Fairchild Semiconductor: Powering ahead

Fairchild Semiconductor focuses on power-management ICs and business in Asia to drive future growth

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

"FAR AND FAST" is the nutshell description of Fairchild Semi-conductor's movement since it broke out of National Semi-conductor Corp in 1997.

"We have specifically focused on power and on Asia in the last two years as the markets have been more difficult.” Kirk Pond, CEO, Fairchild Semiconductor

Over the years, Fairchild made 10 acquisitions totaling $1 billion in value and became the world's third-largest supplier of power-management ICs. Six years ago, analog wasn't even part of the company's portfolio.

Just as quickly, Fairchild penetrated Asia. It bought Samsung Electronics' power division in 2000 and last year put the finishing touches on a $200 million factory near Shanghai that will assemble and test a range of logic, discrete, and analog packages. Today the region represents 70 percent of total sales.

"We have specifically focused on power and on Asia in the last two years as the markets have been more difficult," says Kirk Pond, Fairchild's CEO.

Fairchild is a key player in the multimarket business, making some of the unglamorous but necessary semiconductors--discrete, standard analog, standard linear and logic--that surround the more sexy products like systems-on-a-chip and microprocessors. The company puts a heavy emphasis on the faster-growing segments of interface and power.

Fairchild's broad and diversified analog and mixed-signal portfolio covers nearly everything, including amplifiers, comparators, data converters, analog-interface ICs, power- and thermal-management devices, timing circuits, and application specific ICs.

The company's analog business, accounting for roughly 30 percent of total revenue or about $400 million, derives mainly from the computing and communications end markets.

According to 2002 figures from Gartner Dataquest, Fairchild was the top worldwide power transistor supplier and moved up to sixth position among worldwide standard-analog players.

Pond points out that his company grew standard-analog-IC revenue in 2002 by 9 percent to $391 million, outpacing the market and the five companies ranked above Fairchild.

Our strategy is to focus on power," Pond says, adding that his company has an almost $1 billion annual power business. "And now we are the largest vendor in the power business by a wide margin because we have power analog and power discrete."

The company's 2002 revenues rose slightly to $1.41 billion from $1.407. Fairchild has maintained operating profitability throughout the worst semiconductor downturn in history, with operating margins of 9 percent in the most recent quarter.

Last year, Fairchild introduced 500 new products and for the first time crossed the $100 million mark in revenue per quarter from new products, Pond says. Some 30 percent of Fairchild's revenue comes from new products.

Aggregate R&D for the company is about 6 percent of annual revenue, though each division gets varying amounts. About 4 percent of the budget goes into the power-transistor business while analog gets 12 to 15 percent. The interface mixed-signal business is allotted 25 to 30 percent.

Fairchild often competes against large and well-capitalized companies such as National Semiconductor, ON Semiconductor, STMicro-electronics, Texas Instruments, and International Rectifier.

Rivals may be cash-rich, but Fairchild holds a track record of delivering positive cash flow from operations for 18 consecutive quarters. According to Tore Svanberg, senior research analyst at US Bancorp Piper Jaffray, since Fairchild went public in 2000 it has demonstrated solid cash-flow-generation capabilities, both during market upswings and during the recent downturn.

Pond adds that Fairchild retired $300 million of debt last year. "We've got some deep pockets of our own," he says.

Some analysts see Fairchild's strong Asia focus as a long-term competitive advantage. Its new China facility should bring cost savings and a bigger footprint in the Mainland's exploding electronics market. Previously, the company had been importing all products into China. The company is also establishing closer relationships with Chinese ODMs and Taiwanese ODMs that are shifting to China.

As more manufacturing shifts to Asia, more complex customer relationships emerge. "It's not like the old days where you design a product into a large US or European OEM," says Hubertus Engelbrechten, senior vice president. "Today we do it with the OEM and at the same time deal with their subcontractors and in many cases design houses and ODM partners in Asia."

“People want to squeeze more electronics into smaller systems and also make them portable," Engelbrechten says. "That challenges the power IC supplier, and that's where we are really bringing value” Hubertus Engelbrechten, senior vice president, Fairchild Semiconductor

Pond adds that Asia's foundry phenomenon over the last five years has allowed many small companies to get into the chip business. "What has happened in Taiwan is also beginning to happen in China as they develop a foundry industry," Pond says. Fairchild has acquired small boutique analog companies in the past and remains on the lookout for promising Asian companies, he adds.

Meanwhile, large vertical applications such as PCs and cell phones are growing. To plsy in those businesses, a company must have the right manufacturing assets, he says.

As Intel pushes to next-generation processors, going down in geometry, the voltages keep going down, and the current draw goes up. At the same time, space requirements become tighter.

"People want to squeeze more electronics into smaller systems and also make them portable," Engelbrechten says. "That challenges the power-IC supplier, and that's where we are really bringing value to customers."

Pond adds that Fairchild's biggest challenge is to keep growing faster than the market as a whole. For the first six years since Fairchild spun off, it grew about twice as fast as the total semiconductor market, partly through products, partly through acquisitions, he says.

"We'd like to keep that going, but it's going to be tough," Pond says. "We're going to do it old fashioned way--growth through new products."