International Rectifier: Distinguished performance

International Rectifier focuses on proprietary products to set it apart from its competitors and lift revenues.

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

MANY VICTIMS OF THE worst downturn in semiconductor history may not agree with Alex Lidow, the CEO of International Rectifier (IR), when he says that these are the best of times for an IC company. But Lidow sees the hard and uncertain downcycle period as a chance to shine when others can't.

Alex Lidow, CEO, International Rectifier

"The end-user markets are rather subdued, and companies can distinguish themselves based on how much they can deliver in terms of value," Lidow says. "In boom times, any idiot can do well."

IR has indeed been busy during the downturn, slowly cleansing its portfolio of lower-margin commodity ICs and beefing up its percentage of higher-margin proprietary products. The latter are more resistant to weak demand and price erosion.

The company is a leading supplier of power semiconductors and the leading worldwide supplier of MOSFETs (metal oxide semiconductor field effect transistors).

Power management has evolved from simply an important product feature that many suppliers can deliver to a critical requirement. Internet-infrastructure equipment and the general demand for prolonged battery life, portability, and energy efficiency are driving the market, Lidow says.

IR sells its products into multiple end markets, including information technology, consumer, automotive, industrial, and defense.

The year 2002 wasn't an easy one. Though IR remained profitable, fiscal 2002 revenues fell 26 percent, from $978 million in 2001 to $720 million. But the company points out that it dropped less than the overall semiconductor industry, which declined 32 percent in 2002.

IR was able to increase revenues 18 percent in the aerospace and defense sector, 19 percent in consumer electronics, and 7 percent in automotive. But most market segments ranged from flat to so-so.

Lidow says a notable exception has been content inside the PC box. IR's sales in the PC segment rose 42 percent year-over-year in Q1. Lidow cites the widespread conversion to the Pentium 4 and the first massive use of multiphase dc-to-dc conversion inside the PC. "Where it used to be one-phase dc-to-dc conversion, now it's two-phase, so content almost doubles from that," he observes.

Driving company growth is the strategic emphasis on developing more proprietary products. Such devices generate patent royalties, lock out some competitors, and create more manufacturing efficiency. Moreover, IR's proprietary products, used in motor controls, automotive systems, information technology, and aerospace and defense, have gross margins higher than the company's overall gross margin.

Proprietary products now account for roughly 54 percent of revenue, compared with 30 percent at the end of 2000, according to the company. That translates to a growth rate of 52 percent, while revenue from the lower-margin components business fell by 45 percent.

To enhance that product mix, IR last year bought advanced automotive alternator supplier TechnoFusion GmbH from Philips Electronics for $50 million. It also acquired a submicron fab, European Semiconductor Manufacturing, for $81 million, adding about 300 employees focused on leading-edge mixed-signal and analog design.

Lidow aims to make proprietary products account for close to 70 percent of revenue by the end of fiscal 2004. The increasing share of proprietary products should contribute to improved gross margins in fiscal 2004, as well as a sharper earnings ramp than competitors, according to David Wu, an analyst at Wedbush Morgan Securities.

Analog ICs represent 56 percent of the company's revenues. And IR's total analog sales have increased fourfold in the last three years, Lidow says.

IR looks at analog as a supporting technology as opposed to an end unto itself, he explains. The company selected two key issues in power management--delivering a lot of energy at lower voltages and variable-speed motion--and pulled in all the technologies necessary to address those areas, he says.

In fact, the company bills its ICs as "enabling technologies for products that work smarter, run cooler, and raise the world's productivity-per-watt."

Lidow reckons the focus on power management positions his company well in a $10 billion market that is expected to grow to $70 billion in 10 years.

Intel is the driving force behind increasing energy requirements at lower voltages. Lidow has pointed out that Pentium processors currently give off the same heat as a hot plate. Following Moore's Law, they would be generating heat at the level of a nuclear reactor in a few years. IR's products provide continued reduction in voltage to dissipate the heat. "That often means changing the whole architecture on how that power is delivered, and you have to be there ahead of them," Lidow adds.

Moreover, general demand for electricity is increasing in the US, and IR's chips help gadgets use power more efficiently. IR's ICs appear in energy-saving household appliances such as air conditioners and washing machines.

According to Lidow, motors consume 50 percent of the electricity in the US. The bulk of those motors run without semiconductors, making them electricity hogs. IR's ICs direct the motors inside the appliances to run at the most efficient speeds, allowing them to consume less electricity.

Sales of IR's ICs in the appliance segment have grown 50 percent year-on-year for the last two years, Lidow says. The company also formed a joint venture to develop chips with home appliance-maker Sanyo Electric.

One of IR's competitive advantages is its portfolio of key patents on the technology that created the $3 billion power-MOSFET industry. Another edge, Lidow adds, is technology innovations that reduce the cost of variable-speed motion "so that it's for free," he jokes.

Lidow joined International Rectifier in 1977 as an R&D engineer after earning a PhD in applied physics from Stanford University. Two years later, Lidow co-invented the HEXFET power MOSFET, which set the standard in power-switching characteristics. He became CEO in 1995. Lidow's father, Eric, was a cofounder of the company in 1947 and today serves as chairman.

Twenty years ago, the whole world was supposed to convert from analog to digital, Lidow recalls. Today he sees analog content mushrooming everywhere. Steering systems used to be hydraulic, with zero semiconductor content; now they're controlled by complex digital and analog circuitry. Large plasma TVs hold a lot of high-voltage ICs, and consumers want bigger screens and more channels, requiring more analog ICs.

Yet in boom or bust times, analog engineers are difficult to find. "Analog designers are as scarce as hen's teeth and they are paid very, very well," Lidow adds.

IR addresses the difficulty through distributed design centers in the US, Europe, and Asia. "In the digital world an engineer can be productive quickly, and that's enticing for a lot of people," Lidow says. "In analog it takes years of experience to be productive in designing analog circuits that work at the first pass."