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ST must take calculated risks to stay in the game

Posted: 04 Dec 2012 ?? ?Print Version ?Bookmark and Share

Keywords:diversification? business strategy? reorganisation? structural integrity?

With such a wide range of product offerings and services, STMicroelectronics is hard pressed to choose which markets it should aggressively pursue, this according to EBN Editor-in-Chief Bolaji Ojo.

It's difficult finding anyone today who doesn't believe chip giant STMicroelectronics urgently needs a new growth strategy. And that pertains to people both within and outside the European semiconductor giant.

Generally, company executives and industry analysts believe the Swiss-based semiconductor company must channel a new course for its future. The disagreement comes in deciding whether ST should drastically reorganise its operations and product portfolio, which means jettisoning burdensome and non-core offerings, or simply fine-tune its current strategy, stay the course, and gradually build up a formidable position in its market-leading products.

The company has said it will early in December unveil its plans and attempt to put to rest finally speculations about its future. Those speculations have centred on alleged plans by ST to split itself into two business units, a move the company has rejected. In a statement earlier this month, ST confirmed "its strong denial on the existence of a project which can compromise the unit of the company," adding that "such a project has never been presented to the ST Supervisory Board."

That may be the case, but ST's executives shouldn't fool themselves that anyone in the investment community would be surprised if they decide to go ahead with a split or dump ST-Ericsson, the communications IC joint venture with Ericsson that's considered a dead weight around the two companies' corporate necks. ST's management shouldn't be shocked, either, if investors react negatively to a plan that doesn't surgically pinpoint and address the company's perceived problems. In other words, ST must come up with a reorganisation plan that confirms that the company cannot continue with business as usual.

A breakup of ST into two companiesone focused on analogue and the other on digital ICsmakes little sense, in my opinion. The worn dialogue pitching analogue and digital companies against each other in terms of return on investments is irrelevant in today's world. In fact, it is a short-sighted take on what semiconductor companies must do nowadays to not merely survive but be competitive and very successful. The analogue and digital worlds co-exist and will continue to do so. For the biggest chip companies, analogue and digital offerings are complementary and in fact may be critical to winning business at major OEMs.

ST's most important strengths lie in the extensive product offerings and the wide range of markets served, including automotive, computing, communications, control systems, consumer, and industrial automation. This has allowed the company to offset weakness in any particular market sector with strength in other segments. And, while its growth has been less than impressive latelyannual sales will decline for the second consecutive year in 2012the company's performance could have been worse had it not been able to rely on faster-growing product lines to counter the impacts of its weak segments.

That's where the advantages of ST's multi-product offerings end and the challenges begin. If your sales are seesawing the way ST's have been, then there's a fundamental problem with the corporate structure, and it's time the company's management finally acknowledges this and takes steps to correct whatever ails the enterprise. Analysts predict ST's 2012 revenue will be approximately $8.44 billion, down more than 12 per cent from the $9.63 billion it reported in 2011 when sales fell 6 per cent from $10.3 billion. Current projections for 2013 aren't that impressive either, with estimates ranging from as high as $9.75 billion (unrealistic) to as low as $8.7 billion (possible).

The swings in sales performance and margin-related pressures resulted in Standard & Poor's Ratings Agency putting ST on negative watch in August. ST, the research firm said, "is likely to report significantly lower revenues, operating margins, and free cash flows in 2012 than we previously expected, following a weakening of operating results that started in the second half of 2011."

Nothing that has happened since August has dramatically and positively changed ST's profile. The company's digital semiconductor business remains fragile due to problems at Nokia and persistent weak demand in Europe as a result of the region's economic challenges. While ST's analogue, MEMs, microcontroller, and discrete business have performed satisfactorily, this hasn't been sufficient to stem the losses. ST will likely end 2012 with negative operating margin (estimated by S&P's at about 9 per cent) and a net loss for the entire year.

So what should ST be doing to spark growth? The idea of breaking the company into analogue and digital businesses is tempting, but it will only accelerate the ruin of the weaker digital business. However, ST cannot maintain its structural integrity without taking some hard decisions about which markets it will remain as a strong competitor in. I will address the question above in another report. For now, I believe it's time for ST to say goodbye to ST-Ericsson. Holding on to the business makes no sense notwithstanding the huge investments ST and Ericsson have put in it. The business should go on the block.

ST then might see clearly enough to address its second major problem: the convoluted ownership structure that puts the French and Italian governments in key positions to call the shots about its future.

- Bolaji Ojo

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