Microchip’s strategy in a ‘weak economy’

BOSTON – When Microchip Technology CEO Steve Sanghi spoke in July about “weak overall market conditions,” the industry didn’t want to listen.

Many downplayed the lingering dip in the market; some explained it as an isolated incidence. A few even blamed the media for being a messenger of negative news, thus “causing the market to be too cautious.”

However, it didn’t take long before reality caught up with Sanghi’s prophecy.

Shortly after Sanghi repeated his warning about “the broad-based global weakness” during the company's August 4th earnings call, Analog Devices Inc. reported second-quarter sales and profits far short of analysts'
expectations. ADI’s CEO expressed a growing uncertainty about the global economy.

Altera Corp. in early September cut its third quarter sales target, citing weaker demand in several vertical markets. Earlier this week, Freescale just lowered its Q3 financial guidance.

Recent warnings from other companies led Ganesh Moorthy, Microchip’s COO, to say: “The chorus has begun.”

In a recent interview with EE Times at the Embedded Systems Conference here, Moorthy made no effort to sugar-coat the economic dilemma.  But he also coolly pointed out that “it takes years to win market share; it also takes years to lose market share.” Noting that “everyone is dealt the same cards,” Moorthy explained: Now is not the time to panic, it’s time to “focus on things we can control.”


Microchip: Canary in the coal mine

There are several reasons why Microchip appears to have sniffed out change in the market place much faster than others.

Calling his company “a canary in the coal mine,” Moorthy explained: “First, we have a complete sell-through model.” Microchip recognizes its sales only when distributors have sold products to customers, which allows Microchip to see “true consumption” on the market.

“Second, we have a short lead time. Unlike others with eight to 12 or 15 weeks of lead time, we maintain a three to six weeks.”

Third, Microchip has a broad customer base, including many small to medium sized companies. Such companies, more nimble than their big brothers, don’t keep as much inventory. These customers’ ordering habits allow Microchip a quicker read when slight economic changes are about to hit the broader market.


Moorthy stressed that Microchip isn’t always a harbinger of the negative economic trends. “In Nov., 2009, we stuck our neck out by predicting a much stronger economy for 2010,” he noted.

Either way, sensing real-time changes in the market place tends to help Microchip and its fellow industry “canaries” to keep their cool and prepare better to deal with reality.


Where is the focus?

Focusing on things it can control, Microchip is devoting its resources to innovation in the following three areas: energy efficiency; human-machine interfaces; and short-distance communications.

Calling energy efficiency a “rich area” for innovation, Moorthy mentioned things like “a motor that only spins when it needs to;” power supply improvements; LED lighting control; and products that allow real-time measurement of energy efficiency.

“Our customers demand not just silicon and software from us, but training and customer support” to enable such energy-efficient solutions, said Moorthy.

As for the human-machine interface, Moorthy noted a host of products – ranging from mobile phones to thermostats – that require graphical and tactile user interfaces.  “[Customers] want not just engineering but esthetic solutions,” he said. Beyond MCUs, LCD display controllers, touch screens and graphic solutions, “we need to offer enough building blocks that can satisfy our customers,” Moorthy said.

One new wrinkle for MCU vendors is that they are now expected to offer communication blocks. “Embedded systems want to communicate,” observed Moorthy. Increasingly, embedded systems have been thrust into networks; this requires short-distance communication technologies, so that system can talk to one another in a network.

Such communication blocks range from popular WiFi and USB to ZigBee and proprietary wireless protocols designed by Microchip, which include MiWi and MiWi P2P. Moorthy described the market “broad and fragmented,” as each embedded system makes different demands.

“Does every lighting device need to communicate? Probably not,” he said. “Hype is ahead of reality,” he cautioned. The important thing is to “recognize the true needs for communication of each embedded system, figure out the right price points and pick your spot,” said Moorthy.  The reality is that different communication technologies and protocols will co-exist. “We can help our customers navigate FCC’s certification process when they try to adopt wireless technologies in their products.”

Microchip over the last three years has been methodically picking up new products and technologies through acquisition, in hopes of casting a wider net on the embedded systems market with a broader product portfolio.  Microchip’s acquisitions include: a touch screen controller company called Hampshire Company in Oct., 2008; HI-TECH Software, a compiler company, in March, 2009; embedded WiFi fabless chip company ZeroG Wireless Inc. in January, 2010; and a much bigger company, Silicon Storage Technology, Inc. in Feb., 2010 for its Superflash technology and extensive patent portfolio.

Asked about other “gaps” Microchip might fill in the future, Moorthy said his company is keeping its plans close to the vest. One thing, however, is clear. Microchip’s success in the embedded systems market depends on continued efforts to offer a clear migration path and a singular platform that allows its customers to use common tools to design new systems. “Tech support and field forces are critical to our operations,” Moorthy noted.