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Microchip CEO anticipates 'historical challenge'

Posted: 02 Jul 2007 ?? ?Print Version ?Bookmark and Share

Keywords:semiconductor? "fab lite" strategy? microcontrollers?

Sanghi: The semiconductor industry needs to adjust to mature growth rates.

Steve Sanghi joined Microchip Technology Inc. as president and CEO in 1990!when the company was near liquidation!and engineered a remarkable turnaround. Today, Microchip is the world's leading supplier of 8bit MCUs, has branched out into 16bit MCUs and analog chips, and surpassed the $1 billion sales mark in FY2007 (ended March 31). In an interview with EE Times, Sanghi pulled no punches as he weighed in on the chip industry at large, the private-equity steamroller, the "fab lite" model and Microchip's place in it all.

EE Times: What's the general state of the semiconductor industry?
Steve Sanghi: The 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 $350billion industry. Historically, the industry has been built on growing 17-18 percent a year. This cannot happen forever. Chipmakers 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. The semiconductor industry needs to adjust to this, but I'm not sure it knows how to do so.

What's your view of private equity?
It's not a new concept; it's happened in many industries before. Basically, money is too cheap for the private equities to get. They can raise billions of dollars in no time. Meanwhile, the semiconductor industry has taken a lot of hits in the stock market. So private equity comes in, and they believe that semiconductor companies are sitting on all-time historically high cash flows. However, I believe that some of these private-equity deals will go bust.

Is Microchip pondering the private-equity route?
Private equity doesn't talk about us. They talk about buying Atmel Corp.

The industry is worried about soaring fab, mask and design costs. Are you?
I don't see a step-function change here. It's been going on for 30 years. In terms of design, that's where programmability comes in. If we tried to make an 8bit product for each of our 55,000 customers and every single one had to make a mask, the cost would be prohibitive. So we develop one programmable device, and every design team can write its firmware and customize its end product for an application.

The company was at a low point when you joined in 1990. Microchip is a turnaround story, right?
When I joined the company, Microchip was losing $2.5 million a quarter, and manufacturing was pathetic. The problems were so widespread that I needed a new formula. 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 it a name: the Aggregate System. It essentially means the redesign of an enterprise, with all parts of the company working together.

What was the strategy?
In the product area, the company was involved in too many point products, so we deemphasized commodity EPROM and focused on 8bit MCUs. Microchip also had an effort in building DSPs in competition with Texas Instruments Inc.!I got out of that business. In the process development area, Microchip was several generations behind. In manufacturing, our yields were pathetic. So I decided to leapfrog technology development.

What's the outlook for the rest of 2007? And what can you say about 2006?
We expect another record year in 2007 after crossing over $1 billion in sales for the first time in both the calendar (2006) and fiscal (2007) years. The surprise in 2006 was that calendar Q4!the start of the current inventory correction!was down for most companies. All of the customers and everybody were saying they had no inventory. And all of a sudden, there was inventory.

Have we seen the last of the inventory glut?
Cellphones had a lot of inventory. Any company that is deeply focused on cellphones had a significant reduction in sales. Second, within the cellphone, you did better if you had share in Nokia, and you did worse if you had share in Motorola.

Microchip's commentary at the end of Q4 was that we were seeing the worst of the inventory correction in the rearview mirror. We guided our March quarter to be flat to slightly up sequentially.

What's driving sales? What's your next killer app?
Microchip's strategy is not to look for the next killer application. We're essentially in all of the hot products. We are in iPods and accessories. We are in gaming platforms. We are in STBs and TiVos.

We're balanced by industry segment. The largest portion of our business is consumer. The second largest is automotive, then industrial and computing.

What are the hot geographic markets for the company?
Europe has been between 26-28 percent of our business for the last seven or eight years. The Americas have been as much as 35 percent of our business; now it's smaller. Asia has grown from 33 percent to 43 percent of our business in the last seven or eight years.

There is some debate about who is really leading the 8bit-controller market. Is it Freescale Semiconductor, Microchip or Renesas Technology? And what's driving the business?
Is there a doubt who's leading the 8bit market? We were at the bottom in 1991 and at the top in 2006. In 8bit, there are new applications. There are MCUs today in hedge trimmers, lawn mowers!things you never thought about.

What's your share in 16bit MCUs?
It's small. We're just entering into the fourth year of volume production in 16bit, but we're doing well. Our 16bit business was up 170-180 percent last year. It's our fastest growth market, with analog coming up to second highest. Analog was up by 40 percent.

What's Microchip's fab strategy?
TI is getting a lot of airtime with the hybrid, or "fab lite," strategy. That's the same strategy we've been telling investors about for several years now. We have two fabs in production: Fab 2 and Fab 4. Fab 1 no longer exists.

Fab 3 is available if anyone wants to buy it. It's been up for sale for years. I think it will get sold; if it doesn't, I could equip it. But if I need another fab, I think I can buy a fully equipped fab cheaper than the cost of equipping Fab 3.

Has Microchip thought of going fabless? Do you use foundries?
We don't want to go fabless. Our 0.35?m technology can give smaller die sizes than competitive 0.25?m technologies built at foundries. We can also customize our devices; we don't want to lose that. But we are also using a number of professional foundries in Taiwan and other places. We use foundries if we don't have a given technology. It could be high-voltage, BiCMOS, low-voltage or RF. Right now our outsourced production is in the low single digits, but it will be going up to 10 percent.

Will Microchip build another fab?
We don't ever build fabs. We buy other people's mistakes.

The world is going to 300mm, where I don't need to go. Our products don't require the bleeding edge of lithography at 45nm. There are so many 200mm fabs that are up for sale and going on the market. We also have additional clean-room capacity in our Oregon fab.

- Mark LaPedus
EE Times

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