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CEO interview: Microchip’s Steve Sanghi ponders impact of a lousy economy

Steve Sanghi joined Microchip Technology Inc. as president and CEO in 1990—when the company was near liquidation—and engineered a remarkable turnaround. Today, Microchip is a major supplier of microcontrollers and is expanding into analog. In an interview with EE Times, Sanghi talked about the impact of the U.S. housing crisis on the IC business, trends in the MCU and analog markets and Microchip's place in it all.

EE Times: What's your take on the state of the economy?

Sanghi: The macro view is likely to be dim. First-quarter GDP? If it's going to be positive, it will be by a smidgen. I think the new name for GDP is gross domestic problem. From a company-by-company perspective, we will have to deal with the gross domestic problem.

What's happening in the economy obviously started with the housing issues and subprime issues. Credit is tightening. Financing is getting harder.

EE Times: What is the outlook for the IC industry?

Sanghi: The overall semiconductor market estimates are pretty lukewarm for this year. We don't really do the market forecasts, but I seem to recall numbers I've seen from Dataquest and others in the low- to mid-single-digit range. That's really not enough growth to make everyone happy. With the lack of growth, the industry has to consolidate.

EE Times: Is there anything that bothers you about the IC industry right now?

Sanghi: There are lots of companies that almost never make money, and they've never been profitable for a long time. Zilog. Atmel. A few others. They keep mucking up the market, but they never go away.
Some companies are doing terrible now in terms of where their stocks sit. A number of companies are undergoing hostile takeovers: Zilog is, Micrel is. But none of the CEOs want to sell their companies.

EE Times: What are the current market drivers?

Sanghi: We believe there is no killer product on the horizon. With no killer app, you have to make money on volume. Margins are really compressed.

EE Times: What are you seeing in the microcontroller business?

Sanghi: It's not hugely up, because of the housing crisis. Refrigerators, washers, dryers, garage door openers, automobiles and all those things are down because the consumer has been affected in the housing market.

Year over year, the overall 8-bit microcontroller market is roughly flat. That's not a disaster; [that market is] extremely profitable. Companies are making a 34 or 35 percent operating profit.

There is still significant growth in all sorts of energy efficiency, especially when you're dealing with the efficiency of the motor, lighting, low power or power management. The interface is doing quite well. Connectivity is exploding.

EE Times: Recently, Microchip entered the 32-bit MCU market. Why?

Sanghi: The problem is that when a customer is looking at a competitor's 32-bit solution, [to win that customer] we [also] need a 32-bit solution. Once we're in, we can see what the customer's needs are and what they are trying to do. More often than not, we're able to show them how the most cost-effective solution is to use our 16-bit solution. So, we're able to win a large number of design wins with 16 bit. [But we're invited in] because we have a 32-bit product.
That's doesn't mean we're not getting design wins at 32 bits.

EE Times: What is your product mix in MCUs?

Sanghi: Our revenue mix is heavily toward 8 bit. Sixteen bit is second, and 32 bit is nothing; we just launched it.

EE Times: Last year, Microchip's MCU share was up 1 percent worldwide. But the company's U.S. share fell 5 percent. Why?

Sanghi: Last year, Microchip had an unusual share of the business that went into the housing market. We dominate garage door openers, appliances, security systems, irrigation systems and so on. So when housing starts went from a little over 2 million to about 800,000, that business went down quite substantially. We made it up in the other areas. As a result, two quarters—September and December—were sequentially down.

Some people had higher exposure in PCs and cell phones and those kinds of areas. [In those markets,] September and December are [traditionally] the two stronger quarters. Therefore, with our two weak quarters in there because of the housing market, and other people's strong quarters, you get that market share artifact.

But now, if you look at it, a lot of those companies have guided down this quarter. Atmel has guided down. Freescale has guided down. Intersil has guided down. Cypress has guided down. So it's their weak quarter.
When you look at the results by June and then compile it, you will see the picture in reverse, because we're doing well.

EE Times: Have housing starts seen an upward trend again?

Sanghi: They are really at the bottom. But our business is not getting hurt by that anymore. We absorbed that downfall, and our resources got moved into design wins in other areas.

EE Times: There are rumors that you went to a direct-sales model, thereby cutting off your distributors.

Sanghi: That's not correct. Sixty-five percent of our business for years and years has been [through] distribution, and 35 percent of our business has been direct. It's changed by [only] two or three points over 15 years.

EE Times: Microchip has two fabs operating at production volumes: 200-mm fabs in Tempe, Ariz., and Gresham, Ore. You recently sold Fab 3, in Puyallup, Wash., which you purchased from Matsushita in 2000. Why?

Sanghi: Tempe and Oregon have a combined installed capacity of about $1.6 billion, and there's clean-room space available in Gresham. By adding that capacity, we can grow it by another $600 million. So that adds up to $2.2 billion. The products we're developing in foundries have a long-term revenue of about $300 million. So that adds up to about $2.5 billion. Therefore, we didn't need the Washington fab. It was not listed for sale, but we got an unsolicited offer.

EE Times: There seems to be a lot of fabs up for sale.

Sanghi: Over the next five years, about 30 high-quality, state-of-the-art 8-inch fabs will become available, because they are all losing money.
A number of those are on sale now. Atmel has them on sale. Freescale has them on sale.

EE Times: What is your analog strategy?

Sanghi: If you look at microcontroller applications, they are surrounded by analog. If I look at a thermostat, it starts with a temperature sensor, op amp, filtering and an A/D converter.

Therefore, we see a lot of analog visibility around us. Earlier in our lives, we did joint marketing seminars with Maxim. We attacked similar customers. We were not in the analog business. It was complementary at that time. But over the years, we grew apart. They bought Dallas [Semiconductor], so they encroached on our turf. We bought TelCom Semiconductor, so we started encroaching on their turf.

We wanted a piece of the analog business that goes around the microcontroller. Today, we have 500 products in that market and about a $100 million business. We're growing.

EE Times: Are you looking to buy a company?

Sanghi: If we do a second acquisition, it would have to be for the right financial reasons.

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