TOKYO -- Renesas Electronics' talks toward acquiring U.S.-based Integrated Device Technology, a fabless chip design house known for expertise in technology for autonomous vehicles, symbolize an industry landscape where value has moved away from mass production and toward design and development.
IDT is strong in low-power, high-performance semiconductors that can convert such things as sound and location into digital data. Processing huge volumes of information will be critical in the self-driving era, and Renesas plans to combine the California-based company's prowess with its own technology to gain an edge. The IDT purchase would complement Renesas' acquisition last year of Intersil, whose voltage regulators can help save energy.
The auto sector is considered one of the most promising markets for semiconductors. Level 3 automated vehicles -- which require human intervention only in certain circumstances -- need more than three times as many chips as conventional gasoline-powered cars, according to IHS Markit. Chips abound in automated vehicles, including control and communications systems as well as the array of sensors that serve as their eyes.
Leading the charge into this new world is Nvidia. The fabless graphics processor company designs chips that excel in visually identifying pedestrians and objects on the road.
Another fabless player is U.K.-based Arm, which Japan's SoftBank Group paid 24 billion pounds ($31 billion) for in 2016. Arm designs chips used in smartphones and the "internet of things."
Fabless outfits' expertise also makes them attractive acquisition targets. Intel bought Israel's Mobileye for about $15 billion in 2017 as part of efforts to overtake NXP Semiconductors, which emerged as the world leader in automotive chips after buying Freescale Semiconductor in 2015.
Farming out production also enables companies to keep costs down. IDT's gross profit margin tops Renesas' target of 50%. The Japanese company has worked to reduce fixed costs through such means as outsourcing cutting-edge microcontrollers to Taiwan Semiconductor Manufacturing Co.
Back in 1990, six of the world's 10 biggest semiconductor companies by sales were Japanese. They were known mainly for memory chips, where fabrication technologies held the key to success. But such mass-produced items have since been taken over by South Korean makers like Samsung Electronics thanks to their massive investments. Toshiba Memory is now the only Japanese player left in the top 10.
The emergence of contract chipmakers producing for clients at low prices has pushed Japanese chipmakers to the sidelines, making it harder for them to earn the profits they once enjoyed.
Renesas wants to transform its business model into one competing less on price and more on technological advances. The company was born from the 2010 merger by NEC Electronics and the old Renesas Technology -- itself created years earlier from chip operations of Mitsubishi Electric and Hitachi.
Renesas' future hinges on whether it can expand beyond its strengths in automotive and appliance products and into new fields like robotics and the internet of things.