Selling Shovels for Semiconductors: How EDA Companies Could Benefit from AI Gold Rush

Electronic Design Automation, or EDA, is a market segment consisting of software and services with the collective goal of assisting in the planning, design, implementation, and subsequent manufacturing of semiconductor devices and chips.

The Global Electronic Design Automation Tools Market size is estimated at USD 17.72 billion in 2024 and is expected to reach USD 26.59 billion by 2029, growing at a CAGR of 8.46% during the forecast period (2024-2029).

Some of the significant vendors of EDA tools are headquartered in North America, such as Xilinx, Cadence Design Systems, and Synopsys Inc.Shares of Synopsys and Cadence rose by more than 60% in 2023.

■ How could AI drive EDA demand?

Demand for electronic design-automation software may gain from multiple drivers, including rising R&D spending in an upcycle for the semiconductor industry, higher chip costs (2 nanometers at $725 million vs. 7 nm at $297 million) and a wave of AI-specific chips.

Due to the higher complexity of artificial intelligence chips, higher requirements have been placed on the reliability and completeness of EDA verification. In addition, EDA manufacturers are also constantly iterating products and directly introducing AI into the design process to make chip design simpler, assisting in power, performance, and area specifications for mature and leading-edge process nodes (16 nm down to 2 nm). At a Synopsys user-group conference, the company presented cases where AI beat expert engineers in a mainstream chip design covering 5-10 million gates at 100-200 Mhz.

The main profit model of the EDA industry is software tool licensing. This type of business has strong customer loyalty and is less cyclical than the entire semiconductor industry, acting as a shovel seller.

The top 18 semiconductor-device companies comprise 80% of that market and averaged 9.5% annual sales growth in 2010-20. Over this decade, these companies allocated 17.3% of sales to total R&D expenses. Revenue gains at Synopsys and Cadence have a relatively low correlation to chip sales (Intel, Qualcomm, Nvidia), at 0.18, but a much higher relationship to R&D spending increases, at 0.49.

In 2022, Semiconductor designer AMD completed the purchase of Xilinx in a record chip industry deal valued at about $50 billion. Back in 2011, Xilinx introduced the evolution of its Vivado Design Suite software to help developers leverage machine learning algorithms and techniques to bring greater efficiency to the design process.

Synopsys' recent acquisition intention of Ansys also shows that the industry is still developing rapidly. Ansys has a solid customer base across multiple industries, including aerospace, automotive, energy, and healthcare. This opens doors for Synopsys to enter new markets and growth areas.

In 2022, China's contribution to the sales growth of Cadence and Synopsys accounted for 19% and 21% of their total sales increases, respectively. This represents a substantial yet controllable risk as both firms seek to diversify their portfolios beyond their core EDA software. Cadence is aiming to broaden its reach into system design, while Synopsys is venturing into the realm of security software.

Synopsys has a robust foothold in China, especially in the EDA software and IP design sectors, with this region being its most rapidly expanding market, surging by 41% in 2022—twice the rate of its overall sales growth. Similarly, Cadence has seen its Chinese sales rocket to twice the pace of its wider business growth, at 38% versus 19% in 2022, underpinned by a strong presence in verification tools.