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ST Microelectronics: Strategy

Posted on Saturday, May 24th 2008

By Vijay Nagarajan, Guest Author

As highlighted in our discussion of ST Microelectronics financials, the company has not been very profitable in the last few years. More importantly, it has been growing lesser than the semiconductor industry and losing market share. It is therefore appropriate to peek into the steps that the company has taken to address this situation.

There are five major themes in STM’s strategy.

Scale is important: Last year, the company joined hands with Intel to create Numonyx, an independent Flash memories semiconductor company. Last month, STM announced a disruptive deal to merge its wireless assets with those of NXP to create a solid number three player in that space. In both cases, the idea was to use scale and consolidation to succeed. These efforts also directly impact STM’s product portfolio moving forward.

Convergence is coming: STM has rightly identified the coming convergence – the confluence of the computer and communications. As a technology provider, the company is positioned to supply key components for the convergence platform. With the NXP JV, STM has a complete portfolio of core cellular and peripheral connectivity solutions that along with its application processor can completely power today’s smartphones and tomorrow’s convergence devices.

Streamline R&D: STM has focused its R&D efforts on key growth areas that it has identified. What I find more attractive is the focus on the right things within these areas. For example, its focus on wireless baseband and multimedia demonstrates a good understanding of the market dynamics. With data coming to the forefront, more companies have developed stellar receiver solutions. For STM to benefit from its wireless aggression, it needs to have good baseband and application processor solutions to start with.

Move to a less capital intensive model: STM is also consciously attempting to reduce its CapEx. Its move to divest the FMG is a good example. It continues to work with partners to reduce its process technology advancement costs. The company is targeting a CapEx to Sales ratio of less than 10% for 2008.

Build position as Europe’s flag-bearer: Geo-political alliances can help grow STM’s semiconductor market share. For example, Nokia already contributes to over 20% of STM’s revenues. Moving forward, with TI’s wireless share up for grabs, STM will want to leverage its European badge with Nokia to grow its revenues substantially. The two companies have been getting closer by the day, much to the discomfiture, and perhaps to the resignation, of TI.

Much like Ms. Mitra, I am a strong believer in the convergence device movement. So quite naturally, STM’s wireless direction, and R&D efforts excite me. The company’s consolidation efforts are also very positive. Its relationship with Nokia plays to its strength. STM should however be careful not to repeat TI’s mistake of being complacent about its existing big clients.

STM’s annual report is very honest, upfront and detailed. What was worrying was the lack of an apparent vision except the obvious goal to sustain as a semiconductor giant. Unlike the other wireless chipset vendors, the political underpinnings of the company seem to make it more difficult to make grandiose plans and execute on them.

There is no denial of STM’s value and growing strength in the European technology value chain. But there are inherent inefficiencies of the IDM model. So, I am skeptical about its capital and cost reduction moves. I am inclined to think that the company’s decision to retain manufacturing control may downplay and even negate some of these strategic initiatives. It may inhibit the creation of growing value to STM’s investors.

[SM: European labor laws make downsizing and restructuring very painful. STM has been coming up with creative ways for getting out of non-core areas. A recent example is when it sold off its Design for Test (DFT) division to Mentor Graphics. Straightforward “firing” is almost impossible in Europe.]

This segment is a part in the series : ST Microelectronics

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