After Nokia, STMicro Bets on European Factories

Gerard Matheron could write volumes about how STMicroelectronics NV suffered as orders from its largest customer plunged. Instead, the chief of its biggest European factory has squeezed years of pain into a short slogan hanging over his desk: “Falling down to bounce back stronger.”

The Geneva-based semiconductor maker reported eight unprofitable quarters and $1.6 billion in losses as orders from one-time mobile-phone king Nokia Oyj plunged after it lost market share to the iPhone.

Today, as STMicro restructures plants and revamps its offerings, it’s winning new mobile clients and selling chips for products from Nintendo Co. game consoles to Volkswagen AG cars. Sales, though, are headed for a third consecutive annual decline, to about $8.2 billion, according to data compiled by Bloomberg.

While rivals Qualcomm Inc. and Broadcom Corp. have shuttered factories and outsourced manufacturing to Asia, STMicro -- 27.5 percent owned by the French and Italian governments -- is betting it can prosper by keeping production in Europe, close to its design teams.

“Nokia is no longer the issue, but there are new challenges,” Matheron said, looking out at the panoramic view of the Alps from his office in the southeastern French city of Crolles. “The market has changed -- growth has softened.”

Lost in Middle

Europe, still struggling with the legacy of its debt crisis, is having trouble rekindling expansion and creating jobs as companies from French automaker Peugeot SA to Spain’s biggest builder, Actividades de Construccion & Servicios SA, cut spending.

“Innovation happens at companies in the U.S., and production happens at companies in Asia,” Michel Combes, chief executive of STMicro customer Alcatel-Lucent SA, said at a hearing by deputies of France’s National Assembly on planned job cuts at the company. “Europe is lost somewhere in the middle.”

That makes STMicro’s survival strategy -- keeping production close to home to focus on high-end chips tailored to sophisticated products from the likes of Samsung Electronics Co. and Microsoft Corp. -- a test for Europe.

“Can STMicroelectronics become profitable? Yes,” said Stephane Houri, an analyst at Natixis Securities SAS in Paris. “But it needs the right equation of costs and volumes, in a business that will never be totally predictable.”

Delaying Target

Once valued at $85 billion on the stock market, the chipmaker dropped to about $4 billion in 2009 as Nokia stumbled. In the past 12 months, STMicro shares have gained 26 percent, valuing the company at $7.1 billion.

Today, they dropped 1.4 percent to 5.82 euros in Paris. Italy said today it plans to sell stakes in companies including STMicroelectronics.

CEO Carlo Bozotti has promised to improve operating margins to 10 percent, from 2.7 percent last quarter, excluding impairment and restructuring.

In October, though, the company delayed the date it expects to reach that target by six months, to mid-2015, as weaker consumer appetite for high-end smartphones caused order cutbacks for the entire chip industry. STMicro posted a $142 million loss in the third quarter, while Qualcomm, Texas Instruments Inc. and Broadcom all reported earnings or forecasts that missed analyst estimates -- though they were all profitable.

Hard Way

“We still have no real visibility into 2014,” Bozotti said yesterday at an investor conference in Barcelona. “October was better than the third quarter, but it’s all really short term.”

STMicro learned that the hard way with Nokia. Three years ago, the handset maker was STMicro’s top customer, accounting for more than a fifth of group revenue and half of production at Crolles. Today, Nokia accounts for about 5 percent of STMicro’s sales and is no longer among its 10 largest buyers, though Apple and Samsung now are. Nokia declined to comment.

“We needed new clients,” said Matheron. “A year of production suddenly vanished into thin air.” So the company dispatched sales teams “around the world to find them and show what our technology can do.”

STMicro has spent more than 4 billion euros on equipment at Crolles since the factory opened in 1992. Today 4,200 people work at the 100-acre site about 20 kilometers north of the Olympic city of Grenoble. Over 24 years at STMicro, 59-year-old Matheron has seen the industry cut costs by scaling up. Disks have grown from 8 to 12 inches in diameter -- with as many as 1,000 chips on a single wafer -- and will be 18 inches in a few years.

Self-Parking Cars

The billions of dollars of investment required to keep up with each new technology cycle have spurred many in the industry to outsource production, fueling the growth of Asian foundries like Taiwan Semiconductor Manufacturing Co.

STMicro has bet on making high-end products at Crolles and four other European factories. The company has promised to invest and keep jobs in Europe in exchange for tax breaks.

European sites focus on higher-end products and more than half of group revenue comes from chips made there. At Crolles, for instance, 2,300 designers help make image sensors and micro-controllers for products like cars, lighting, routers and cameras. Simpler chips for refrigerators, microwaves or TV set-top boxes are produced in larger volumes at a Singapore factory STMicro opened in 1984.

Manufacturers of smartphones, autos and game consoles are increasingly relying on chips to boost processing power and memory, or to beat rivals with new features from touchless hover-over screens to self-parking systems for cars. That means they’re asking their suppliers for better design, faster production and cheaper prices.

Nerve Center

To help sway picky customers, Matheron said keeping production near researchers is essential. While Asian rivals can offer cheaper prices, STMicro is betting its engineers can come up with sophisticated designs and rush them straight to the production floor, going from concept to chip in just days.

“A good prototype is essential to set us apart,” said Matheron, a veteran of the French industry ministry. “That, as well as working closely with our clients, is how we remain on our feet.”

The wafer fabrication facility has become the nerve center for signing contracts as clients come to Crolles to audit early versions of a design. There, wrapped head to toe in anti-dust gear, customers see robots on rails moving disks from one machine to the next in the 600- to 700-step production process.

A U.S. company recently selected a design from Crolles after engineers managed to produce a working prototype in about 10 days. Matheron, who declined to name the client in question, expects to turn a dozen prototypes now being tested into firm orders by summer.

“We can’t bet only on volumes,” Matheron said. “We’re smaller than the big foundries, and our costs aren’t as competitive as in Asia.”

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