Double digit semiconductor growth in 1998........................
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Philips SemiconductorsPosted December 5, 1997
Philips upbeat about semiconductor sales
After rebounding from a negative 9 percent growth in 1996 to a single-digit growth in 1997, the European semiconductor industry can look to a double-digit growth this year.
Arthur van der Poel, chairman and CEO of Philips Semiconductors, predicts a good year for Europe's chipmakers in 1998. In an exclusive interview with Electronic Components, he explains the company's global strategy as it focuses on the consumer, communications, and multimedia sectors.
Electronic Components: How do you see this year developing for Philips Semiconductors?
Arthur van der Poel: We see 1998 as a continuation of a trend that has developed in 1997. I'd say that in 1996 the industry hit its lowest point in the summer and has since been gradually and slowly recovering from that. In 1997, we ended up with single-digit growth for the semiconductor industry.
In 1996, Philips did better than the average of the industry and we will continue to do so in 1997, consolidating our position in the top 10. Both in the industry's and in our own case, we achieved a gradual improvement on a quarter-by-quarter basis. There are two lessons to be learned from this.
First, that Philips Semiconductors has recovered from the situation in the early 1990s, when we were losing market share, which had to do with a number of restructuring activities. Secondly, from the industry point of view, there is a recovery taking place and the outlook for 1998 is double-digit growth. It will be between 15 and 20 percent. Certainly in terms of volumes the unanimous expectation is well over 20 percent. The facts in the second and third quarters of 1997 have underpinned this. There's unanimity in the industry that 1998 is not going to be a spectacular year, but certainly a good year.
EC: How important to you is 1998? If it hadn't looked like being a good year, what would that have meant?
AvdP: If 1998 would not be a good year, that would be bad for the industry and it would be also a break with the trends because the industry has been shown to be very volatile, dynamic, but it never happens that negative growth or downturns occur within very short periods of time. That really would be the first time in the history of the industry. So after negative growth of about 9 percent in 1996 and single-digit growth in 1997, a very poor 1998 would be a big surprise. There is no expectation whatsoever that that will happen.
EC: How do you think the big European companies will fare in 1998?
AvdP: If we look back on the performance of the European industry, then we were pretty weak as an industry in the late 1980s, early 1990s. I think that's a fair observation. We have grown positively since then, not only in size or in profitability, but also in competitive positioning and product offering. For the end of 1996, we were ranked 9, 10 and 12, which for each company is a moving up of three or more places compared to the early 1990s.
And we are in a healthy financial position. The figures of SGS-Thomson are known because they are a public company. Neither Philips Semiconductors nor Siemens goes into big detail in publishing its financial figures, but, speaking for ourselves, we are in a very healthy situation. We are one of the cornerstones of the profitability of Philips Electronics.
We have just embarked upon a new cooperation program, Medea, where the emphasis is shifting from technology-only to technology and applications, which underpins the fact that the European industry is prepared to cooperate. In this global industry, doing everything on your own is not a wise thing to do, so we cooperate gladly.
As far as product offerings are concerned, Siemens is the only one of the big three in Europe that offers DRAMs. We decided seven years ago that we would stop making memories. We made SRAMs at the time and we could not do so profitably so we've stayed away from it since then, and we never were in microprocessors. That means that we do not address 40 to 45 percent of the total market. What we call our servicable market is between 55 and 60 percent of the total and the message for us is that we have to outperform in this segment to be among the world leaders. We've shown that we can do that in recent years.
EC: What are you focusing on then?
AvdP: The focus areas of Philips Semiconductors are consumer, communications and multimedia. Consumer is considered to be a not very spectacular market. The consumer-electronics industry grows in small single-digit figures. However, the ICs in those sets grows at a faster rate and we have been shown to be good at this.
We have a very strong position, particularly in television, in all areas of the consumer industry and we want to stick to it. The challenge in that market is moving from analog to digital.
The second segment is communications. Because we're not active in telecommunications infrastructure, we don't produce ICs for switching centers or long-haul transmission. We do supply commodity products to customers who build those systems but our primary target is telecom terminal equipment or phones in the widest sense, including pagers and cellular phones, but GSM being the most important for us today.
The third area is multimedia because it integrates audio, video and communication, the three areas that we are very familiar with.
EC: What technological advances are we likely to see from Philips Semiconductors over the next few years? Where are you looking to make breakthroughs?
AvdP: There are certain things that we have to take for granted in this industry. One is that quality has to be impeccable. Technology is proceeding at a fast pace so all the semiconductor suppliers go from 1æm to 0.8æm to 0.5æm to 0.35æm and 0.25æm, etc. That's the treadmill we're running. That's not a differentiating feature.
Our competitive advantage is that we have a long tradition of systems-on-a-chip. All the suppliers are talking about that today, but many are coming from a history of selling products and now have to undergo that different mindset. We have been in that mold for a long time, offering complete chips for, traditionally, consumer applications and, more recently, communications applications. The challenge that we're facing now is that a part, or 100 percent, of that solution is moving from analog to digital and from hardware to hardware/software.
EC: With the other companies now thinking in terms of systems-on-a-chip, can you continue to rely on this as a differentiating factor?
AvdP: We're in a transfer stage from the analog to the digital era. In systems like telecommunications, going into GHz, although fully digital, the speeds are such and the interference risks are such that you need to understand analog crosstalk, interference, design methodologies, which we're good at. So there we still think we have a big advantage. We consider RF one of our key strengths, where we are arguably No.1 or No.2 in the world.
EC: What are the main components you buy in and what do suppliers have to do to satisfy you?
AvdP: It's raw wafers, chemicals, gases. For the wafer fabs, it's leadframes, gold wires, plastics and the like for the assembly industry.
We try to convey the message to our suppliers that we are in for partnership solutions, win-win. Who isn't? The reason is, first, of course, cost, and there we're talking cost-of-ownership rather than simply negotiating prices down to the lowest level-being smart together, how can we avoid waste, in whatever form?
A second topic is what I would call flexibility-by-standardization. If the supplier educates us better and convinces us that we shouldn't have 12 variants of a basic thing and the supplier can deliver cheaper and we get equipment or material that are interchangeable, then fine. Once we have the discipline to be more standardized, we are flexible in execution. But the most important of all is timing. If we can find ways-and we are identifying those ways-to have shorter supplier times, shared solutions for materials and clever ways of forecasting new equipment needs, then we can ramp up our factories faster.
EC: Do you see your suppliers as an extension of Philips?
AvdP: It was introduced three of four years ago, the system/methodology of involving our suppliers in our improvement program. In that sense, we have learned from our customers who have involved us in their programs and in some cases, specifically with the automotive customers, this was the condition for doing business.
We learned so much from that, that we are doing the same thing with our suppliers, first because we want it, secondly because the supplier wants it, thirdly because our customers want us to make that chain longer.
EC: Do you ever think that perhaps a company such as yours should go into microprocessors and take on companies such as Intel?
AvdP: We don't have any plans to go into microprocessors comparable to Pentium or PowerPCs. We do, however, have another kind of processor, Trimedia, which we hope would become the de facto standard in multimedia applications.
The Pentiums are workhorses and that's like painting the walls, ceilings, furniture. You can also have a more artistic view on painting of Picasso or Van Gogh and that's the kind of processor Trimedia is. It is a new architecture, specifically designed to handle audio/video communications simultaneously. It can be used in multimedia PCs, in consumer equipment such as digital TVs, where you can Internet-browse and send e-mail. Also in videoconferencing applications. So in that sense we are competing with the MMX Pentium, which tries to address the multimedia market, and we think Trimedia can do that faster, better and cheaper.
EC: What plans do you have to increase wafer fab and assembly plant capacity in the future?
AvdP: We're scheduling to build a new assembly facility pretty soon and are in the final phase of decision-making. It's certain that we build that in Asia because that is where the expertise is. The time when we would build an assembly facility in Asia just because it was cheaper is over. They're also better.
We don't have any plans to start assembly facilities, at least not on short notice, in Europe. Asia is the most logical place. Assembly facilities are still quite labor-intensive. They are huge facilities.
We feel that any new wafer fab we will build should not necessarily come in Europe. We feel that a better regional spread should be strived for, so we are currently investigating our next step, whether we build it on our own or together with somebody else, because we're certainly open to partnerships.
EC: Two regions you have not mentioned are Latin America and Central/Eastern Europe. Why not?
AvdP: We had an IC assembly factory in Brazil but closed it in 1991 because at that time Philips Semiconductors was in deep trouble. We had to lay off one-third of our employees. We had to close all factories that were too old or too small. We have not moved into Central and Eastern Europe because all the factories that we have are worldwide facilities. We don't have local-for-local production, so with the political instability and the economic uncertainties, we feel it's not the right time to build a factory in Eastern Europe producing today for the whole world.
EC: How important are local subsidies when you are deciding where to locate wafer fabs and assembly plants?
AvdP: We're looking for support. Support can be given in many ways. It can be in the form of tax holidays, which is quite customary in many countries. It can be x percent of the training costs. It can be a fee on capital investments. It does influence the decision-making, absolutely, because with support a billion-dollar fab would cost $700 million, which is a substantial difference. But it is not the only overriding argument. Skills of the people, accessibility, infrastructure of suppliers, whether they have support centers nearby, or an airport nearby-all those arguments play at least as important a role as financial support.
EC: What makes up the Philips brand? How do you see Philips' public image?
AvdP: We should make a distinction between Philips Electronics and Philips Semiconductors. There is a clear distinction between the brand towards the consumer and the image in business-to-business relationships. I would say because of our leading role in consumer electronics historically we have very good recognition in Europe. We're seen there as a reliable supplier with the technology capabilities and looking for solutions that are good for our customers.
We have a bit of the same situation, to a slightly lesser extent, in Japan and Southeast Asia. We feel we need to achieve that position in the United States, where we are still identified too much with being a commodity supplier of standard products.
We're working hard with an attractive multimedia campaign to change that image in the United States and the first signals are that it is playing out positively.
Electronic Components-January 1998 |
