Chipmakers from Silicon Valley to Tokyo are feeling the pain. Sales have sagged amid slowing personal-computer growth and mounting inventories. Yet escaping the sudden fourth-quarter industry slump, Geneva-based STMicroelectronics (STM) ended the year with a flourish. Revenues grew 48.3% in the fourth quarter, while net profit jumped 151%. For the full year, ST's sales--powered by chips for mobile phones, set-top boxes, smart cards, and flash memories--climbed 55%, nearly double the industry average. That propelled the $7.8 billion company up two notches, to No. 7, in a worldwide ranking by San Jose (Calif.)-based market researcher Dataquest Inc.
The market is treating ST like any other chipmaker, knocking its shares down more than 50% from its March, 2000, high of 73. But Sicilian-born Chief Executive Pasquale Pistorio has beaten the odds before. Over the past decade, the 65-year-old former Motorola Inc. exec has racked up one of the most successful track records in the global chip industry. Now, for the first time in two decades, a European chipmaker is poised to enter the industry's inner circle, with the heft and R&D muscle to battle for industry leadership. "It's a top performance," says Ulrich Schumacher, CEO of rival German chipmaker Infineon Technologies.
To get to this place, Pistorio wagered a decade ago that sales growth for digital gizmos such as cell phones, TV set-top boxes, and smart cards would one day outpace the PC's growth. It was no sure bet. In the 1980s, U.S. and Japanese companies dominated the industry by selling processors and memory chips to the booming PC market, relegating Europeans such as ST (then called SGS-Thomson Microelectronics) to the sidelines. Headquartered 8,000 miles from Silicon Valley, the company appeared unthreatening as it quietly invested in so-called systems on a chip, which pack processors, memory, and analog functions on a single sliver of silicon.
PRESCIENT. But ST's gamble seems on the mark. Analysts figure sales of chips used in PCs will drop by 5% this year, to about $94 billion, while the communications, automotive, and consumer-electronics markets ST serves will surge 20%, to more than $100 billion. "ST is in the sweet spot," says Peter Knox, a chip analyst at Commerzbank in London.
Of course, no company can defy weak markets for its products: If sales of cell phones, autos, and handheld gadgets stall this year, ST could feel the pinch. It already has warned that first-half sales could be bruised by the U.S. slowdown and a glut of chip inventory around the world. But analysts still figure it will top $9.7 billion in revenues this year, up 26%. That's more than three times the growth forecast for the whole industry. "I will be disappointed if we do not make it into the top three," says Pistorio.
ST has a shot at getting there. It has spent a decade building up a library of intellectual property and has perfected the art of welding these building blocks into combo chips designed to the precise specifications of customers or industries. That's a skill not easily matched by companies such as Intel Corp. (INTC) and Samsung Co. that are tooled for high-volume production of standard chips. "ST is the absolute leader in system-on-a-chip technology," says Josh Fisher, director of Hewlett-Packard Laboratories in Cambridge, Mass. HP (HWP) selected ST in 1995 as a strategic partner to develop powerful new processors for various digital applications that are now nearing launch. "ST is positioned as well as Intel or Microsoft were in the 1980s for a decade of superheated growth," says Fisher.
Credit Pistorio's faith in forging close links with customers. In the 1980s, he was among the first in the industry to form R&D alliances with other companies. Now, his top 12 customers, such as HP, Nokia (NOK), and Nortel (NT), account for 45% of revenues. "Alliances are in our DNA," Pistorio says. Such relationships also should help ST keep its better-than-average growth going forward, even in crunch times. That's because close partners are less likely to defect in favor of other suppliers.
COLLABORATION. Cell-phone giant Nokia Corp., for example, approached ST in 1989 seeking an energy management chip that would give its phones longer battery life. ST then made a chip that tripled standby time to 60 hours--a breakthrough at the time that gave Nokia a big edge. Their collaboration grew, and Nokia is now ST's largest customer, accounting for some 12% of sales. "They've gone the extra 10 miles for us," says Pertti Korhonen, a senior Nokia manufacturing vice-president.
Of course, Nokia itself is caught up in the gloom. And in any case, ST is not the only player with system expertise. Texas Instruments, LSI Logic, Toshiba, and Analog Devices all boast strong system skills and are building chips for telecom, networking, and digital-appliance companies. To reach Pistorio's goal of 5% of world market share by 2007, ST will have to outperform them all. "Until now, ST has been able to spot the next growth area a little ahead of the competition," says Joe D'Elia, head of the semiconductor group at Dataquest. "They have to continue to do that."
In short, ST has waltzed into the post-PC world. But how will ST fare, post-Pistorio? "The company has yet to put a credible succession strategy in place," says D'Elia. And that leaves some analysts concerned. A charismatic leader who inspires strong corporate loyalty, Pistorio has one of the lowest rates of management turnover in the industry--a factor analysts say has contributed to ST's exceptional performance. Since the 1987 merger of SGS and Thomson, only six of the top 350 managers have quit.
A tough act to follow. But for now, Pistorio isn't ready to talk about retirement. And when the handover finally comes, ST fans say the company can count on a deep management bench. That, and its diversified markets, should help ST weather the slump better than most. By Gail Edmondson in Rome and Andy Reinhardt in Paris