Making Hay In The Rain At Sgs

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 as the industry has gyrated through eight business cycles. 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 earnings in mid-July, the French-Italian chipmaker happily reported that second-quarter profits spurted 44% on a 19% increase in sales--driving the share price up 10%.

How did Pistorio pull this off? By carving out a strong foothold in new markets for customized chips--the type that control cellular phones, automobile air bags, ink-jet printers and high-function televisions. These devices are stepping stones to chips that contain entire electronic systems. Unlike Siemens and many Asian competitors, Pistorio steered SGS-Thomson away from standard memory chips, now in severe oversupply. "Their product strategy is clearly working," says Peter Knox, semiconductor analyst with UBS Ltd.

Market researcher Dataquest Inc. concurs. It 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 semiconductor analyst Mike Williams. "They have a very balanced portfolio."

Nobody expected this in 1987, when SGS-Thomson was formed by the merger of two money-losing French and Italian state-owned chipmakers highly dependent on national subsidies for survival. That's when Pistorio, a former Motorola Inc. executive, boldly set his sites on an emerging market for application-specific integrated circuits, or ASICs--the partly customized chips that manage everything from car engines to computer printers.


BIG GAMBLE. Working with customers such as Nokia Group in mobile communications and disk drive giant Seagate Technology Inc., SGS-Thomson pioneered applications that mix different semiconductor technologies on one chip. Teams from SGS-Thomson now collaborate on TV decoder boxes with counterparts at Thomson Consumer Electronics/RCA and on automotive elec- tronics with Robert Bosch. In Japan, Sony Corp. and Toyota Motor Co. are eager clients. And fast-growing Asia now kicks in 29% of sales, up from 18% five years ago. "Putting systems on silicon is the key issue that will confront everyone in the next five years," says Pistorio.

Sustaining this breakneck pace won't be easy. Competitors in the U.S., Japan, and Asia are all targeting the same types of systems-on-chips. And there is no guarantee that the products Pistorio is betting on, such as digital televisions, will take off as quickly as he envisioned. But SGS has shown that it can march up the ranks of chip powerhouses in good times and in bad.

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