It's going to be a long, cold and dreary winter for semiconductor companies as revenue growth stalls and margins deteriorate. But amidst the turmoil, STMicroelectronics NV is emerging as the most likely beneficiary of Europe's multiyear and now rapidly accelerating restructuring of regional high-tech markets.
The consolidation of Europe's high-tech sector extends well beyond the embattled semiconductor industry although the effects are much more pronounced in the chip sector, where two of the top three players are struggling for survival. These companies also are trying to pull together the most viable business structure for themselves in a rapidly changing global market.
Indeed, Europe's entire high-tech supply chain, stretching from raw material suppliers to component vendors, equipment manufacturers and retail outlets, is being overhauled in response to changes in consumer demand and more recently due to a sudden slowdown in the global economy. This is where ST has staked out a formidable position for itself by partnering with local rivals, customers and even foreign technology companies.
ST has over the last few years leveraged its broad product base, strong credit ratings and cash positions to lead Europe's top-tier IC vendors through a series of tough restructuring programs involving the traditional tools of cost cutting, layoffs and joint ventures. The company has in recent months leveraged its privileged position with European equipment vendors like Alcatel Lucent, Ericsson and Nokia to reinforce its role as a leading supplier and strategic partner to the region's tier-one OEMs.
The Geneva, Switzerland-based company is already the dominant player in the regional semiconductor market and is, by revenue, the world's fifth largest chip vendor. ST maintains significant market share in five key sectors: automotive, consumer, telecom, computer and industrial.
"ST has maintained resilient profitability through industry cycles, thanks to good market and technology positions, a focus on differentiated ICs and a strong network of strategic alliances," Standard & Poor's analysts Matthias Raab said in a recent research report.
"In 2008, ST ranked No. 5 in the fragmented $260 billion semiconductor industry and slightly increased its market share to about 4 percent," added Raab. "It benefitted from a strong product portfolio and generated a substantial part of its sales with products positioned in the top three in the market thanks to its strong R&D efforts."
Challenges and opportunities ahead
This year is shaping up quite differently. On Jan. 27, ST is slated to announce weak fourth quarter 2008 results, which analysts said will mirror the performance of a weak industry rather than a strong, dominant regional and industry player. Revenues for the last quarter of 2008 are forecast to sink 18 percent or more sequentially, hurting margins and sharply reducing profitability for the entire year.
Even in 2009, ST's sales and cash flow will come under more pressure and the company could see its first annual revenue decline in seven years—during the last major industry downturn ST's revenue fell 19 percent in 2001, to $6.4 billion from $7.8 billion. The company has been climbing back steadily since then, with annual sales rising as at the end of 2007 to $10 billion.
However, due to the fourth quarter market slowdown, analysts have revised downward revenue estimates for ST, expecting 2008 sales would be unchanged to slightly higher from the preceding year. Net income, too, is forecast to take a hit although the company is still expected to be profitably for the entire year.
A sharp reversal in sales is only one of several challenges ST will face in 2009. The company's traditional hedge against market uncertainties has always been its dependably strong cash flow, upon which it relies for funding expensive manufacturing facilities, R&D, dividends payment, strategic acquisitions and other joint venture initiatives with rivals, customers and suppliers.
With revenue slowing and manufacturing capacity utilization declining, ST's cash flow will certainly come under pressure in 2009. Analysts said they expect the company will announce more cost-reduction measures later this month, including possible job cuts, plant closures and product rationalization. In response to the worsening climate, several analysts lowered their rating on ST's share price earlier this month.
"Standard & Poor's expects ST to respond quickly to the current severe market downturn through accelerated cost-cutting programs, the reduction of discretionary capital expenditures and also, if necessary, by reducing its dividend payments to preserve a positive discretionary cash flow generation," Raab said.
Generally weak global economic conditions can mask individual corporate strength, however, and some analysts believe ST is one of a handful of semiconductor companies that will likely emerge with a stronger market share position when the industry revives. Indeed, even a severely weakened ST—compared to fellow European chipmakers Infineon AG and NXP Semiconductors—is still better positioned to lead any consolidation of the regional market.