It is turning out to be one of the bigger corporate fads of the late '90s for U.S. chip makers. Many of the big guys are going on a diet. That is, they're getting rid of big chunks of their operations in order to streamline their businesses and focus on fewer strategies.
Two recent examples: Texas Instruments Inc. got rid of its vaunted DRAM business and National Semiconductor Inc. spun off Fairchild Semiconductor.
Now the latest and largest example of such downsizing and strategic refocusing comes from Motorola Inc., which decided in May to sell its $1.5 billion (annual sales) commodity semiconductor business. The buyers -- the operation's managers and a private investment group -- will pay $1.6 billion in cash, notes, and stock in a new company to be created from the unit.
It's a big move. By the end of the year, Motorola's Semiconductor Components Group is slated to turn into a new Phoenix-based chip giant with plants all over the world, 10,000 employees, and a wide range of standard analog, logic, and discrete products.
The deal definitely has its risks for Motorola's Semiconductor Products Sector. The unit had steadily moved up in the ranks of the world's top 10 chip makers in the 1980s by becoming one of the world's broadest suppliers of solid-state products.
Sale of the Austin-based unit's high-volume, standard chip business will be a point of no return. There will be no fall-back position if Motorola's new strategy of embedded system-level ICs doesn't pan out.
But the times "they are a changing," and so is Motorola Semiconductor, which has been recasting itself during the past couple of years by selling off product lines -- such as smart-card ICs -- and closing down others (like DRAMs, gate arrays, and programmable logic) in order to strengthen its market-focus initiative for embedded products under the DigitalDNA brand.
Motorola's chip sales peaked at $8.1 billion in 1997, but it managed in 1998 to hold on to the No.3 position despite a 12.2% decline in revenues to $7.1 billion. Without its components group, Motorola would have been ranked No. 6 in 1998 chip sales. Its $5.6 billion in sales would have put the company between TI at $5.8 billion and Hitachi Ltd. with $4.6 billion.
In 1997, Motorola launched its current semiconductor strategy based on four market-focused technology groups that no longer just sold products. As a result, the commodity-selling semiconductor components group turned into a fifth wheel and grew further apart from the rest of the company's IC businesses.
"The business models have become quite different for these two businesses," according to Hector Ruiz, president of Motorola Semiconductor. The components side, while profitable and capable of generating cash, always tends to generate margins running at the low end of what the chip industry reports, he said.
"The portion we are focused on -- in what remains of the Semiconductor Products Sector -- is high-growth, with strong potential for us to establish a leadership position," Ruiz said. "Our expectation is that the margins will be healthier" than those of the standard components group that's being sold.
The commodity chip operation may have lower profit margins, but it also has lower capital investment needs. Ruiz acknowledges that its cash requirements are about 50% less than the rest of Motorola's IC groups.
Another advantage of the components group is that it's able to utilize some of the company's older fabs, equipment, and backend assembly lines that already has been depreciated. But Motorola managers figure that it will get harder to leverage such depreciated equipment and plants as the chip company began getting closer to its goal of outsourcing half of its production to third-party fabs.
"I can remember when they called that discrete business their cash cow," says veteran analyst and Motorola watcher Jim Feldhan, president of Semico Research Corp. in Phoenix. "It was not only profitable but heavily depreciated. But over the years," he says, "they have realized that these older fabs are more labor intensive than the newer ones. And these older fabs not only take more maintenance but they also require management resources."
But not everyone believes the two semiconductor businesses are growing apart. As Motorola and other major chip makers try to move away from commodity products, Europe's STMicroelectronics still see a solid synergy between advanced system-on-chip designs and standard high-volume products. "We still like the combination of the two," declares Pasquale Pistorio, president and CEO. ST was ranked No. 9 in global chip sales last year with revenues of $4.2 billion, up 4.4% from the $4 billion in 1997.
In fact, Pistorio wants to keep the European chip maker's sales divided 30% sales of standard and commodity products and 70% from its strategic "differentiated" ICs, which includes system-on-chip designs. "Together they make a very good mix," he says. Standard products "generate positive cash flow and use assets from the other," he explains, while "differentiated products have high margins and growth potential but also need higher investments."
The Geneva-based Pistorio also won't be moving ST over to foundries as far as other major chip suppliers plan to. He aims to keep ST's foundry usage down to between 10-to-20%. Part of the reason for that is that he still regards manufacturing as vital, particularly when the company plans to stay in commodity chips. ST's Singapore plant, which turns out 35,000 five-inch wafers a week, gets most of its production gear from the company's other IC fabs, which already have depreciated the equipment.