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Analysis: ST keeps Europe IC market afloat

Posted: 16 Jan 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Europe IC market? semiconductor industry? equipment manufacturing?

It's going to be a long, cold and dreary winter for IC companies as revenue growth stalls and margins deteriorate. But amidst the turmoil, STMicroelectronics NV is emerging as the most likely beneficiary of Europe's multiyear and now rapidly accelerating restructuring of regional high-tech markets.

The consolidation of Europe's high-tech sector extends well beyond the embattled semiconductor industry although the effects are much more pronounced in the chip sector, where two of the top three players are struggling for survival. These companies also are trying to pull together the most viable business structure for themselves in a rapidly changing global market.

Indeed, Europe's entire high-tech supply chain, stretching from raw material suppliers to component vendors, equipment manufacturers and retail outlets, is being overhauled in response to changes in consumer demand and more recently due to a sudden slowdown in the global economy. This is where ST has staked out a formidable position for itself by partnering with local rivals, customers and even foreign technology companies.

ST has over the last few years leveraged its broad product base, strong credit ratings and cash positions to lead Europe's top-tier IC vendors through a series of tough restructuring programs involving the traditional tools of cost cutting, layoffs and joint ventures. The company has in recent months leveraged its privileged position with European equipment vendors like Alcatel Lucent, Ericsson and Nokia to reinforce its role as a leading supplier and strategic partner to the region's tier-one OEMs.

The Switzerland-based company is already the dominant player in the regional semiconductor market and is, by revenue, the world's fifth largest chip vendor. ST maintains significant market share in five key sectors: automotive, consumer, telecom, computer and industrial.

"ST has maintained resilient profitability through industry cycles, thanks to good market and technology positions, a focus on differentiated ICs and a strong network of strategic alliances," Standard & Poor's analysts Matthias Raab said in a recent research report. "In 2008, ST ranked No. 5 in the fragmented $260 billion semiconductor industry and slightly increased its market share to about 4 percent," added Raab. "It benefitted from a strong product portfolio and generated a substantial part of its sales with products positioned in the top three in the market thanks to its strong R&D efforts."

Challenges, opportunities in '09
This year is shaping up quite differently. On Jan. 27, ST is slated to announce weak Q4 08 results, which analysts said will mirror the performance of a weak industry rather than a strong, dominant regional and industry player. Revenues for the last quarter of 2008 are forecast to sink 18 percent or more sequentially, hurting margins and sharply reducing profitability for the entire year.

Even in 2009, ST's sales and cash flow will come under more pressure and the company could see its first annual revenue decline in seven yearsduring the last major industry downturn ST's revenue fell 19 percent in 2001, to $6.4 billion from $7.8 billion. The company has been climbing back steadily since then, with annual sales rising as at the end of 2007 to $10 billion.

However, due to Q4 market slowdown, analysts have revised downward revenue estimates for ST, expecting 2008 sales would be unchanged to slightly higher from the preceding year. Net income, too, is forecast to take a hit although the company is still expected to be profitably for the entire year.

A sharp reversal in sales is only one of several challenges ST will face in 2009. The company's traditional hedge against market uncertainties has always been its dependably strong cash flow, upon which it relies for funding expensive manufacturing facilities, R&D, dividends payment, strategic acquisitions and other joint venture initiatives with rivals, customers and suppliers.

With revenue slowing and manufacturing capacity utilization declining, ST's cash flow will certainly come under pressure in 2009. Analysts said they expect the company will announce more cost-reduction measures later this month, including possible job cuts, plant closures and product rationalization. In response to the worsening climate, several analysts lowered their rating on ST's share price earlier this month.

"Standard & Poor's expects ST to respond quickly to the current severe market downturn through accelerated cost-cutting programs, the reduction of discretionary capital expenditures and also, if necessary, by reducing its dividend payments to preserve a positive discretionary cash flow generation," Raab said.

ST's edge
Generally weak global economic conditions can mask individual corporate strength, however, and some analysts believe ST is one of a handful of semiconductor companies that will likely emerge with a stronger market share position when the industry revives. Indeed, even a severely weakened STcompared to fellow European chipmakers Infineon AG and NXP Semiconductorsis still better positioned to lead any consolidation of the regional market.

Here's why: First, ST maintains a stronger cash position and has relatively moderate longer-term debt. Even after paying $1.5 billion or so to acquire NXP's wireless IC unit in mid-2008, ST closed the third quarter with approximately $1.6 billion in cash and short-term investments.

The company's cash position should improve later this year when it receives about $600 million from Ericsson as part payment for merging its ST-NXP Wireless joint venture with Ericsson's mobile platform businessST is scheduled to pay NXP approximately $300 million for the Eindhoven, Netherlands, company's remaining 20 percent stake in ST-NXP Wireless, according to analysts.

ST's greatest strength, however, rests in the company's deal-making capacity. ST executives have over the years demonstrated a keen ability to sense opportunities and quickly engineer strategic deals that have helped the company overcome problems or gain market share.

Transactions like the ST-NXP Wireless joint venture and other strategic business and technology deals over the last few years with rivals and customers will further help strengthen ST's position in the European market. With both Infineon and NXP battling strong winds in their respective markets, and with demand softening across the industry, the two companies may be forced to strategically review their operations and exit additional businesses where they lack the scale to compete.

That could present opportunities for ST to establish stronger market positions by forming additional alliances with NXP or Infineon in areas where it either has limited or relatively weak positions. European politicians eager to see the continent maintain a strong presence in high-tech manufacturing could help by nudging NXP and Infineon into alliances with ST.

Sound deals
ST doesn't have to force itself into unfavorable alliances with its European partners, however. The company, if necessary, can continue to manage its way through the ongoing downturn and still emerge with a commanding position in its key market segments.

The company is already in a class by itself in Europe. The multimarket IC vendor is unrivaled in sales, financial stability and prospects. Over the last years, it has stealthily overhauled its operations, trimming operational costs and moving into more stable product areas either through strategic acquisitions (Genesis Microchip, Nokia's IC development unit), joint ventures (with Ericsson, NXP and Intel) or by divesting unwanted businesses.

To further reduce manufacturing and R&D costs, ST has teamed up with other high-tech companies, including IBM Corp., with which it is collaborating on the development of next-generation 32nm and 22nm process technologies.

These product development steps taken over the last two to three years complement cost-cutting actions ST undertook during the same period, including the decision to wind down production at expensive fabrication plants in Arizona, Texas and Morocco.

The company also overhauled its management team following the March 2005 departure of founding CEO Pasquale Pistorio. His successor, Carlo Bozotti, is an electronic engineer by training who rose through the ranks, but specialized in marketing and sales.

All this has helped improve ST's position not only in the global IC industry but especially in Europe, where many politicians now pin their hope for the continent's continued role in the high-tech market on ST. With Infineon and NXP battling for survival in their respective markets, ST is now carrying the torch for the entire continent. Its continued strength has become the one bright spot in the region's troubled semiconductor market.

Even ST could stumble, though, especially in a market that has become incredibly fickle in only a few months. That's why ST, despite possible cash flow problems and inevitable margin pressures, may forge many more strategic alliances with fellow European companies, both OEMs and component makers, before the current recession winds down.

- Bolaji Ojo
EE Times

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