Talk from the hip at Microchip

NEW YORK – Microchip CEO Steve Sanghi is a straight talker.

When Sanghi comments on the economy, outsourcing, technology or market trends, you’ll hear very little conventional wisdom or polite evasion. He has no stake winning a popularity contest or looking fashionable.

Sanghi – heading up Microchip for the last 20 years and keeping the company profitable for all these years – stays atop the game by knowing his trade, his company’s 70,000 customers, and perhaps, more important, holding no illusions of what Microchip does.

Tom Starnes, embedded processor analyst at Objective Analysis, believes that Microchip has always done a good job “of making their MCUs accessible to ‘the little guy’ with excellent support and lots of little development kits.” In Starnes’ view, serving the smaller customer is “more of a mission at Microchip,” while it’s often a secondary goal to most vendors who concentrate almost exclusively on their biggest clients.

With SMSC’s acquisition announced last week, though, industry observers have suggested that the familiar narrative of who Microchip is and what it does could potentially change.

The biggest concern swirling around the financial community now is: How can Microchip – inherently good at serving the vast horizontal market – integrate its business, products, technology and corporate culture with an SMSC whose business is more attuned to vertical market segments, such as automotive, computer and consumer.

In the MCU revenue share ranking put together by Databeans earlier this year, Renesas (Tokyo) logged microcontroller sales of $2.62 billion in 2011. The Japanese company’s sales remained significantly higher than second-ranked Freescale Semiconductor Inc., which increased its MCU market share to 10.1 percent in 2011 from 10 percent in 2010.  Microchip was ranked No.4 after Atmel, which climbed to No. 3 from No. 5 with an increase in microcontroller revenue of 25 percent.  

‘We will be much bigger than Freescale in no time’

As Microchip keeps buying more companies with technologies such as gesture control and a broader range of wireless expertise and edges toward more mainstream, established automotive and connectivity markets, some even worry whether Microchip will be eaten alive by giants like Freescale, presumably armed with a bigger set of IPs, expertise and product portfolio.

But Sanghi, of course, thinks otherwise.

He dismissed last week the horizontal vs. vertical market argument by noting: “That’s a barrier Microchip crossed years ago.” He further pointed out, “With the SMSC acquisition and the economy bottoming out, before you can blink, we’ll become a $2 billion company [combining Microchip’s $1.4 billion annual sales with that of SMSC’s $412 million] -- much larger than Freescale in the microcontroller space.”

Freescale earned annual net sales of $4.57 billion last year (ended in Dec., 2011) Freescale’s MCUs and associated application development systems generated about 35% of that.


The following Q&A is based on our interviews with Sanghi (EE Times conducted a one-on-one interview with Sanghi about a month ago, and followed with another right after the SMSC announcement), and public comments Sanghi made during financial and acquisition conference calls last week.


EE Times: Leading to the announcement of SMSC acquisition, you recently bought Roving Networks, a Calif-based company providing Bluetooth and Wi-Fi modules and solutions, and Ident Technology AG, a German company developing 3-D gesture recognition technology.  Is this the beginning of Microchip moving in a new direction?

Sanghi: This is completely in line with our strategic objectives for the last four to five years. In our efforts to drive the company’s growth, we are taking this approach, called ‘elbow-out acquisitions.’

EE Times: What do you mean by ‘elbow-out’?

Sanghi: Some people could interpret it as a strategy for us to “elbow out” our competitors. But what it really means is that we started participating in the areas around our customers’ central ‘ball.’ Think the customers’ ball as being a microcontroller, DSP or FPGA. Our offerings in the areas surrounding the ball include: RF, power drivers to amplifiers, converters, encryption and others. Our goal is to ‘elbow out’ the available market we serve. I want to occupy more (space) in customers’ solutions.

EE Times: Give us examples of your successful elbow-out acquisitions.
 
Sanghi: We’ve been doing this over the last 12 to 13 years. Take an example of R&E International, a small company focused on security applications that we acquired in 2009.  R&E’s technology is now inside all the smoke detector solutions we sell.

Our bigger deals include TelCom Semiconductor, an analog and interface company [Microchip bought in 2001]; and Silicon Storage Technology (SST), a flash memory company [acquired by Microchip in 2010].

At the time of acquisition, TelCom was a low gross-margin business. After our acquisition, SST didn’t even make profit for the following five years. But we know how to succeed in big acquisitions. SST’s SuperFlash technology [associated IPs], geared for embedded memory applications, is now generating a steady stream of licensing revenue for us.

Just last month, we bought Roving Network, specialized in the development of high-performance Wi-Fi and Bluetooth connectivity including Bluetooth Lite. This complements well with ZeroG Wireless – low-power embedded Wi-Fi solutions – we bought in 2010. We understand that Wi-Fi is fast becoming the most common node-to-node connectivity in every home.


EE Times: Many industry observers are concerned about how Microchip, known for its huge horizontal business, will address the vertical market segments.

Sanghi: Our broad customer base is viewed as a hallmark of Microchip’ success -- on the horizontal market. But you should know that we’ve been in vertical businesses like automotive, home appliances, energy and medical segments for a long time.

To sell to the automotive market, for example, you have to look like an automotive [technology/component] supplier. By winning customers like Delphi, you start selling to other big companies, too. We’ve been in the automotive market for the last 12 years. We already have a huge business -- worth a couple of hundred million dollars. SMSC acquisition will only help expand it.

So, this notion of Microchip being new to the vertical market is not accurate.