CEO Roundtable
CEOs speak out
Staff -- Movers and Shakers, 8/15/2002
On a special night in San Jose, some of the industry’s most successful
CEOs came together to tackle some really tough questions. In a time when most
leaders want to run and hide from difficult issues and challenges, our group was
ready and willing to take on our writers and editors. And whether they were
talking about how to streamline their organizations or how to innovate and
re-energize the industry, we found them to be open, honest, uncompromising, and
full of determination.
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| [participants] Left to Right (front row): Kenneth Schroeder, President and CEO, KLA-Tencor M Kenneth Oshman, Chairman and CEO, Echelon TJ Rodgers, President and CEO, Cypress Semiconductor Michael Marks, Chairman and CEO, Flextronics Roy Vallee, Chairman and CEO, Avnet Joseph M Tucci, President and CEO, EMC Left to Right (back row): |
The first question I’m going to throw out is how do you cope with the ever-fluctuating economy? Every day it’s up and down, and it seems like you need to forecast and adjust your businesses almost on a daily basis.
Bob Bailey (PMC-Sierra): Well, I’ve taken a page out of Jack Welch’s recent book. We were trying to move faster than the market was in the last year, which was challenging. It felt like Bungee jumping, and while we were falling, we were trying to figure out if we had the right length on the cord or not—waiting for the bottom to finally happen. So, while you’re doing that, your plan is in place. And if we want to have a chuckle or get depressed or whatever, we look at what our plans were in January of 2001, thinking what was going to happen in 2001. I don’t think anybody could have predicted what happened. So we were just trying to move and adjust with the market as fast as we can.
Michael Marks (Flextronics): It’s just so painful. Really, it’s been 18 months since things turned down. One of the things is, we don’t have to worry about keeping our employees anymore. It’s unbelievable. I don’t know what you guys are seeing, but we have no turnover now.
TJ Rodgers (Cypress): I stopped trying to get happy or sad and rationalize the ups and downs. I started Cypress in ‘82 and before that I was at AMD, so they had their shares of ups and downs. After 20 years, I’m in my fifth or so cycle right now, and there’s different ways you behave on the way up and the way down. And I just enjoy both.
As a matter of fact, perversely, I probably enjoy it on the way down more
than on the way up, because we went into this down cycle with $1.4 billion in
the bank and we bought 13 companies on the way down. If you believe that people
are what companies are, and if you
believe there will be hard times in the
future where everybody’s griping that they can’t keep their employees, then
you’ll believe that this is a golden opportunity to get and integrate credible
talent that just wants to succeed and be part of an organization that can
support them while they’re making their ideas come to market. Then down times
are real good. As long as you’ve got the cash to survive it and you’ve got the
fortitude to take all the flack you get on the way down. That flack is minimal
if you just slide slightly less quickly then your fellow companies, and you can
point at them when the finger points at you.
How does this downturn rate in comparison with some of the other ones you’ve been through?
TJ Rodgers (Cypress): 1982 was the worst one. Then the one from ‘96 to ‘98. ‘96 was like 2001, but not as bad. And then ‘97 was a little bit of a mild recovery and everybody was saying, “Oh that wasn’t that bad.” We didn’t lose any money in ‘96. Then ‘98 came—the Asian financial crisis. It netted out three years of just continuous pain for three years. So that was one was no fun for a long time.
 “We were trying to move
faster than the market was in the last year, which was challenging. It
felt like Bungee jumping, and while we were falling, we were trying to
figure out if we had the right length on the cord or not—waiting for the
bottom to finally happen.” Bob Bailey, President, CEO, and Chairman,
PMC-Sierra
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John East (Actel): I’ll give you another view: This is the worst. Next worst is ‘73, and next worst was ‘80. What do you think?
Michael Marks (Flextronics): ‘84 was the one I remember, not ‘85, ‘85-’86. But tech was such a small part of the economy in those days, so that kind of went by without a lot of attention. So, how bad is this one in terms of being the worst?
John East (Actel): If you go back to ‘73 or ‘74, everybody took credit for sales to distribution. We had a quarter of negative bookings at Fairchild back then because the distributors were just returning stuff we’d already shipped. And we’d already taken credit for that, so that made it look worse. We got more back and had more cancellations than we shipped out the door. So that made it look worse, but it was by our own doing because we took credit for sales to distribution and, of course, we stuffed the channel because that was the way to make the numbers earlier. I was only a lowly engineer, so I wasn’t the one who was doing it. But, I think if you neutralize that, then this is worse by 10 or 20 percent than that one.
TJ Rodgers (Cypress): In the fourth quarter of 2000, we booked $400 million plus. In the third quarter of 2001, we booked $13 million. By virtue of having $267 million of bookings and $250 million of cancellations, we had positive bookings by just a round off....
This one is real sharp. You’ve been there before. “I’m going to get hit, it’s going to hurt, and I’m going to get up and get on with my life.” That other one where you had a back-to-back, where you were bruised from the first fight and you got thrown right into the second fight before you had a chance to recover—that was my bad one.
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M Kenneth Oshman, Chairman and CEO, Echelon |
M Kenneth Oshman (Echelon): I think where you come from, TJ, from the semiconductor industry, you guys get whip-sawed worse than anybody. Maybe Michael [Marks, of Flextronics] gets whip-sawed just as much.
The poor equipment guys have it the worst. I mean, they are at the absolute tail end of the dog. But you in semiconductors are not a long way away. Of course, for the tech world, this has got to be the biggest. I’ve been at this since 1968 and I’m telling you, this is the most amazing downturn I have ever seen. It’s not because I think the economy necessarily turned down that much. But the tech bubble was so big that the apparent effect has been just amazing compared to anything I’ve ever seen. I’ve just never seen anything like it.
William White (BPMicrosystems): I’m an equipment supplier and I’ll vouch for that. This is actually our first downturn. Part of that is also because now, we’ve got a big enough market share where we can’t grow in the downturn. But, personally, it’s been bad for us really. Since we supply back-end equipment, when the prices fall and the volumes go up, it’s good news for me, but this time that didn’t happen.
Bob Bailey (PMC-Sierra): What’s interesting in this downturn compared to the ones earlier is that back in the early ‘80s, and certainly in the ‘70s, stock options weren’t nearly as ubiquitous. So there was a human toll in this one, where people went out and thought it was going to go on forever and bought houses and made other financial commitments. Then they were worthless, for the ones that went underwater.
Then, considering the size of the whole tech industry now and the percentage of the economy that it is, compared to 20 years ago or so, the absolute dollars that evaporated are so much larger. So again, that has another human toll. You can look at charts and say, “Percentage-wise this or that,” but when you look at just the numbers of people and how it affected people, I think, it’s much more profound right now.
M Kenneth Oshman (Echelon): Back to TJ’s point, I think the best way to cope with the ups and downs in the economy is to have cash in the bank. Of all the things one wants to do to cope with these ups and downs, if you don’t have the cash, you’re dead. You can do everything you want to in terms of employee programs. You can do everything you want to in terms of promotions to your customer base and new innovations and everything else, but you’ve got to have the cash.
What this downturn has done, which I think I’ve never seen, is wipe out two out of three little companies that we’re doing good things. The worst thing about them was that they were doing the same thing everybody else was doing. There was far too much money chasing far too few good ideas.
I think the other thing that you do to cope with the downturns, which I think everybody around this table has done, is you have a business model that makes sense. You sell real products to people who need those products at gross margins that are reasonable with an expense level that is sustainable. I mean, without that you’re dead no matter how much cash you’ve got.
Bob Bailey (PMC-Sierra): If you had said that two years ago, the audience would have groaned.
M Kenneth Oshman (Echelon): I’ll tell you, I don’t know about the rest of you, but I started questioning myself. I started saying, “Maybe there’s something I really don’t get.”
Could you guys talk a little bit about how you approached the issue of layoffs? Did you try to minimize it across the board? Or did you use it as an opportunity to perhaps weed out your less productive employees? How did you approach it?
Ron Van Dell (Legerity): We had a situation with Legerity being a spinoff from a division of AMD. It wasn’t really an organization that was ready to be an independent company yet, so we actually did both. We had a fairly serious performance-management program where we looked at “How can we drive the culture to be more entrepreneurial?” Some of the employees really rallied around that, and others of them wondered why it couldn’t be the way it used to be.
We had a combination of what I tend to call weed-and-feed kind of activities, to better adapt the company to what we needed going forward, combined with just the economics of the income statement or “Where do you actually have to change the absolute number of heads.”
The other thing that we did—and I’m sure it’s true for a lot of companies here—is we did things with bonuses, base salaries, mandatory leave, and these kinds of things in concert with just purely a layoff calculation, so that we could actually preserve as much headcount as made sense and have some upside flexibility. You can restore those other things I mentioned once economic times recover enough and you’re back out in the labor market looking for talent. So we’ve had a combination of things that we’ve had to do over the last year.
TJ Rodgers (Cypress): Our first layoff was 1992; we were 10 years old. We had
been every year up and to the right. It was sort of engraved in our minds that
we had a right to go up and to the right each year, regardless of what the
market did. The same comment as before, we were finally big enough that we were
coupled to the market with a very tight spring and we couldn’t just float on our
expectations.
“What Silicon Valley is about is
companies, which are composed of people, and when you lose people, you’ve
necessarily lost your right arm. So that’s something you try to avoid.
That’s what we do now as much as we can, and we will lose some money too.
We could have laid off our weight of profitability in this quarter and be
bragging about being profitable, but we chose not to.”
TJ Rodgers,
President and CEO, Cypress Semiconductor
We had a very carefully planned layoff. We reduced according to what we had to, which was dictated by finances. Actually, for a very young company, it was well executed. I’ll never forget, I walked out into the parking lot and I was there—it wasn’t one of these absentee layoffs. We talked directly to people. I talked directly to people. We told them what we were doing and why we were doing it. We had a good severance package. Obviously, a bad day when you look out there and see somebody that you recruited and you tell them “Congratulations for getting sucked into my pitch, you’re now fired,” and that was bad news.
Then I walked out in the parking lot and this Channel 2 reporter stuck a microphone in my nose and she said, “So why don’t you cut your salary instead of laying people off?” Implying that my $180,000 a year at that particular time, somehow, would prevent a layoff for more than one day. I decided I didn’t like that experience a lot. I didn’t like the failure of recruiting people and then putting them on the street. I didn’t like the unfair and unreasonable criticism of a reasonable business action. So since that time, our policy has been that we will do everything we can not to lay people off until we have to.
The second thing is, we will inform people well in advance. We gave our people a nine-month warning. I even mentioned the groups—you, you, you, and you, if I’ve got to cut this is where it’s going to be. That’s a two-edge sword. One way is they understand, they have a warning. And the second way is if the economy is still reasonably hot and if they want to self-select and leave, they can leave. That way they can go and get another job and interview for a position on strength of employment as opposed to having been laid off.
This time we had a small cut, bottom performers done by ranking rate. We’re still losing money, but I told them in the last meeting—we do a quarterly report to employees the day of our quarterly report—we’re not planning on laying anybody off because I don’t think I’m going to be forced to right now. We’re losing a little bit of money and we can hang in there.
Also, we are extremely generous to the people we lose. The biggest morale killer of layoffs is not the employees who get laid off, it’s the employees that stay behind and have survivor’s guilt. So, we did a pretty good job of taking care of people—extended vesting rights, big packages, etc, and a long warning, so people had nine months worth of warning.
Layoffs are a bad deal. What Silicon Valley is about is companies, which are composed of people, and when you lose people, you’ve necessarily lost your right arm. So that’s something you try to avoid. That’s what we do now as much as we can, and we will lose some money too. We could have laid off our weight of profitability in this quarter and be bragging about being profitable, but we chose not to.
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money. There’s no question about it. But you’ll never, ever, ever see the euphoria—the craziness—in telecom that you saw before. Every cycle is driven by something else. It gets one round of euphoria and then it gets to be a normal business. But semis keep playing it over and over again.” John East, President and CEO, Actel |
John East (Actel): There’s been a lot of discussion about stock options lately, and the bottom line of that is, if we were trying to hire people in 2000 and didn’t have an option program and offered somebody the job with no option, you couldn’t get anybody. If we were trying to maintain people and say, “Please stay with the company without an option,” they’d leave. We were presiding over Mother Hubbard’s Cupboard if we were trying to run a business, in the Valley anyway, without a stock-option program. So what does that have to do with anything?
Well, that was then, this is now. Now, we’re in a downturn, so you can get along without it, except that now is the time you need to be thinking about what to do today so you don’t have that same trouble tomorrow. So we’ve made the decision to not have a layoff. Then you’ve got to ask me in two years, “How did that work? Is your turnover worse than ever?” In which case, there was no payback for not having a layoff. Or do people have the view of “Well, you took care of me when times were down?”
I don’t know what the answer to that is going to be. I think the answer is going to be we will do better in the next few years because we didn’t have a layoff now and we’ll have the employee stock-option question a little less.
Michael Marks (Flextronics):I’ll give you a new perspective on this one because there’s nobody around the table whose business looks like ours. We have 80,000 employees, and we’re at the end of the chain. We’re the guys everybody hires so that they can come to dinners like this and say, “We can do no layoffs.” We’ve done 13 separate layoffs in San Jose alone since the beginning of the downturn. Thirteen. The rule about layoffs is you do a layoff and you get it over with. Thirteen. You can just imagine what the morale is like around there.
In Sweden, where we’re the No. 2 employer in the country, we now negotiate with the government. It’s actually not a negotiation. We’re in it with the government. So in a negotiation they say “Can you not do this for a while?” But we’re in the business of just basically supplying labor to everybody else who doesn’t want to have this problem anymore.
In fact, a piece of statistical information that’s kind of interesting is that Hewlett-Packard, which has been very successful in outsource, is one of our biggest customers. They did a calculation recently of what their layoffs would be like during this downturn if they had not gone and used companies like this as extensively as they did. They said they avoided 15,000 layoffs by using outside contractors. Of course, the outside contractors have the 15,000 layoffs. And that’s the bad part about our business.
We have no choice. We can’t do what you guys do. And these aren’t engineers. These are laborers putting parts together for those of you who order something from us to build and if you don’t order from us, you have nothing to do with it. There’s no gain in the future. There’s no anything.
In San Jose, we had 11 factories. We now have two. We need one, we decided to keep two and, like you said, we’re just going to lose money here for a while under the theory that some of it will come back eventually. So, we have to do something very different. We use a bunch of techniques around a lot of temporary workforce and we try to build up a workforce that understands that there’s ups and downs, and when there’s downs they’re the ones who are going to lose. We try to be as generous as we can. We pay more money than we need to. We pay well more than the statutory minimum for layoffs. But in our business, that’s the part of the business we’re in. It’s not very much fun. I’m just as depressed as anybody else about it. We let 15,000 people go this year. Not very pretty.
Ron Van Dell (Legerity): But do you think, if that’s really
fundamentally the focus of what your company has to learn how to do well, then
from a sociological perspective, is it better to have disintegrated the
value-added chain and have you focusing on that, instead of it still being
bolted to HP?
“If you think about what the up
cycle was like, for those of us who can remember what the up cycle was, if
it wasn’t for the fabless model, if it wasn’t for specialized value-added
distribution, if it wasn’t for outsource contractor manufacturing, there's
a lot of companies and a lot of innovation that couldn’t have happened,
period.”
Ron Van Dell, President and CEO, Legerity
Michael Marks (Flextronics): Well if you talk to guys like HP, HP thinks this is great because they’ve made their business much more variable. The reason we have a business is because we’ve made our customer’s cost variable.
On the semiconductor side, it’s like TSMC and those folks. Anybody on the outsourcing side, you get the advantage that when their business goes down, you can cut your orders and you don’t have to go and lay off a bunch of people and close a bunch of factories yourselves. Sure, that is the business. It’s a rough business. With $13 billion of revenue this year, so I’d say this is a pretty crappy business, but it’s been pretty good to me. It’s not horrible, but in these downturns, we’re the ones really getting the brunt of it.
Ron Van Dell (Legerity): What I’m wondering, although maybe this is sort of a perverse sentiment, is, can that become something that you get good at? The HPs and the Compaqs and the others that would normally have had those factories and that direct labor, [maybe] they wouldn’t be as good at it?
Michael Marks (Flextronics): I think that’s right. Also, because it’s where we live and we’re in the manufacturing business and it goes up and it goes down. I mean, you’re exactly right, we have all that stuff with temporary guys.
M Kenneth Oshman (Echelon): I think one of the interesting electronics-industry issues that we’ve managed to pretty much avoid is unions. This is an industry which is pretty much non-union. Do you have any unions? And you [contract manufacturers] are the threat to the rest of the industry. Your ability to handle these ups and downs is ultimately going to decide whether the electronics industry becomes a unionized industry. I’ve always said unions are excuses for bad management. It will be interesting to see if you can lay off 15,000 and then do whatever you have to do and hire another 25,000. It’s a very big issue for the electronics industry.
Roy Vallee (Avnet): Just an FYI, back in the ‘83 time frame, the Teamsters tried to unionize Hamilton [Avnet] out in Culver City, California. We, of course, ran a very aggressive campaign and frankly, we learned some things about how to treat hourly employees in a way that precluded the unions from really being able to come in and offer value. I don’t think either we or the unions can eliminate or mitigate the impact of cycles, but we can deal with the way in which the layoffs are conducted and how employees are treated. From what I heard Michael saying, I think it’s similar to the way we run our business. We do have to move the workforce up and down, but if you do it in the right way, there’s not a whole lot the unions can do to come in and fix that.
Remember, in both of our businesses, which are fundamentally services, the margin structure is such that we can’t suck it up today for a home run tomorrow. We never get more than singles in terms of margins. So the business is pretty much going to have to pay its way, along the way. We don’t have the luxury, so to speak, of cranking out great products, licensing, or creating some intellectual property and then being able to cash in later with excessive margins to cover for the down margins.
M Kenneth Oshman (Echelon): Let me just be sure you understand what I said. Unions don’t change the numbers of jobs. They just screw up the industry. I mean, the industry is going to lay off what it’s going to lay off and the union will facilitate it.
Roy Vallee (Avnet): Right. I think there is this macro force
in industry today that goes beyond technology, that moves businesses from
vertical stacks to horizontal organizations. I think, fundamentally, Mike’s
industry and my industry are service providers to the rest of you folks. We help
move your products into markets and, as such, we have to become the experts at
labor management, because fundamentally what we’re doing is deploying labor.
“What keeps me awake at night is the
daunting task of learning
how to be a global company
and how to make seamless supply
chains work for our
customers who want to operate on
a global basis.”
Roy Vallee, Chairman and CEO,
Avnet
Bob Bailey (PMC-Sierra): The big difference is, with you guys when you cut or have to cut workers, it’s not affecting the product you’re offering, it affects the capacity. Particularly in the semiconductor and software industry, if you’re laying off engineers it literally affects the product you’re going to end up offering in the next cycle. The trick is going through this deep profound trough. And, for us—we’re focused pretty much in the telecom space—from peak to trough we dropped 80 percent in our revenue.
We literally went to asking what business we are in. We went back to that basic question because when we come out of this, what do we want to look like? The actions that we take today are going to affect that in terms of what kind of core competencies, capabilities, and product offerings we have.
We actually did have to have a layoff. We had our first layoff ever because we grew our headcount in 2000 from 660 to 1750 in one year, and right before the most precipitous revenue drop, so we had to cut some capabilities. It was done in a way that didn’t harm our customers, and our core capabilities are pretty much intact. We outsourced the manufacturing. So the capacity for us is variable, and we don’t have to worry about that. But what products and technologies we have to support in the future is really what dictates those decisions.
Joseph M Tucci (EMC): Let me put a little different spin on it. I think that when the economy recovers, I don’t think things are going to go back to the way they were. I think this is a fundamental change. Not that it’s a good example or a bad example, but what you’re seeing with HP and Compaq is going to continue. This industry is maturing now and is going to go through some consolidation. What’s the under opinion of HP and Compaq consolidation—$3 billion in cost savings, right? How are you going to get $3 billion in cost savings? It’s going to be a lot of people. So I think that as this industry matures, let’s not fool ourselves that you don’t think that the big guys—there’s going to be a lot of consolidation.
I’m doing the same thing TJ is. We had $5.2 billion in cash, no debt. Depending on the day, $25 to $30 billion in market capital, and I’m definitely going to consolidate. Then you read on given days that we will be part of a consolidation or a consolidator. I’m not going to comment on either way. Our industry is growing up and maturing, so I don’t think this is a one-time phenomenon. I think you’re going to see a lot more of this.
Ron Van Dell (Legerity): It’s kind of easy, though, to focus on “During the down cycle, isn’t it great that everything is outsourced.” And Roy can take the heat, Michael can take the heat, and TSMC and whoever. But I think one point that we’re missing is, if you think about what the up cycle was like, for those of us who can remember what the up cycle was, if it wasn’t for the fabless model, if it wasn’t for specialized value-added distribution, if it wasn’t for outsource contractor manufacturing, there’s a lot of companies and a lot of innovation that couldn’t have happened, period.
I think that’s one of the advantages we still see in the industry. The long-term fundamentals are still positive. Then what you really get down to is, “What’s the engine that drives innovation?” I think that the degree to which these value-added layers have been pulled apart actually helps drive innovation. It helps you have a very short path from 10 guys with a great idea to the next. Because they aren’t waiting around for somebody to come up with $10 billion in cash and buy into a single plan just for them. I think that’s still a real positive.
How else are you streamlining your organizations? Employee downsizing is one thing, but what else are you doing? You talked about how it’s never going to be the same when we come out of it. I guess I have a two-part question. First of all, when are we coming out of it? And second of all, if you don’t think things are going to be the same, have you streamlined other things in your organization, whether it be supply-chain efficiencies or whatnot, to weather the next down cycle?
John Daane (Altera): With your second question, I think with the desegregation in the industry, where we’ve now broken up and there are lots of different suppliers in this food chain, what we have not done well is developed an information flow. What product is where, at what stage in inventory, and how much do people really want?
 “What we saw on the up cycle was that
everybody was scrambling to try to get components. Then on
the down cycle, everybody was scrambling to try
to dump the inventory that they’d
got. And in between, what we haven’t done is try to work on
the information sharing that we really need to have
as an overall industry
in order to smooth out
this
process in the future.”John Daane, President and CEO, Altera |
I found when I came to [Altera], which was the day before the industry started to roll over, a general lack of information on how much inventory was out in the supply chain. And it was predominantly a North American phenomenon. The reason it was a North American phenomenon is because this is where we really started to break apart the industry first. A lot of companies in Europe still own their own manufacturing factories. If you look at the electronics industry, most of the largest fabless players happen to be, from a semiconductor perspective, in the United States.
So we kind of broke apart first. For all of the advertisements, the software, and all the things that people were doing in working with one another, it hasn’t happened.
What we saw on the up cycle was that everybody was scrambling to try to get components. Then on the down cycle, everybody was scrambling to try to dump the inventory that they’d got. And in between, what we haven’t done is try to work on the information sharing that we really need to have as an overall industry in order to smooth out this process in the future.
I fully believe—I’m in semiconductors and have always been in semiconductors—it is cyclic. No matter what anybody tells you as the industry’s rising. You’ll always have somebody who says, “OK, we’re not cyclic anymore; we’re going to keep going up forever.” That’s baloney. We are cyclic. We always will be cyclic moving forward. But we need to learn, and I think mature, as an industry, because the industry has changed.
I don’t see people deciding in this cycle that they want to go back and say, “I want to become vertically integrated again. Let me go buy pieces back from [Flextronics],” or myself saying, “Gee, I really want to go own my own fabs.” We’re not going to do that. We’re in this different environment. We need to learn how to work together to share information, and that really has yet to start.
