Yes, there's life after AT&T -- Lucent's Micro unit enjoys strong sales, but faces
obstacles
By Ismini Scouras
Berkeley Heights, N.J.
Eighteen months after Lucent Technologies Inc.'s Microelectronics Group gained its
independence from AT&T, the group's president, Curtis J. Crawford, has much to be
thankful for.
For one, sales in the group's latest fiscal year grew 28%, while many competitors
posted declines. And the group has increased market share in some major
communications segments.
The key: "staying focused on those areas where we have fundamental advantage over
the competition," Crawford said in a wide-ranging interview at company headquarters
here last week.
But despite all he has accomplished, Crawford still has his work cut out for him. While
DSP solutions represent a tremendous market opportunity for Lucent, it must contend
with the the market's dominant player, Texas Instruments Inc.
And on the modem-IC front, where Lucent is the No. 3 supplier, TI presents a
significant challenge, according to industry analysts.
Crawford acknowledged that the competition is stiff, but pointed to several
accomplishments as an indication that his expansion strategy is working.
Lucent's keen focus on the communications, network computing, and data-storage
markets, as well as its alignment with leading customers in prospective markets, such
as Silicon Graphics Inc. in workstations, has enabled the company to succeed,
Crawford said.
Its concentration also on top-tier customers has helped boost its percentage of
merchant sales. The company struggled for years to cut the apron strings from its
parent company, AT&T. It wanted to be less dependent on the telecommunications
giant for sales and a bigger supplier to the worldwide merchant semiconductor market.
Today, more than 78% of the Microelectronics Group's sales are garnered from
non-Lucent customers, and Crawford expects that figure to grow to 85% by year's
end. That's a far cry from 1990, when more than 70% of sales came from AT&T.
The Microelectronics Group's focus on key markets and customers helped it to post
double-digit growth in fiscal 1996, which ended Sept. 30. It reported a 28% rise in
revenue to $3.48 billion. ICs accounted for $2 billion; power systems, $691 million;
and optoelectronics, $176 million. The remaining $613 million was revenue from
intellectual property and the sale of its Richmond, Va., printed-circuit-board facility.
Although part of the healthy sales increase can be attributed to the group's lack of
participation in the memory market, analysts said Crawford has done a masterful job in
developing the Microelectronics Group. "They've been able to sustain greater than
28% revenue growth," said Nikos Theodosopoulos of UBS Securities LLC, New
York. He expects the group's chip sales to reach $2.8 billion in fiscal 1997.
Challenges ahead
The Microelectronics Group will continue to face tough competition from TI in both the
DSP and modem chip-set markets, analysts said.
Although Lucent rapidly moved from last to second place among the top DSP
suppliers in the past three years, plenty of room still lies between Lucent and TI, which
accounted for 45% of the $2.3 billion DSP market last year, according to Will Strauss,
president of Forward Concepts Co., Tempe, Ariz. Lucent was next, with 29.4%,
followed by Analog Devices, 11.4%, and Motorola, 8.3%
Crawford believes that there's plenty of opportunity for the Microelectronics Group to
increase market share, and that the realm of possibilities DSPs bring to electronics
equipment offers a tremendous opportunity.
Lucent's DSPs have found their way into several Motorola products, including a
two-way messaging pager, a voice pager, and a cellular phone. "But then again, TI is
also in at least one Motorola cellular phone," Strauss said.
DSP strategy a double-edged sword
The Microelectronics Group's DSP strategy is different from those of its competitors,
which offer general-purpose DSPs. Instead, it delivers customer-specific solutions.
But Lucent's unique DSP approach has been a double-edged sword: Its
customer-specific strategy has enabled it to gain market share, but it is also holding the
company back from garnering even more, because the strategy doesn't allow for sales
through distribution.
Lucent's DSP competitors are able to reach both small and large customers through
distribution, while the Microelectronics Group relies on seven of the 10 leading OEMs,
including IBM Corp. and Compaq Computer Corp., for high-volume orders, analysts
said.
Crawford will take a hard look at the group's distribution situation this year and
possibly increase its percentage of revenue from distribution, he said. Approximately
10% of the company's sales are currently generated through distribution, with Arrow
Electronics Inc. its major distributor, he said.
A key soldier in the modem wars
In addition to paying "considerable attention" to its distribution strategy this year, the
Microelectronics Group has taken up a battle position in the 56-Kbit/s modem-chip
arena.
"We will be a major player [in the 56-Kbit/s modem-chip market]," Crawford said.
"We don't plan to stop there - we have a lot of people behind us and a number of
different approaches to transmission. It could even be in the air."
Lucent's Microelectronics Group joined forces with Rockwell Semiconductor Systems
to establish the K56flex protocol to compete against TI and U.S. Robotics. The
protocol allows Lucent's V.flex2 technology and Rockwell's K56Plus technology to
interoperate.
"It's going to be an interesting battle," Strauss said. "Lucent will still be a significant
provider of modem chips and so will Rockwell, but TI is the most aggressive and is
gaining heavy market share," he said.
In the modem-IC market, Lucent's Microelectronics Group was third behind TI and
Rockwell. Of the 32 million V.34 modem chip sets shipped in 1996, Rockwell
accounted for 40%, TI for 35%, and Lucent for 20%, Strauss said.
"I expect our business to continue and outgrow the competition," Crawford said,
adding that the worldwide semiconductor market should rebound from negative growth
last year to 20% in 1997.
As a big proponent of maintaining a healthy level of spending, even during a downturn,
Crawford will increase capital expenditures this year. The Microelectronics Group will
continue to allocate roughly 20% of revenue to capital expenditures, he said. "Capital
expenditures will always be a leading indicator of commitment in the industry,"
Crawford said.
Roughly 70% of the group's capacity this year will be generated from its own platform,
while 30% will come from joint ventures. The group is currently in a joint-venture
agreement with NEC Corp. to bring up 0.18-micron process technology in 2000.
Crawford expects that by continuing to seek out new markets, the Microelectronics
Group's sales growth will exceed the market average. For example, the group recently
sold cellular chip sets to Blaupunkt-Werke GmbH of Germany for use in the
Radiophone, a dashboard-mounted device that combines a car stereo with a cellular
phone in one unit, and conforms to the GSM standard, Crawford said.
"I expect us to move into new areas, create new markets, and move into wide spaces,"
he said.
---
Crawford's Challenge
- Chip away at TI's huge lead in the DSP market
- Increase sales through the distribution channel
- Strengthen efforts in the modem chip-set biz
Copyright r 1997 CMP Media Inc.
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