International Rectifier: Constant current

Focus on power-management helps International Rectifier ride out the tech-industry's ups and downs.

by Terrence Lynch -- Movers and Shakers, 8/15/2003

SELLING CHIPS IS a brutal business: plummeting prices, skyrocketing expenses, and manufacturers still wondering when the market is going to get back to normal. But while most companies are wondering what normal means these days, International Rectifier (IR) continues to do just fine by focusing on power-management semiconductors, just as it has for the last 56 years.

Even in the disaster known as calendar 2001, the company managed to be profitable. How? By operating smartly and anticipating what OEMs will have to buy--and not by depending on a rising tide of end-user purchases to float all economic boats.

"I think we're in a prolonged-period poor global economy," says CEO Alex Lidow. "But this is the best of times, because in the really great times, any idiot can make money. But in a period like now, if you have better products and a better strategy of dealing with your customers, you can show yourself to be better."

Alex Lidow, CEO, International Rectifier

And that's just what IR seems to be accomplishing. The results speak volumes. After-tax profits came in at 6.7 percent in fiscal 2002, and gross revenues were down just a little over 4 percent compared with 2000. Compare that to the power-semiconductor industry's overall slowdown of 10 percent in 2001, according to Frost & Sullivan. All in all, it was a credible performance when many companies were breaking open the piggy banks to buy the volumes of red ink they needed.

Results for 2003 are likely to look far poorer on the surface, with a second quarter after-tax loss of more than $121 million, but are most likely due to a series of acquisitions the company undertook in calendar 2002. Those purchases translate to more growth. In fact, Lidow says that as a whole, IR has grown 41 percent since 1999.

For years, according to Hoovers.com, Lidow and his brother Derek reputedly argued long and hard over corporate strategy, especially when they succeeded their father as co-CEOs in 1995.  But at the end of the decade, things became simpler when Derek resigned and Alex could offer a single point of leadership. Certainly IR has lost none of its market luster. "Looking at the client and customer base speaks for it," says Deepa Doraiswamy, semiconductor research analyst for Frost & Sullivan. "They already have all the big players in the big industries. They've proved...their capabilities."

But no firm can rest on its laurels. "They need to be coming up with newer products and newer technologies," she adds. "They have to keep evolving because the customers they have are market leaders in their industries."

And evolving is just what Lidow has in mind. Without abandoning existing markets, he is pushing the company toward two areas of specialty: dc-to-dc conversion and motion control. The former is important for the future of IT applications. The latter is key for energy savings, which is a critical part of power management. The two together mean products that offer higher margins and have helped fuel a nearly 300 percent growth in proprietary products since September 1999.

Dc-to-dc conversion is critical for feeding the chips in electronic systems as much power as they need when they need it, and in allowing those chips to make lightning-quick transitions between full-power operation and low-power sleep modes.

How much power-management product can the world demand? Quite a bit. For example, according to Doraiswamy, IR has 15 to 20 percent marketshare in MOSFETs (metal oxide semiconductor field-effect transistors), which appear in power chips in industries ranging from defense to automotive. Even if those markets are not growing, their dependence on power semiconductors is, as the amount of electronic system controls increases.

"The dollar value [of power semiconductors] in 2000 was probably $100 per vehicle," Doraiswamy says of the auto industry. "By 2010, the dollar value of the power management will probably be $1500. And when talking about the defense industry, the power content going into an aircraft in 2000 was about $150,000 per aircraft. By 2010, it will be around $310,000."

The other major breakout market for International Rectifier is motion control. According to figures Lidow sites, the area is moving from $750 million this year, between household appliances and light industrial applications, to an expected $3 billion by the end of the decade.

The attraction is how machinery can significantly cut energy costs by varying motor speeds to what is most efficient for an application, and not depending on the simple on and off of basic motors. "Over 50 percent of [power from wall electrical outlets] goes into electric motors on a global basis," he says, adding that motors without variable-speed controls waste about half of the energy they take in.

Saving 50 to 60 percent of the energy consumed by refrigerators, washing machines, and air conditioners has been possible for many years, but only using expensive control technology. "The challenge is how to do that for just a few dollars instead of a few hundred dollars," Lidow says. IR's current motion-control product line is the result of research that started eight to 10 years ago.

The technology also applies to the automotive industry. Lidow says that variable motion can help cars save upwards of half the fuel they use. Technology similar to that for variable motion will also result in applications--and revenue streams--in such areas as fluorescent lighting, uninterruptible power supplies, and video displays. The trick for IR will be to offer these technologies in a way that allows manufacturers to reduce costs without forcing end users to pay more than they do now.

Lidow believes he is moving ahead with some powerful business strategies that competitors cannot easily duplicate. These new areas require a combination of approaches, including new transistor design, packaging, and device architectures. "IR has developed all of those skills so we can mix the brew constantly to evolve to meet the market," Lidow says.

Or, as Doraiswamy puts it: "They've got all their manufacturing facilities. It's easier to adapt or change the technology concerned. It's very difficult for any company to start from scratch." And as long as IR can keep things cooking, the financial future should look bright.