Freescale CEO cautious on chip demand

Reuters News
Posted: Dec 13, 2012 3:01 PM
Freescale CEO cautious on chip demand

By Noel Randewich

SAN FRANCISCO (Reuters) - Freescale Semiconductor Ltd's chief executive painted a bleak outlook for chip demand, which has been hit by economic uncertainty, and said his plans to refocus R&D resources on key businesses would likely pay off with gains in market share in 2015.

Gregg Lowe, who left Texas Instruments Inc to lead Freescale in June, has embarked on a restructuring that he expects will reverse losses in market share that the chipmaker has suffered in nine of the past 10 years.

Like other chipmakers, Freescale has struggled for over a year as the debt crisis in Greece, concerns about China's growth, and fiscal uncertainty in Washington caused manufacturers of cars, computers and industrial machines to buy fewer semiconductors.

Lowe told Reuters in a telephone interview on Thursday that if fourth-quarter global chip revenue falls year over year, as expected, it would mark a sixth straight quarter of year-on-year declines and match the longest market decline seen in 25 years,.

"History would say that if you've got something that's declined for so long, it would probably go up - but there's no evidence for that," Lowe said. "If the market rebounds that's great, but it's not something anyone can point to or forecast at this point."

His cautious comments were in line with a chip industry report released on Thursday. Market research firm Gartner said it expects semiconductor revenue this year to dip 3 percent instead of growing by 0.6 percent as was previously forecast. It sees the industry growing 4.5 percent next year.

"What we're seeing is end-demand is weak," said Gartner analyst Peter Middleton. "Demand is concentrated in a few areas," he said, pointing to smartphones and tablets.

Chips used in cars and trucks account for 40 percent of Freescale's revenue. Its semiconductors are also used in industrial equipment, cellphones and consumer products.

The company has been struggling with falling prices and shrinking margins, and its factories have been operating at reduced capacity.

Under Lowe, Freescale is combining manufacturing operations under a single management group to cut down on costs. He is refocusing R&D resources, which represent almost a fifth of revenue, on select product areas in the auto industry as well as microcontrollers and radio frequency chips.

"The issue we have on market share is straightforward: We're trying to do too many things," he said. "As we narrow the focus we'll be able to spend that money much more efficiently, and we'll get a bigger bang for the buck."

"My thought process is, 2013, we're implementing the strategy; 2014, we'll start to see some benefits, maybe holding share at that point. And in 2015 we start regaining share."

Freescale was taken private in 2006 for $17.6 billion by a group of private equity firms including Blackstone Group LP, Carlyle Group and TPG Capital LP. It was the biggest leveraged buyout of a technology company on record, but was criticized because it left Freescale with lots of debt, hurting its ability to compete in the investment-intensive chip business.

Freescale cut just under 5 percent of its work force this year as it restructured. It plans to hire a similar number of people in 2013, with a focus on China, where it already has over 500 technical employees.

"What we're expanding now is our sales footprint (in China), opening 10 new sales offices, almost 100 sales people, to get more feet on the street," said Lowe.

He said Freescale will also restart a college hiring program next year after slowing recruitment from universities over the past decade.

At the end of the third quarter, Freescale had cash and cash equivalents of $763 million and long-term debt of $6.476 billion.

Freescale shares closed down 0.5 percent at $9.75 on Thursday afternoon on the New York Stock Exchange.

(Editing by Matthew Lewis and Leslie Adler)