Facing mounting debt and a sales slump that has nearly idled its chip fabs, Agere Systems Inc. may be forced to take more aggressive measures than slashing head count and consolidating fabs to cut costs, according to analysts last week.
But how far is the company willing to go to bring expenses in line with revenue? According to one source, a fabless ASIC strategy is not out of the question.
The source, an Agere customer who requested anonymity, said Agere has notified the company that it plans to discontinue CMOS chip manufacturing and will move internal production to offshore foundries.
A spokeswoman for Agere last week denied the Allentown, Pa., company is contemplating such a drastic move, but said its long-term strategy is to increasingly outsource mainstream CMOS production.
"We won't become a fabless company," the spokeswoman said. "Our stated position is that we'll manufacture products when we can add value, such as in optoelectronics, but we won't build our own fabs anymore."
Instead, Agere plans to continue investing in joint venture wafer facilities such as Silicon Manufacturing Partners, a plant jointly owned with Chartered Semiconductor Manufacturing Ltd. in Singapore.
Internal capacity and manufacturing head count is being scaled back accordingly. An accord was reached last week to sell Agere's 0.35-micron CMOS fab in Madrid, Spain, to energy company BP plc. And two underutilized fabs in Pennsylvania have been combined into one Allentown plant, said president and chief executive John Dickson, in a conference call last week. Dickson was not available for an interview.
In 2000, as much as 40% of Agere's IC revenue came from chips produced externally by Chartered and Taiwan Semiconductor Manufacturing Co. Ltd., according to ABN Amro, San Francisco.
As the company has leaned more on foundries, research and development dollars have been funneled toward chip design and emerging technologies, rather than improving manufacturing technology, analysts said. As a result, Agere-last year the second-largest ASIC supplier behind IBM Microelectronics-is losing its edge, some said.
"I don't look for them to survive or flourish by being on the leading edge of process technology and chip manufacturing," said analyst Bill McClean of IC Insights Inc., Scottsdale, Ariz. "It doesn't appear they have any interest, or now even the ability to be strong in IC manufacturing and technology, like IBM."
Analysts said Agere has never leveraged in any meaningful way the developments coming out of Bell Laboratories, the microelectronics research arm of parent Lucent Technologies Inc.
"Agere has been underperforming since before the downturn," said Ambrish Srivastava, an analyst at ABN Amro. "They're not getting the bang for their R&D buck."
But to adopt a fabless model for CMOS-which represented $3.6 billion of its $5 billion in 2000 chip sales-would be a major shakeup in the semiconductor world, said analyst Jordan Selburn of iSuppli Corp., an El Segundo, Calif.-based market research and supply chain services firm.
One of Agere's strategic strengths has always been ASIC manufacturing and the ability to beat its competitors to the punch in integrating technologies like analog and flash memory into its ASIC processes, Selburn said.
"That's not the sort of thing that can easily translate to a TSMC," he said.
Still, with sales to networking customers rapidly evaporating, Agere may not have the financial strength to support the high overhead of the ASIC manufacturing business model.
"The manufacturing economies, particularly in the networking segment, are not good-volumes tend to be lower and support costs are high," Selburn said. "If they find they're not getting some of the good, high-volume jobs that make it worthwhile, and are still carrying that overhead, they may have to rethink their participation."
Analysts believe Agere may have to shut down more of its IC and optics fabs to bring costs in line with business levels. The company that came out of the spinoff from Lucent Technologies emerged with a large infrastructure of factories and R&D that analysts said is far out of balance with its rapidly declining revenue. Agere last week reported fiscal third-quarter revenue of $927 million, down 22% from the previous quarter, and will likely drop another 30% to 35% in the current period.
"It's easy to say they need to lose X number of people and consolidate manufacturing, but it's a fairly difficult process to undertake," said Charles Boucher of Bear, Stearns & Co. Inc., New York.
In the meantime, the company announced plans to reorganize its product development efforts around two main segments of network infrastructure and client-side technology, a strategy it said will be discussed in more detail within a few weeks.