STMicroelectronics: Incidental Leader

STMicroelectronics is the top global analog supplier--not that the application-focused company puts much stock in such rankings.

by Drew Wilson -- Movers and Shakers, 8/15/2003

SOMETIMES THE US and Europe don't view the world in the same way.

STMicroelectronics, for the second straight year, remained the top global analog supplier in 2002, with a 14 percent marketshare or $3.4 billion of the worldwide $23.9 billion analog market, according to Databeans Inc.

Alain Dutheil, Corporate Vice President, STMicroelectronics

But unlike most of its US counterparts, the Europe-based analog leader has no analog division, doesn't see analog as a separate market, and avoids following the competitive rankings of analog suppliers, says Alain Dutheil, corporate vice president of strategic planning.

Instead, the Franco-Italian chipmaker looks at the IC world in the broader terms of application markets such as automotive, digital consumer, communications, smart cards, and PC peripherals,  Dutheil says. "We serve application markets with ICs that frequently contain analog circuits," he says. "We have no plan to reach a certain ranking, but our top ranking validates that we are offering our customers ICs and expertise that have enormous value."

In the analog sphere, ST management can recite a list of leadership positions including ICs for power management, interface, audio, mass storage, wireless, RF, xDSL, and various automotive applications. Analog ICs brought in 53 percent of revenue, or more than $3 billion, in 2002, up from 49 percent in 2000.

ST targets applications that demand healthy analog and mixed-signal content and can exploit the company's system-level expertise. In the consumer area, for example, ST last December announced what it calls the industry's most advanced silicon product for DVD playback, with all the required analog and digital circuitry in just two chips.

The automotive market, which consistently requires more analog ICs as the digital car takes shape, represents a stable growth area. Research company iSuppli ranked ST the world's third-largest automotive-IC supplier in 2002, with a growth rate exceeding any other company in the top 10. ST holds alliances with several carmakers, including DaimlerChrysler and Ford, and management forecasts CAGR of 11 percent in automotive-market revenue, reaching $15 billion by 2006.

Behind ST's first-place ranking in analog is Bruno Murari, director of the company's Castelletto R&D Labs in Italy. Murari developed the process by which ST manufactures power-IC amplifiers and other high-power devices.

System-on-chip (SoC) evolution is driving the growth of analog content, Murari says. Silicon chips long ago consolidated the digital brain and digital memory. They're now swallowing the analog sections that interface to the external environment and to the units powering the systems. "This is an area that ST pioneered and one in which we still excel," Murari says.

Murari believes the markets ST focuses on will continue to expand at a rate faster than the overall semiconductor market. "Though the analog part will not notably increase its complexity, it will remain the most critical part of the IC," he says.

Jack Romaine, analyst at SG Cowen Securities, says ST has found success mainly in the vertical markets, where parts are typically designed for one or two customers in very high volumes.

Moreover, big companies like ST are more willing to take building blocks and put them together into more customized solutions to go after specific applications. That allows ST to address complex issues with single-chip solutions, unloading a lot of the design-intensive work off the OEM.

"Given all the time-to-market pressure and reductions in headcount at OEMs, there definitely has been a move toward solutions that feature more integration," Romaine says.

ST, which was born from a merger of Italy's SGS Microelettronica and France's Thomson Semiconductors, is ranked by Dataquest as the world's No. 4 semiconductor company, with $6.35 billion in sales in 2002. ST follows a long-held strategy of maintaining a diversified product basket, which makes the company less vulnerable to the cyclical chip market.

Some 30 percent of total sales come from communications, 20 percent from PCs, 15 percent from industrial, 20 percent from consumer, and 15 percent from automotive. The company points out that except for communications, all markets are forecast to show double-digit annual growth to 2006.

Differentiated ICs--chips with application-specific features that command higher prices and provide lower gross-margin volatility than standard commodity ICs--made up about 69 percent of revenues in 2002, up from 63 percent in 2000.

Dutheil believes that ST's strength lies in its strategic relationships, which accounted for 47 percent of revenues in 2002. Revenues from 1998 to 2002 showed a CAGR of 10.4 percent, while combined strategic-partner revenue showed a 15.1 percent gain. Both outgrew the overall chip market, which showed 2.9 percent growth during the same period, according to company figures.

ST shares common design centers with several customers. In some cases the companies design products together and exchange technology. For example, ST is working with Texas Instruments, a chief competitor in analog and the No. 2 analog supplier, on wireless interfaces and with TI and Nokia on development of CDMA chips.

"We understood how important this relationship was when [the industry was] moving to SoC," Dutheil says. "You need to share with key customers silicon know-how, which we have, with system know-how, which they have."

As one of the world's top five chipmakers, ST can flex some manufacturing muscle. CEO Pasquale Pistorio sees the industry dividing along lines of manufacturing prowess. On one side stand big companies like ST with deep pockets, strong R&D, and leading-edge fabs. On the other side are fabless companies using foundries. There's not much in between.

ST's manufacturing investments will pay handsome dividends when the industry recovers, Pistorio says. Fabless competitors using foundries will be paying an increasing premium, "putting those companies at a competitive disadvantage versus those competitors who have been able to set up their own efficient manufacturing machine," Pistorio says. "SOC devices--and even more convergence-on-chip devices--require process variations that only very few foundries can afford to have."