| BUSINESSWEEK ONLINE : FEBRUARY 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
Look Who's in the Chips (int'l edition) The Europeans are finding profits in niche markets Folks at Siemens were concerned. Ulrich Schumacher, president of the German giant's semiconductor unit, was shedding kilos almost as fast as the global market for computer memory chips was tumbling. By the middle of last year, with so-called DRAMs at one-tenth of their 1995 price, Siemens was forced to pull the plug on a new chip factory in England. Schumacher, meanwhile, had slimmed down by 20 kg. Was it stress? Perish the thought. Schumacher, like his fellow European chipmakers, was getting into fighting trim. Other than world leader Intel Corp., only three chipmakers in the top 10 eked out sales growth last year, and they are Europeans: Siemens, Philips, and STM Microelectronics, formerly SGS-Thomson Microelectronics. According to a preliminary Dataquest report, while revenues at Texas Instruments, Motorola, and NEC all shrank by more than 10%, sales at Philips and STM rose in the single digits, and Siemens paced the industry with a 12% expansion. Siemens grew despite the DRAM market slump. For European chipmakers, such a showing marks a real turnaround. Bullied out of key markets a decade ago by more efficient Asian and American rivals, the Europeans have clawed their way back. They're even positioning for spin-offs and new public offerings. They've done it by attacking niches--making the brains for a new generation of mobile phones and providing the power chips that activate auto air bags. These rich markets are providing some relief as the DRAM market tanks. And they are propelling STM and Philips against the cyclical tide: They're profitable in the industry's bleakest year of the decade. ''Europe's strong now,'' says Arthur van der Poel, CEO of Philips Semiconductors, the $4.5 billion division of Royal Philips Electronics. ''Our American colleagues have suffered far more.'' NET CHALLENGE. To be sure, Americans are far from down and out. But those that aren't locked into the commodity business are moving toward the European niche model. Texas Instruments, for example, sold its DRAM business last year to Micron Electronics and is focusing on the same custom-engineered chips buoying the Europeans--making Europe TI's fastest-growing region in '98. As competition intensifies, the challenge for the Europeans will be positioning the Continent for the next generation of Internet devices, from cell phones to set-top boxes. Leading the charge is STM. Formerly owned by the French and Italian governments, the company was near death a decade ago. Under CEO Pasquale Pistorio, STM was the first to push engineers into collaboration with customers such as Ericsson and Nokia Corp. Now, the company has become, along with TI, a key force in the development of the next generation of mobile phones. Production of such phones doubled in Europe last year alone, to 100 million units. More important, each advance calls for more chips. Ilkka Rauvola, analyst at Paribas in London, predicts STM will register earnings of $405 million on sales of $4.24 billion, up 6% from 1997. Schumacher has had no such luck at Siemens. The only European player still in the deadly DRAM market, Siemens announced a $700 million loss in fiscal 1998, even while specialty chips spurred sales growth. Now, management is preparing to spin off the $3.9 billion unit by yearend. This should free up Schumacher, who will head the spin-off, to scour the globe for partners for high-end chips. Still, he's vowing to hold on to the memory-chip business, betting that global recovery will hoist profits in time for the public offering. Following Siemens' spin-off decision, investor pressure mounted for Philips to follow suit. For now, CEO Cor Boonstra insists the Dutch giant will keep semiconductors in the fold. The company is relying on them to power a range of Internet devices. After two major restructurings, Philips Semiconductors has outearned the industry for the last three years. In the first nine months of 1998, its operating profits were $700 million--the fattest margin in Philips' portfolio. European CEOss have long had their reasons for holding on to semiconductor businesses, often viewed as crucial in-house technology. But making money on them? That's something new. The question now is whether Europe's revived chipmakers can lead the Continent, after a decade in the wilderness, to the heart of the Information Economy. By Stephen Baker in Paris _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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