latest multi-cores to Atom to Cavium to Providing the best processor solutions for the application – from the latest multi-cores to Atom to Cavium to FPGAs and beyond.

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Global migration to the ‘cloud’ will be drive demand for, and be enabled by, new scalable edge nodes

Aggregation of Embedded Compute Functionality, 2009-2013

, y, g

2009-2013

• Embedded compute functionality is re-aggregating out of the enterprise infrastructure first to edge nodes and then to MSPs in all verticals

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g

How VDC coverage will help clients stay on top of these markets in 2010

The 2010 Embedded Hardware Market Intelligence Serviceg

• Track 1: Embedded Boards Market Analysis -- 4 technology volumes• Track 2: Embedded Integrated Systems Market Analysis – 6 vertical volumesg y y• Track 3: Embedded Boards & Integrated Systems Demand Analysis – 6 verticals• Track 4: Embedded Boards & Integrated Systems Channel Analysis – 6 verticals

• The 2010 Scalable Edge Servers/Edge Node Computing & the Cloud for• The 2010 Scalable Edge Servers/Edge Node Computing & the Cloud for Embedded Systems Market Demand and Requirements Analysis

A study focused on the important trend of scalable edge nodes -- computers and servers general purpose and application optimized deployed at the edge/servers, general purpose and application optimized -- deployed at the edge/ intersection of enterprise/ infrastructure networks and embedded/ high availability/ mission critical installations

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Primary Research and Market Model Highlights

2010 Embedded Hardware ServiceTarget Communities Target Sample Sizes

Phone Interviews Suppliers of Merchant Computer Boards and Integrated Systems N~100

Web-based Interviews Industrial and commercial end users, OEMs, VARs, and systems integrators N~500

Phone Interviews Various channels for embedded computer boards and integrated systems N~50

Study Publication Date Supplier Share Actual Market Size Forecast Market Size

Service Year 2010 2009 2009 2010-2014

Scalable Edge Servers / Edge Node Computing and the Embedded CloudScalable Edge Servers / Edge Node Computing and the Embedded Cloud

Target Communities Target Sample Sizes

Phone Interviews Suppliers of Edge Node Computers & Embedded Cloud Services/Software N~40

Web based Interviews Embedded users/customers evaluating edge node computers and cloud services N~250Web-based Interviews Embedded users/customers evaluating edge node computers and cloud services N~250

Phone Interviews Various channels for edge node computers and cloud services N~25

Study Publication Date Supplier Share Actual Market Size Forecast Market Size

2010 2009 2009 2010-2014

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Q&A Session

Thank You for Attending this VDC Webinar

For more information about VDC Research coverage of the global markets for embedded systems – including the 2010 Embedded Hardware Market Intelligence Service & Scalable Edge Servers / Edge Node Computing &Intelligence Service & Scalable Edge Servers / Edge Node Computing & the Embedded Cloud – please contact:

Eric HeikkilaDirector, Embedded Hardware and Systems Practiceerich@vdcresearch.com | 310-393-9086

Cyril BernardAccount Executivecbernard@vdcresearch.com | 508-653-9000 ext.142

Chris RezendesE i Vi P id

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Executive Vice Presidentcjr@vdcresearch.com | 508-653-9000 ext.120