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Microchip seeks to 'elbow out' MCU rivals

Posted: 17 Apr 2009 ?? ?Print Version ?Bookmark and Share

Keywords:microcontroller? Microchip elbow out strategy? MCU?

Bleak outlook?
That's among a growing list of challenges for Microchip. In terms of aggregate sales declines for the fourth quarter of 2008 and projected first period of 2009, Microchip's sales are expected to fall a staggering 36 percent. Others are in the same boat.

For Q4 09, ended March 31, its sales are expected to be down 8-to-12 percent from Q3 of fiscal 2009. In the Q4, Microchip is projected to earn $0.11 a share on sales of $171.99 million, according to analysts.

The company's fourth fiscal quarter appears to be looking up to some degree. "Despite limited visibility and the challenging macro-economic backdrop, the company indicated that order patterns bottomed at the beginning of the quarter and improved throughout the quarter. Furthermore, the company has seen a high level of expedited orders (turns orders) despite relatively short lead times as inventory levels and consumption rates presumably return to equilibrium," said John Barton, an analyst with Cowen and Co. LLC, in a recent report.

Responding to the IC downturn, Microchip in January lowered its forecast, took pay cuts and reduced its IC production rates. Sanghi is quick to point out that Microchip has yet to reduce its workforce via layoffs, unlike mostif not allof its rivals. "Microchip is the only company in this cycle that has not laid off a single person," he said. "The morale is higher than normal" at the company despite the economic climate.

In March, though, Microchip also cut its capital expenditure budget to only $15 million for fiscal year 2010, compared to $106 million in the previous year. The company's fab utilization rate is running between 50 to 60 percent.

Obviously, Microchip is not rushing to build more fabs or expand its alliances with foundries. It only has a tiny percentage of its overall production handled by TSMC and others.

Like many chipmakers, Microchip was hit hard by the sudden drop in demand in the fourth calendar quarter of 2008. "Consumer confidence was destroyed," Sanghi said. "People stopped buying. It happened so fast."

At present, there are signs that the IC industry has seen the bottom. "We've descended down a sink hole and we're looking for the bottom," he said. "I don't think end demand has changed. Customers are not really replenishing their inventories. They are only buying what they need."

Asked when he sees a recovery, Sanghi said: "I don't know. I think it will be market-by-market and segment-by-segment."

There are mixed signals in the market right now. The automotive industry, a key market for MCUs, remains in what some call a depression. Housing starts, or the construction of new homes in the United States, "have leveled off" after a severe drop, he said. There were 400,000 to 450,000 housing starts in the United States in 2008, down from 2.5 million in 2007, he said.

The downturn has impacted all chip sectors, especially memories. It has forced the likes of Qimonda AG and Spansion Inc. into the equivalent of protection under bankruptcy.

Unlike the memory market, there are no signs of a major shakeout in the fragmented MCU market. But what bothers the Microchip CEO is that many MCU vendors continue to lose moneyeven during the boom times.

Failed attempt
"You are not going to see a major player go away," he said, "but there are a lot of guys not making any money. That's my complaint. Guys like NEC and Renesas have not made any money in the last decade."

Microchip also has a bone to pick with Atmel. Last year, Microchip and On Semiconductor Corp. proposed a $2.3 billion takeover bid for Atmel. The proposal was rejected by Atmel's board, prompting Microchip and On Semi to say they would take the case directly to Atmel's shareholders through a proxy vote.

But then, On Semiconductor reversed course and bowed out of the fight for Atmel, citing deteriorating market conditions. At the time, Sanghi said Microchip would continue to evaluate alternatives for pursuing a transaction without On Semiconductor.

Then, in February, Microchip terminated its consideration of a potential takeover of Atmel. Microchip also withdrew the slate of directors it had nominated previously for election at Atmel's next annual meeting of shareholders.

"The global economy and the semiconductor business environment have deteriorated significantly since Microchip first made an offer of $5 per share on October 1, 2008. Based on actual results and Atmel's first quarter 2009 guidance, Atmel's revenue will have declined more than 30 percent since then and the company is expected to lose money. In light of the economic uncertainty and the lack of visibility that continues to exist with respect to Atmel's business, Microchip is no longer able to put a value on Atmel. Microchip will therefore terminate consideration of a potential acquisition of Atmel," said Sanghi in February.

During a recent interview, Sanghi reiterated that explanation for the ill-fated Atmel bid. Others had a different view why the deal failed. "That deal was botched by the bankers," said Broadpoint.AmTech's Freedman. "I don't think (the deal) was sold the right way. The deal was flawed."

But overall, the ill-fated Atmel deal is not the end of the world for Microchip, as the chipmaker has done an admirable job diversifying into analog and multiple markets, he added.

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