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Online Extra: Infineon: High Risk, but Hardly Lacking Potential


When German electronics giant Siemens spun off its Infineon semiconductor unit last year, a national furor ensued because some German investors couldn't get all the shares they wanted. Why, angry editorialists wanted to know, did managers of big foreign funds sometimes get preference over the folks at home? The outrage only grew as the shares more than doubled within months of the March 2000 initial public offering.

People aren't complaining so loudly these days. After falling more than 50% over the past few months, Infineon shares are hovering uncomfortably close to the IPO price of 35 euros. Like the rest of the tech world, Infineon has been hammered by investor disillusionment over the presumably curtailed growth prospects of products that use semiconductors, including mobile phones and personal computers.

Investor fears are at least partly justified. Infineon's profits plunged 84% in the quarter ended Mar. 31, to $20 million, on sales of $1.5 billion. And since no one really knows how deep or long the economic downturn will be, the situation could get worse.

Still, there are reasons why Infineon could survive tough times better than most of its competitors -- and come out stronger once growth returns. For those with a stomach for high risk, in fact, Infineon could be a good bet. Here's why:

Diversification. CEO Ulrich Schumacher has consistently resisted pressure from analysts and fund managers to focus his company narrowly. Investors like pure plays, but Schumacher wanted a broad enough spectrum of products to ride out the economic ups and downs. In retrospect, that looks like a smart strategy: Soaring profits in Infineon's auto and wireline communications businesses are making up for weakness in wireless and memory products. "A year ago everybody said, 'Why don't you kill automotive?' "Schumacher says with satisfaction. "Nobody asks me to kill it today."

Computer Memory. The analysts also told Schumacher to quit making DRAM memory chips, a business known for booms and busts. And sure enough, Infineon's memory products, which generated income of $164 million before taxes and interest in the March quarter a year ago, delivered a $114 million loss in the corresponding quarter this year as prices plummeted. Still, Schumacher points out that a disastrous, three-year decline in the DRAM business in the mid-1990s taught the industry an unforgettable lesson. This time, manufacturers dialed back production sooner, so excessive inventory won't force down prices for as long. Infineon execs predict that a turnaround could start late this year.

Management. Schumacher, 43, has converted Infineon from a pokey Siemens division to a world-class competitor. He's one of the few German CEOs who gets job offers from abroad, say headhunters. Energetic and open-minded, he has the ability to galvanize the people around him, say those who work with him. "His personality sets an example for the workforce," adds associate partner Martin Eisenhut at Roland Berger Strategy Consultants in Munich. Charismatic management doesn't guarantee success, of course. But in an innovation-driven business like semiconductors, where attracting and motivating good people can be decisive, it helps.

Investment. While competitors such as Intel are laying off people, Schumacher is still hiring and investing millions in new technology, such as 300-millimeter wafer technology. That will allow Infineon to squeeze out 2.5 times as many chips as is possible with a 200-millimeter wafer. The technology isn't cheap: Ramping up production will cost Infineon some $1 billion. But, says Schumacher: "If I stopped 300-millimeter [production] I would throw away my 15-month advantage [over competitors]. Why should I do that?"

It's possible that Schumacher will make a wrong call, the effects of which could be heart-stopping in an already tough year. But for now, analysts are praising his boldness. "Knee-jerk reactions seldom work," says SalomonSmithBarney analyst Navdeep Sheera. He and others are guardedly optimistic about Infineon's prospects -- which helps explain why the company's shares have held their ground better than those of most of its peers. If you believe the economy will start to turn up soon, Infineon is a bet you might want to check out. By Jack Ewing in Frankfurt


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