Making Hay At Sgs While The Rain Falls

As its industry slumps, SGS cashes in on specialized chips

During his 35 years in the semiconductor business, Pasquale Pistorio has seen some punishing market contractions. Etched in his memory are the eight cyclical downturns that have slammed chipmakers since their market first exploded in the 1970s. But the supply glut of 1996 will always make the CEO of SGS-Thomson Microelectronics smile. While a global excess of memory chips is thrashing industry profits and sending share prices tumbling, the French-Italian chipmaker in mid-July happily reported that second-quarter profits spurted 44% on a 19% increase in sales. The company's share price jumped 10% on the news.

That performance against a dismal industry backdrop may herald SGS-Thomson's entry into the top tier of global chipmakers. By betting big a few years ago on the technology revolution that is putting entire microelectronic systems on one chip, Pistorio steered SGS-Thomson clear of the market for standard memory chips that is now in severe oversupply. He also carved out a strong foothold in new markets for specialized chips with high potential for growth. These SGS chips now go into products ranging from cellular phones and automobile air bags to ink-jet printers and television sets.

BIG GAMBLE. So far, it's paying off. Market researcher Dataquest Inc. ranks SGS-Thomson No.1 worldwide in four chip categories and expects the company's share of the global chip market to jump to 5% by 2000, from 2.2% at the end of last year. That puts SGS-Thomson, with annual sales of $4 billion, on track to join the ranks of the world's 10 largest semiconductor companies, now occupied by only one other European chipmaker, Philips Electronics. "SGS-Thomson is outshining a lot of companies," says Dataquest Inc. semiconductor analyst Mike Williams. "They have a very balanced portfolio."

A role as market leader was hardly the expectation in 1987, when SGS-Thomson was formed by the merger of two money-losing, state-owned chipmakers--one Italian, one French--highly dependent on national subsidies for survival. Pistorio, a former Motorola Inc. executive, went against the grain in gambling that SGS-Thomson could thrive without a heavy dependence on standard memory chips, or DRAMs, for the personal computer market. Instead, he set out to become a big player in what was then an emerging market for application-specific chips such as those that control the functions of a car engine or a printer.

CRITICAL ALLIANCES. To make the strategy work, Pistorio needed industrial partners. He established alliances with market leaders such as Nokia Group in mobile communications and Seagate Technology Inc. in disk drives. Such tie-ups enabled him to generate a steady stream of new-generation chips that could match or outperform those from bigger rivals.

By pioneering applications that mix different semiconductor technologies on one chip, SGS-Thomson also gained expertise in its efforts to develop the systems-on-a-chip for which demand is strong. Teams from SGS-Thomson now collaborate with engineers from Thomson Consumer Electronics/RCA in TV decoder boxes, Northern Telecom in cellular phones, and Robert Bosch in automotive electronics. "Putting systems on silicon is the key issue that will confront everyone in the next five years," says Pistorio.


The strategy extended SGS-Thomson's geographic reach. Fast-growing Asia now kicks in 29% of sales, up from 18% five years ago. As the chips SGS-Thomson produces for top clients such as Sony Corp. and Toyota Motor Corp. become more pervasive in mass-market products, Pistorio has secured a balanced revenue flow not dependent on geography, application, or market. Demand for such non-commodity chips is expected to average 17% annual growth through the year 2000. By contrast, the market for DRAMs is forecast to shrink by 17% this year. "Their product strategy is clearly working," says Peter Knox, semiconductor analyst with UBS Ltd.

But can SGS-Thomson maintain the pace? Customers are demanding that producers put ever more technology on one chip because it lowers their costs. And even if SGS-Thomson can continue its impressive run of product innovation, there's no guarantee that the ones Pistorio is betting on, such as decoder boxes for digital televisions, will take off as planned. For now, however, Pistorio seems to have the strategy to keep him marching up the ranks of global chip powerhouses in good times and bad.