Fairchild Semiconductor: Plugged in to power
Fairchild's increasing reliance on power-related chips should give it juice for the long haul.
By Erik Sherman -- Movers & Shakers, 11/1/2004
The mention of power products doesn't set too many eyes twinkling—it's not exactly a glamorous business. But it can be a smart one, and that's why Fairchild Semiconductor has chosen power as its focus. When it first spun off from National Semiconductor in 1997, Fairchild took 5 percent of its revenue from power products. By last quarter, the company had increased that figure to 74 percent.
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| Kirk Pond, CEO, Fairchild Semiconductor |
Where there are semiconductors, there must be power. "These are not small contents either," Pond says. "If you take a look at the [power] components in a Samsung plasma display, it's $80 to $90." Room air conditioners can use $13 in power components. A cell phone, $4.50. In heavy-duty devices, power controllers can be multichip modules with high chip content. Some washing-machine modules, for example, can include 13 or 14 pieces of silicon. The price tag for semiconductors in modern autos is reaching $1000, says iSuppli principal analyst Gary Grandbois, and power represents a significant portion of that.
Fairchild has expanded by acquiring product lines from Raytheon, Samsung, and Intersil. "They're strong in power and that's their focus," Grandbois says. "They've had some other product lines, but the power is starting to increase in significance."
And although power may not be considered "sexy," it's got reliability going for it. "There's not much glamour attached to it, but that's perfectly fine," says Jim Turley, principal analyst with Silicon Insider. "It's a good, solid business."
Fairchild is in a pretty good position relative to competitors like STMicroelectronics, Texas Instruments, International Rectifier, and Infineon, Grandbois says. More strength in the power-IC area and a larger stable of products would further improve the company's overall competitive position.
From 2002 to 2003, the semiconductor industry as a whole scored revenue growth of 30.5 percent, while Fairchild notched 7.0 percent, according to data from Hoovers.com. The company is now on a $1.6 billion to $1.7 billion run rate, according to Pond.
"The semiconductor industry is a very large industry—more than $200 billion, and it supports $1 trillion to $1.5 trillion of electronic manufacturing," Pond says. "Were a GNP [Gross National Product] kind of industry now. That's 4 to 5 percent a year just because the world is growing at that rate. I think the days of booms and busts—caused by the computer industry or the TV gaming industry or the military industry being a little slow—those days are fading away because the industry is in everything."
That may be true in Fairchild's specialties. The power-component market will grow at 24 percent through 2004 and continue at 12 percent in 2005, Grandbois expects. And that's despite the fact that other parts of the semiconductor industry will see fairly low growth at 9.6 percent. If the current market downturn continues into 2006, it could mean mere 2.2 percent growth for semiconductors and 4.4 percent for power products.
Industry gross margins were 55.07 percent, while Fairchild saw 35.39 percent. That would seem to put Fairchild into a financial bind, but Pond argues otherwise.
Many semiconductor companies are developing complex chips that require extensive development and manufacturing overhead. In the power industry, however, much of the work can be done at older geometries, using technologies that are relatively cheap.
"You don't need high density fabs, complex development tools, and high...[marketing costs]," he says. That means the company can deal with the largely commodity power market and take the price hits more easily than other semiconductor companies.
Nevertheless, Fairchild continues to run at a loss. That's why the company considers it critical to develop new products that can bring higher margins. By increasing the mix of new to old products, the company can boost gross margins and hopefully move toward real profitability, not just pro forma operating income.
Pond says that the company is aiming to grow the bottom line by driving internal development, creating products that can drive margins and growth higher. In 2004, Fairchild will spend about $100 million on R&D and $180 million on capital equipment to support those new products.
"This is building up a tidal wave of new products for us," Pond says, noting that already about a third of the company's revenue comes from new products.
The company is also working to balance the business, both geographically and among business sectors. Last quarter, communications accounted for 14 percent of business, consumer products 21 percent, industrial power supplies and adapters 15 percent, industrial automation and instrumentation 11 percent, computing 24 percent, displays 10 percent, and automotive 5 percent.
One could say that when it comes to power, Fairchild is well plugged-in. And that should give the company the juice needed to continue strengthening its competitive position.
