Analog Fever By Ed Sperling -- 10/6/2003
Electronic News
Jerald Fishman, president and CEO of Analog Devices Inc., sat down with Electronic News to discuss his company’s unique strategy in the market, the competition, and how it’s positioned to take advantage of a market uptick. What follows are excerpts of that conversation.
Electronic News: Has your business held steady throughout the downturn?
Fishman: We went down when the market collapsed. But we’ve been coming back. We’ve had six quarters of sequential sales and earnings growth. We hope this quarter will be the seventh. We’re certainly coming back from the depths, and the pace is not bad. And that’s on a fairly broad base of customers. We expect 2004 will be a good year.
Electronic News: How has Analog Devices fared when compared with competitors?
Fishman: There’s plenty of opportunity for growth. There’s also plenty of opportunity to take share from our competitors.
Electronic News: It seems the whole semiconductor world has suddenly found analog religion, too.
Fishman: I don’t think that’s unusual in this part of the cycle. Analog business tends to hold up better in the downturn because so many of the products are proprietary. That means you don’t have the compound effect of units and pricing collapsing at the same time. Part of the reason is that it’s hard to do. Analog is a much harder science. Unless you have a constancy of purpose it’s hard to really win for a long period of time.
Electronic News: Can you drill down into this market?
Fishman: The analog market is not a homogenous market. There’s a very high-performance component, which is growing like gangbusters, and there’s a commodity part that is not very different than it was 20 years ago. The performance part is about a third of the analog market, and it’s becoming very important in a plethora of new applications. If you were to just look at the analog growth rates from the analysts, it’s confusing because they lump both of them together. There are parts in there that sell for 20 cents and parts that sell for $20, and looking at the averages doesn’t help you understand what’s going on.
Electronic News: What makes your company unique?
Fishman: We’ve been at this for a very long time. We have 3,300 engineers, most of them in analog, all over the world. And they’ve been doing this, in many cases, for 25 or 30 years. They train the new guys, who in turn train the next class of new guys. Then, when you look at the customer base, they’re also very diverse. We don’t have any customer that represents more than 1 [percent] or 2 percent of our sales. And we sell 10,000 different parts.
Electronic News: How about your top competitors?
Fishman: When you look at the large guys, they tend to have 10 or 20 large customers. We draw a triangle, and on the bottom are 50,000 or 60,000 customers. On the top tier are maybe 100 customers. That’s why we get through the cycles better. We don’t depend on any one customer or on any one geography.
Electronic News: Are you seeing any shift in your customer base in terms of geography?
Fishman: They’re moving toward Asia.
Electronic News: How fast?
Fishman: It’s hard to tell, because a lot of the stuff we ship into Asia is developed here. So it’s hard to say exactly, but it is noticeable.
Electronic News: Is there a lot of consolidation in the customer base, too?
Fishman: No. We’re selling to as many customers as we always sold to. And we’re working that very hard. Keeping our brand selling to a broad range of customers is probably the most important thing we do. A lot of the core technology we develop across a broad customer base can be adapted to application-specific products. That gets us to the market much more quickly and with much less risk than if we were to identify an application and start to develop core technology at that time.
Electronic News: Can you give an example?
Fishman: Digital cameras. We had a lot of very high-speed converters that we originally sold to military customers. We adapted that technology and now it’s in almost every digital camera, because you need to convert the image off of CCD to digital format. You need something that does [analog] to [digital] conversion. But to start developing that chip, by the time that market develops you’re already too late. The only way you can get there is to have the core technology and adapt it very quickly to the application as it develops. There’s no way you can predict these applications up front.
Electronic News: Analog Devices seems to be running counter to the rest of the industry, which is becoming more application-specific rather than less specific.
Fishman: That’s a cycle the industry has gone through. In the earliest days of this industry, people would use general-purpose chips. Then we went into the ASIC phase where everything became an ASIC. Now, at 90 nanometers, it’s going to cost $1 million to do a mask set. That means going quickly to an ASIC is a very expensive and very risky thing to do. According to one analyst, at 90 nanometers only 1 in 10 current ASICs are viable.
Electronic News: What’s the fallout for you?
Fishman: Our programmable DSPs are really gaining attention now because for an MPEG algorithm that keeps changing and changing, it’s more attractive to do that in software instead of hardware. The hardware is too expensive to keep modifying. The same is true in analog, where people don’t want to go to ASICs quickly. If you’re not selling 1 million units a year, it’s hard to justify it with these upfront costs.
Electronic News: What does that mean for the future of ASICs from your standpoint?
Fishman: The ASIC era is rapidly approaching the end of its life. It’s not the end of Moore’s Law technologically. But it is the end economically.
Electronic News: Given the shifts in the market, who do you see as your chief competitors now?
Fishman: In the power management portion of the business, we compete with Linear [Technology] and Maxim, whose portfolios are heavily geared toward power management. In DSPs, it’s us and Texas Instruments -- particularly our programmable DSPs, which are much more useful than fixed DSPs. In converters, it’s a lot of little companies. We’re probably two or three times the size of any competitor. In amplifiers, it’s a very fragmented competition list.
Electronic News: How much of your business is coming from Asia and what are you doing about it?
Fishman: If you look at Asia and Japan, it’s more than 50 percent of our business. An increasing percentage off that is being designed in the region. We’ve always been focused on designing products and getting good applications people over there. That’s the initial phase. Will we ever do any manufacturing over there? Time will tell.
Electronic News: Can you drill down a little further on that?
Fishman: The early phase is getting products designed for customers in those regions, and having high-level applications people that can help customers apply those products. That’s always worked best for us.
Electronic News: Again, you seem to be running counter to many other companies in the industry, which are building factories in Asia to get closer to their customers.
Fishman: Factories may get you physically closer to your customers, but you don’t learn a lot about what your customers are doing.
Electronic News: What’s the next big thing in analog?
Fishman: The applications are moving toward our technology. At a very high level, people want to process images and video and voice over lines and over the air with low power. Many of those products are consumer, but even industrial customers want to apply that to their world. The whole idea of signal processing is taking hold, and it turns out that there are not a lot of people who are good at this stuff. Signal processing used to be for small, niche markets. Those are still there, but there’s a whole new layer of very high growth markets.
Electronic News: What does that mean for Analog Devices?
Fishman: We don’t really have to change our product strategy. We don’t have to change our technology strategy. We don’t have to change our organizational strategy. And we have a lot of cash.
Electronic News: How much cash?
Fishman: We just paid off our convertible bond. We have about $2 billion. We had a $1.2 billion convertible bond, so that made $3.2 billion.
Electronic News: Are you planning on any acquisitions?
Fishman: No, we never plan on them. Sometimes we do them. But my sense is most of our growth will be from internal development. On the other hand, every now and then you need to fill in a straight. But it won’t be the primary engine of our growth over the next five years.
Electronic News: Does that mean you’re going to pump more into development?
Fishman: We’re already spending almost 25 percent of our sales on R&D. That’s huge. We’re spending $500 million, which is what we would do if we were a much larger company. We will continue to increase that, but sales will have to catch up.
Electronic News: What’s your ideal rate of R&D as a percentage of revenue?
Fishman: About 15 percent to 16 percent. We deliberately kept our R&D up during this cycle because we saw enormous opportunities for investment and because we could. That gives us a big advantage in these down cycles relative to our competitors. |
