For almost two years, Bing Yeh has steered flash memory supplier Silicon Storage Technology Inc. through the semiconductor industry's worst downturn without flinching, standing almost alone in refusing to cut jobs.
Step into Yeh's Sunnyvale, Calif., office to get a sense of his methodical ways. SST's president and chief executive operates out of an office so functional and devoid of any CEO trappings that it could be a clean room at a wafer plant.
SST's management techniques reflect Yeh's Spartan lifestyle. Even at the height of the last semiconductor industry expansion, when an overflow of orders left SST struggling to meet OEM demand, the company added employees only when absolutely necessary, leaving it with barely any fat to cut when the market tumbled in 2000. A cautious strategy like this is necessary for success in an industry noted for its inaccurate demand and supply forecasts, Yeh said.
"To solve the supply and demand imbalance, you need the full cooperation of everyone and advanced tools that everyone can use to get information," he said. "But such a thing does not exist. If the tools don't exist, then everybody is operating on gut feeling, so there's no way this thing can be solved for the foreseeable future."
But recent developments are sorely testing the effectiveness of Yeh's cautious style. Battered by sluggish revenue growth as well as severe pricing pressures, SST soon may be compelled to cut overhead in what could be the company's first major workforce reduction, according to analysts.
"SST expects to significantly lower its  operating expenses as a percentage of total revenue," said John Barton, an analyst at Wachovia Securities International Ltd., New York. "R&D is modeled to be 14% for the year vs. roughly 18% in 2002, and SG&A is expected to be only 11% vs. about 15% for the current year. [The] reductions can come only one of two ways--big revenue growth or big headcount reduction."
Rule out a big revenue increase. SST executives and analysts said sales will remain under duress for at least the next few quarters. SST, like other flash suppliers, is trapped in a deflationary quagmire. Rising unit shipments have had minimal positive impact on revenue growth because of the intense pressures on pricing.
Figures tell the tale
The company's revenue is steeply lower and gross profit remains depressed. In the third quarter, unit shipments of SST products rose slightly, but revenue slumped to $68 million, down 9% from $74 million in the year-ago quarter and less than half the $164 million posted at the height of the market upswing in the third quarter of 2000. The fourth quarter is unlikely to be any better. Analysts estimate SST's revenue will slip in the quarter to $66 million and fall to $65 million in the first quarter of 2003.
"Visibility is so limited that the second half of 2003 is anybody's guess," said Wachovia's Barton.
Right now, SST is focused on restructuring its business to limit its exposure to weak end markets. The company has overhauled its operations to reduce its dependence on the PC sector from as high as 50% of sales in 2001 to less than 30% this year. SST has also licensed its superflash technology to several top-tier chipmakers and is targeting the consumer electronics, wireless, and networking equipment markets with new products.
Like many component manufacturers, SST, which generates 80% of its sales in Asia, is going flat out to explore opportunities in China. The company has invested $15 million in China's Grace Semiconductor Inc. to secure foundry space, and is pouring money into its Chinese subsidiary to help develop design activities in the country.
"If you look at our business, it's very understandable why we [are making] all these moves in China," Yeh said. "Many companies, including Taiwanese motherboard manufacturers, are moving to China, so when we say 30% of our revenue is from Taiwan, probably about half of that is coming from China, and that will continue to increase."
SST is also well positioned in the market for small- and medium-density flash memory, where its share is 60% of the PC BIOS and 50% of the optical disk drive industries, according to Wachovia.
In the past two years, the company has made significant inroads into several new markets, including cell phones, DVD players and recorders, cable modems, and digital set-top boxes. It has also licensed its technology to bigger rivals eager to explore the higher-density flash market. Licensees include companies like Analog Devices, Motorola, NEC, Sanyo, Seiko-Epson, and Taiwan Semiconductor Manufacturing. This approach enables SST to participate in higher-density flash by proxy through licensees, while avoiding the prohibitive production costs.
"I personally view the high-density flash memory business just like the DRAM business. Sometimes you have good sales and good profits, and sometimes pricing collapses 90% and it can wipe out all your profits," Yeh said.
"With our superior technology, we can enable our partners to design a smaller die so they can be competitive and pay us" royalties.
That strategy has boosted SST's licensing revenue, almost all of which flows directly to net income. This year the company expects licensing revenue to exceed $30 million, more than a 100% climb from the prior year, after excluding the effects of a court-ordered $20 million payment from Taiwan's Winbond Electronics Corp.
"By combining the royalty income and selling the products ourselves, we'll be able to make a nice profit," Yeh said. "Just selling the high-density chips alone? I don't think we'll be able to sustain it because the die size is too big and most of the cost is in the silicon."