In 1990, Steve Sanghi joined Microchip Technology Inc. when the firm was flat on its back and near liquidation. But in a relatively short period, Sanghi, president and CEO of Microchip (Chandler, Ariz.), led and engineered a remarkable turnaround of what has now become the world's leading supplier of 8-bit microcontrollers. The company, which has also branched out into 16-bit MCUs and analog, is expected to surpass the $1 billion sales mark in fiscal 2007. In an interview with EE Times' Mark LaPedus, Sanghi pulls no punches and addresses the state of the semiconductor industry, private equity, the IDM/fab model and Microchip's overall strategy.
EE Times: What is the general state of the semiconductor industry?
Sanghi: The semiconductor industry, in my view, has a historical challenge that its leadership has yet to recognize. In some cases, where it has recognized the challenge, the industry doesn't know how to deal with it.
Semiconductors are a $350 billion industry. Historically, the semiconductor industry has been built on growing 17 to 18 percent a year. This cannot happen forever. Semiconductor companies are also largely built on these ideas: 'Build it and they will come. Price the parts for tomorrow. Moore's Law. Move to the next geometry.'
But the industry is slowing now. Most pundits say the semiconductor industry will grow 7 to 8 percent a year. The semiconductor industry needs to adjust to these mature growth rates, but I'm not sure it knows how to do so. And the 'build it and they will come' idea just won't happen anymore.
EET Times: What is your view of private equity?
Sanghi: It's not a new concept. It's happened in many industries before. Basically, money is too cheap for the private equities to get. That's the bottom line. They can raise billions of dollars in no time.
Meanwhile, the semiconductor industry has taken a lot of hits in the stock market. The stocks have gone no where. So private equity comes in and they believe that semiconductor companies are sitting on all-time historic high cash flows. However, I believe some of these private-equity deals will go bust. I believe private equity is going into the excessive bubble phase.
EE Times: Is Microchip pondering the private equity route?
Sanghi: Private equity doesn't talk about us. They talk about buying Atmel. Why? Atmel is cheap and there's room for improvement. Atmel sells chips by the pound. Their competitors have walked away from accounts and they still take the price down 40 percent more. They are competing against themselves.
EE Times: The industry is worried about soaring fab, mask and design costs. Are you?
Sanghi: I don't see a step function change here. It's been going on for 30 years. Two-inch masks were more expensive than one-inch masks. Four-inch masks were more than two-inch and so on.
In terms of design, that's where programmability comes in. Microchip serves 55,000 customers. If we try to make an 8-bit product for each customer--and each customer had to make a mask--the cost would be prohibitive. So, we develop one programmable device that every design team can write their firmware and can customize their end-product for an application.
EE Times: Microchip has seen its share of low points, especially when you joined the company in 1990. Microchip is a turnaround story, right?
Sanghi: When I joined the company, Microchip was up for sale in liquidation. Our sales were flat to dropping. The majority of our sales were commodity EPROM. We were losing $2.5 million a quarter. And manufacturing was pathetic.
The problems were so widespread that I needed a new formula. So what did we do to fix the company? This is where I didn't take any of the proposals from the consultants. We really needed to design our own system. Years later, we ended up giving our system the name 'Aggregate System.' It essentially means to re-design the enterprise, in which all parts of the company are working together.
EE Times: What was the strategy?
Sanghi: In the product strategy area, the company was involved in too many point products and the majority of R&D was going into ERPOM, which was highly commodized and making negative gross margins. So, we de-emphasized from commodity ERPOM and focused on 8-bit microcontrollers. We also had an effort in building DSPs in competition from TI. I got out of that business.
Then, in the process development area, Microchip was several generations behind. In manufacturing, our yields were pathetic. So I decided to leapfrog technology development.
EE Times: What's the outlook for 2007? What can you say about 2006?
Sanghi: We expect another record year in 2007. 2006 was a record for us. It will be the first year we cross over $1 billion in sales both calendar and fiscal years. The surprise last year was, in fact, that calendar Q4 was down for most companies, which was the start of the current inventory correction. All of the customers and everybody was saying they had no inventory. And all of the sudden, there was inventory.
EE Times: Have we seen the last of the inventory glut?
Sanghi: Cell phones had a lot of inventory. Any company that is deeply focused on cell phones had a significant reduction in sales. Secondly, within the cell phone, you did better if you had share in Nokia and you did worse if you had share in Motorola. Motorola lost share. The companies exposed to Motorola aren't doing well.
Microchip's commentary at the end of last quarter was that we're seeing the worse of the inventory correction in the rear view mirror. We guided our March quarter to be flat sequentially. Later on in March, we gave an update to that and said that we're seeing a slightly better quarter. We see that the March quarter will be flat to slightly up sequentially.