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At Last, Europe Is In The Chips


International International Business: EUROPE

AT LAST, EUROPE IS IN THE CHIPS

Pasquale Pistorio, chief executive of SGS-Thomson Microelectronics Inc., relishes the pleasures of the table. But on this hot July afternoon in France, he's too excited to touch his lunch. Instead, Pistorio is mentally adding up the European semiconductor maker's recent gains. "1994 is going to be even better than 1993," he says--an impressive statement, since in 1993 the once ailing chipmaker grew 30% and churned out a profit of $160 million. At this rate, the company could become the world's 10th-largest chipmaker this year. And while Pistorio is mum on the topic, executives at the state-owned companies in Italy and France that hold SGS-Thomson shares say a partial sell-off could be announced in September.

Big profits, talk of a share float--none of this seemed remotely possible four years ago, when SGS-Thomson, a combination of France's state-owned Thomson Semiconducteur and Italy's state-owned SGS Microelettronica, seemed a hopeless case. Today, the company still faces major challenges--most notably its pressing need for capital to match the investment of such heavy hitters as Motorola, Hitachi, and Texas Instruments. But its success in an industry where the phrase "made in Europe" was once hardly a mark of quality is giving

hope to other high-tech companies on the Continent. "You have to hand it to SGS-Thomson. They are getting things right," says Jim Eastlake, senior semiconductor analyst at Dataquest Inc. in London.

COUNTERATTACKS. But Pistorio's not content. By the year 2000, he wants to catapult SGS-Thomson into the exclusive club of the world's six top chipmakers. That means tripling current revenues--estimated to top $2.5 billion this year--over the next five years.

That goal would seem far-fetched except for the fact that over the past five years Pistorio has managed to triple sales while restructuring. A quality program has helped fuel productivity gains of 15% a year since 1987. Even now, the 58-year-old Pistorio makes surprise midnight visits to factories, where he scrutinizes waste bins for signs of snafus and quizzes workers to see if they have memorized the company's goals.

At the same time, Pistorio has played to SGS-Thomson's strengths in designing complex, high-powered chips. The company is now a world leader in chips used in the telecommunications and auto industries. It's also a world-class player in smart power and smart signal chips, which blend two semiconductor technologies on the same chip.

To thwart counterattacks of such companies as Motorola, where he worked for 17 years, Pistorio has been locking in long-term relationships with customers by designing and making custom chips for such companies as Northern Telecom Ltd. and Seagate Technology Inc. He has also expanded SGS-Thomson's reach to Pacific Rim markets, which now account for 29% of sales, up from 18% in 1987. Throughout, Pistorio has stayed close to the market himself, making four to five sales calls a month.

The pulling and tugging has positioned SGS-Thomson to benefit from the global explosion in semiconductor demand during the past 20 months. The surge in demand dovetailed with a capital infusion of $500 million from the state-owned French and Italian companies that are the company's shareholders. The aid has helped pare down SGS-Thomson's debt and allowed Pistorio to earmark $700 million in cash flow for capital spending in 1994.

The trouble is that staying in the game means spending even more money--lots more money. To boost volume production and expand revenues fast, Pistorio must build strength quickly in memory chips and microprocessors. The plan is to build a new chip plant every 18 months, and that will require a boost in capital spending to at least $1 billion a year. "The amount they need to invest annually [to be in the top tier] is about the entire sum of their current revenues," says Keith Chapple, director of strategic development in Europe for Intel Corp.

The looming need for more capital is one reason that SGS-Thomson's investors are considering a partial sell-off of shares to outsiders. Industry experts say Pistorio will need an equity partner with deep pockets to attain the 5% global market share he is shooting for by the year 2000, up from 2.7% today. "They need to privatize to continue their momentum," says Eastlake.

One area where SGS-Thomson now lacks a strong presence is in chips used in personal computers--which represent roughly 30% of the total semiconductor market. So come January, Pistorio will enter the $13 billion microprocessor market with a line of Intel-compatible 486 chips. Pistorio has no illusions about beating mighty Intel with his clone chip, which he is making in partnership with Texas' Cyrix Corp. Yet the market is so hot even clonemakers are reaping 80% gross margins on their chips, and he wants a piece of the action. "Even if you scratch the surface of this market, it's hundreds of millions of dollars," he says. In fact, the SGS-Cyrix chip is based on an Intel design licensed by Mostek Corp., a U.S. company acquired by Thomson in 1985.

At the same time, Pistorio is gunning to be a major player in the hot new market for flash memories, the chips increasingly used in wireless telephones and portable computers. Market researchers say SGS-Thomson is well positioned in flash memories, since it already is the global leader in erasable, programmable, read-only memory chips (EPROMS), the precursor to flash chips.

INTANGIBLE ELEMENT. While he angles for extra revenue, Pistorio must keep SGS-Thomson's edge in complex custom chips, which feature entire electronic systems crammed onto one chip. In telecommunications, SGS-Thomson is already a prime supplier to European telecom giants Alcatel Alsthom and L.M. Ericsson. For Northern Telecom, SGS-Thomson has been making and helping design custom chips, as well as running Northern's semiconductor plant in San Diego. "They can really produce silicon devices at very competitive prices," says Cesar Cesaratto, Northern's group vice-president of components and supply

operations.

The most intangible element of SGS-Thomson's strategy is Pistorio himself. Few managers combine conviviality so well with pressure tactics. Insisting that everyone address him by his first name, he often calls managers at every level to note progress or discuss setbacks. On Christmas, he phones some 500 managers to wish them a happy holiday.

When Manufacturing Director Laurent J. Bosson was struggling with technical problems in upgrading a plant

to six-inch-wafer technology, Pistorio phoned every two hours from around the world--for three weeks--to encourage him. "He always works with positive reinforcement," says Bosson. "It's stronger than the stick. He convinced each one of us we were winners." Now, like Pistorio, Bosson stages midnight visits of his own. If Pistorio can teach all his managers to maintain that level of enthusiasm, SGS-Thompson may yet keep surprising its rivals as well.Gail Edmondson in St. Genis, France, with William C. Symonds in Toronto and John Rossant in Rome


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