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Content Tagged with semiconductors + infineon

Freescale should get ready for change. I visited the Austin-based chip maker yesterday to talk about wireless and networking chips as well as broad trends in the industry, and walked away realizing that the firm needs to split itself up in order to survive.

The company has some very cool technology — especially around its multicore processors for embedded systems such as printers, storage arrays and routers — and a huge base of users for its Power architecture. But it has too many areas of focus. In the next two years, it’s unlikely that the company will have the same combination of businesses it has today.

Specialization is key in the chip-making industry because it allows a company to allocate its R&D more effectively, optimize manufacturing processes and generally improve profits. Freescale, which makes chips for automobiles, RFID systems, cell phones, base stations, networking equipment and industrial applications, designs both high-volume chips at advanced process nodes and low-volume chips that require a lot of manufacturing tweaks.

It’s likely that Freescale’s private equity owners will divide the company along the lines the firm established late last year: networking and multimedia; microcontrollers; cellular; and RF, sensors and analog. Each of the divisions made more than $1 billion in 2007 and could be combined with similar divisions at other firms such as Infineon, Broadcom, STMicroelectronics or even Intersil. Earlier this year, Freescale got a new CEO (from Intersil) with M&A experience, so change is certainly in the air.

A former executive at French semiconductor firm ST Microelectronics is proposing a three-way merger of Europe’s three largest semiconductor companies: ST Micro of France, NXP of the Netherlands and Germany’s Infineon. But while it underscores many of the problems facing the chip industry — and makes for fun headlines! — the proposal is a ludicrous one.

Geographically-based culture differences aside, the three firms don’t need to combine — they need to focus. And their respective actions over the past few years indicate that’s just what they’re trying to do. In an effort to focus on its core markets, Infineon back in 2006 spun out its memory division, then last week it sold its hard disk drive division to LSI. In the meantime, NXP last year exited the VoIP market to focus more closely on six segments, among them consumer electronics, automobiles and cell phones.

The real problem for the industry is that the cost of making and developing chips is becoming ever more prohibitive, and profitable mainstays such as high-end processors are facing more competition. And it’s why in the microprocessor space, Intel’s taking another stab at the low-power market and AMD is trying to use a platform strategy to differentiate its microprocessor chips. It’s also why firms are constantly buying and selling specialized divisions as one player decides to exit a less-than-stellar market and another buys that division to differentiate itself by having an area of expertise.

As market forces continue to wear on chip firms, the best response for most will likely involve an asset-light manufacturing plan and more R&D partnerships. I think in many cases, it will also involve greater specialization rather than diversification. So any ménage à trois for these guys had better be a one-night stand.