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By Ed Sperling -- Electronic News, 7/1/2005
John Dickson, president and CEO of Agere Systems, sat down with Electronic News to talk about the consumer market, business in China and what the next big thing will be. What follows are excerpts of that conversation.
Electronic News: How is business these days?
Dickson: Business is going well. Generally, we expect to see our revenues climb. Our profitability is improving. The acquisition we made of Modem-Art in the cell phone space helps us with our customers and our products. We see good opportunities for growth in the storage space expanding our customer base. Generally, there are plenty of opportunities around. But competition is very, very intense. The whole aspect of bringing wireless services to the developing countries is putting in a level of cost pressure on the equipment manufacturers, whether it’s Nortel, Lucent, Nokia or Ericsson. That’s the standard phenomena in the semiconductor space. The volume grows if the prices go down.
Electronic News: If the United States economy were to slump, are you hedged in enough other geographies to offset that?
Dickson: It’s a matter of scale, no matter what the problem is. We have over 80 percent of our revenues shipped into the Asia/Pacific region, but a lot of that comes back. It is driven by the U.S. or the European economy. If there is a housing bubble in the U.S., most certainly there would be some sort of impact. But it wouldn’t be significant. If it was also to happen in Europe and Asia at the same time, we would be naïve to think we wouldn’t be impacted. But then, everyone else would be, as well.
Electronic News: But isn’t globalization supposed to work like a hedge strategy? If one geography goes down, the others don’t.
Dickson: Yes. But the reality is that our presumption about the strength of the market in the U.S. is that it stays positive for the next two to three years. So it’s really a case of one market going down and the others staying where they are, so it would be a net loss for us and anyone who’s playing into the U.S. market.
Electronic News: Where is Agere focusing versus a year ago? What has shifted?
Dickson: We reset our strategy somewhat fundamentally last August when we disengaged from the WiFi business and also from the RF power business. Other than the deletion of those two target areas, the base strategy has been unchanged for several years.
Electronic News: So within those areas, where do you see your biggest growth opportunities?
Dickson: Mobility and storage. We have four business units -- enterprise and networking, telecom, mobility and storage. When I talk about growth I’m talking about businesses rather than markets. As the market moves from 2.5G to 3G and [High-Speed Downlink Packet Access] beyond that, we see that as an opportunity to grow share. This is a major transition point in the technology. In storage, the addition of the consumer market, which is then layered on top of the PC market as a consumer of disk drives, will be a significant opportunity over the next four to five years. And then there are other areas like our relationship with the satellite radio people here in the U.S., which at last is really starting to take off. Those are the major growth areas. We expect the telecom market to grow for the next two or three years. But the growth rate is mid-single digit.
Electronic News: The telecom market has been incredibly volatile, hasn’t it?
Dickson: Yes. Some of that is a function of what is happening in the various end markets and who is taking share from these emerging telecom providers. These are very, very big pieces of business, and they tend to be moving around. There’s always some second-guessing going on, and that can cause blips in terms of inventory. But there is a steady growth rate on the infrastructure side.
Electronic News: But sooner or later, with all the devices hanging off the infrastructure, doesn’t that have to grow?
Dickson: Yes, and it’s doing that now. We’ve grown for the past several quarters, and we would expect the fundamental demand to continue. It’s not a huge growth rate, but it’s steady business.
Electronic News: Is that growth primarily in Asia/Pacific?
Dickson: The rollout of EDGE started off as a European and North American phenomenon and is now a global phenomenon in terms of the opportunities that exist for us in India. There is also a 3G rollout, which is spotty by geography. China hasn’t quite made up its mind yet about what it wants to do. Europe and the U.S. have different views.
Electronic News: China appears to be hooked on trying to create its own 3G standard so it doesn’t have to pay royalties.
Dickson: China will try to establish its own standards in the world marketplace, and certainly in its own market increasingly as we move into the next decade and over the next 20 or 30 years. What we’ve seen with 3G standards in China is one of the first fairly strong signals of what they’d like to do. How successful this technology will be is open to question. Most people think it will be less rather than more successful at this stage, but I have no doubt China will continue to work these issues particularly hard. Given the size of the population and the buying power they have, why wouldn’t they do that? They tried it with WiFi security, which was pushed back because of pressure from trading partners. I don’t think we should be worried about that. It’s something we should expect from a nation that size and with the buying power of China. We need to react to that just as we’ve reacted to other developing countries historically. This just happens to be massively larger than ever before.
Electronic News: China tends to fill in market opportunities such as chip-making capacity with a huge glut of competition. Does that worry you?
Dickson: No. An excess of foundries is good for us. More competition results in better prices, better services. But the problem with semiconductor manufacturing at the fab level is that every developing country in the world wants to have that capability almost as a manifestation of its movement into a worldwide leading economy. I don’t totally understand that, but it does create problems and I think it’s going to create problems for the foundry industry again. There are a lot of dollars going into foundry capacity. A few weeks ago there was investment in India. These fabs, unless someone is putting up an older-technology fab, tend to be very large with a tremendous capacity and an enormous appetite for being fully loaded. It is a problem. The presence of two major developing countries could make this, euphemistically speaking, a very exciting period.
Electronic News: Is your business seeing this type of competition, as well?
Dickson: No. But I’m sure we will see, over the next four to five years, several multibillion dollar Chinese/Asian semiconductor companies developed that will be direct competitors to ourselves, TI, STMicro, Broadcom and Marvell. You already have the genesis of that now with MediaTek and Realtek, which are going to be very large semiconductor companies. They have an advantage in where the market is developing. That’s where they are. They understand the culture. They have the culture. They also have the physical presence. What they don’t have is a lot of history of this is how you behave and this is how you react to customers and this is how you develop products. They are very new organizations, so they have all that downside. But they have significant upside in being able to address old issues in new ways without being trapped by culture or history of a corporation as you go into the market.
Electronic News: We’ve talked about this being a global industry, but so far it appears limited to companies in very few countries.
Dickson: South America has almost no consumption of semiconductors that we know about. India has been in that state for many years, but that is changing. There are a tremendous number of design houses expanding very rapidly, and now we’re seeing that the foundry business is moving there. Eastern Europe, except for what was sourced internally by the Soviet Union, had no market. That will change. But the major economies, as always, are Europe, the U.S., and then Asia/Pacific covering a whole gamut of services and consumption, whether we’re talking about Taiwan, Japan, China or South Korea.
Electronic News: Does convergence of everything into the mobile consumer market create more competition or more opportunity?
Dickson: It does both. I think the issue in the semiconductor industry -- and some of our fabbed competitors would disagree -- is much less about critical mass in terms of manufacturing capability and much more about critical mass in intellectual property. As you move to system on a chip in virtually any application you can think of and combine that with the amount of gates that are available as we move from 130 nanometers to 65 nanometers, it’s not beyond the wit of man to put anything down on a piece of silicon. But the range of intellectual property to be licensed to do that is significant, and more than ever before it forces people to step into adjacent markets and to accumulate that or they risk being marginalized. For companies that can do that well, it presents a significant opportunity. If you’re used to doing everything yourself, the move toward convergence is something of a cultural difficulty. It’s difficult to change a company culture to be able to go out and acquire IP as well as to create it internally.
Electronic News: How will the M&A market change as a result of this. Will it be M&A of IP or companies?
Dickson: There are companies that still believe that having your own fab is very important. They will continue looking for other companies to fill their fabs. That is a different kind of M&A opportunity. If Company X builds a new fab, it’s hardly likely they’ll be able to load it themselves either in terms of capacity or demand increment. One way to solve that is to acquire other companies. If you’re not in that mode, you could just buy intellectual property or you could buy part of a company. It’s a very mixed model, and I suspect the acquisition of IP will be more about buying small entities that have developed a piece of intellectual property. I still think companies are troubled by the difficulties of merging large organizations.
Electronic News: Is the next big thing a technology or is it a business model?
Dickson: I think for the semiconductor industry, the next big thing is the management of this SoC phenomenon as it approaches dominance in the marketplace. There are very few markets that will be immune to it. The telecommunications market will be, for a long while, because the volumes are just not there. But in the markets that are volume-based, which are the consumer, PC and mobile markets, this whole IP/SoC combination is a trick yet to be mastered by the industry. And it’s a big problem that is looming in front of the industry.
Electronic News: So the issue is business rather than technology?
Dickson: I think so. There are all the issues with the semiconductor road map and when does it run out of steam. But that’s much further out. The here and now problem for the next five years is what does convergence cause in the accumulating, consolidating and integrating blocks of intellectual property and how do you service the customer base in that market.
