BY ROBIN SAXBY
Chairman and Chief Executive Officer,
ARM Holdings plc,
Cambridge, United Kingdom

The electronics industry-particularly the semiconductor business-has witnessed what is probably the sharpest downturn in its history. But ARM is fortunate to be an intellectual-property (IP) company: Our expertise is in creating designs of microprocessor cores, peripherals and software that we license to our partners. They manufacture chips containing our technology, for which we receive a royalty.

Fortunately, our costs are mainly people-related, so we are able to quickly align our hiring plans with the latest economic outlook and refocus our resources on the areas that will grow through the down cycle. Currently, our partners are more willing to outsource IP development to us than they were two years ago.

Our partners are also seeing a lot of design activity as their customers design the products of tomorrow. We are fortunate because we are active in many market sectors and applications and are broadly spread from a global perspective.

I believe that during this downturn there will be some fundamental restructuring in our industry. I expect that companies that are a long way from profitability will disappear or be taken over. Large corporations will refocus on areas of core competence and divest themselves of non-key assets. Investors are favoring the companies with strong balance sheets, convincing strategies and a record of success.

The current downturn presents an opportunity to focus and build for the next upturn, which will undoubtedly arrive. I also believe that during this period some new winners may emerge-after all, ARM was created in the last major downturn at the end of 1990. I also predict that emerging markets like China will benefit from the current down cycle in the West. In the next wave of products, software will become more important and companies that understand hardware and software trade-offs will have greater potential than those that do not.

Certain market sectors like networking and telecommunications have been the most affected by the current economic downturn. They have built up two quarters of inventory that they are now working their way through. The market for new consumer electronics products, which are at a more nascent stage of their growth cycle-like digital audio players, digital cameras and electronic handheld games-is still growing. In a down cycle, basic business principles apply even more.

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