by Bob Haavind, Editorial Director, Solid State Technology
Jan. 29, 2009 – CEOs try to make rational, informed decisions based on the limited data they have, using their experience and intuition about future potential problems as well as opportunities.
Deeply troubled times make this a very tricky task. The global economic havoc described by analysts and economists at the recent ISS ’09 in Half Moon Bay, CA, suggests that many companies are in danger of failing, and that the tested, somewhat reliable models of the past may need adjustment when mapping strategy for the future.
“Markets tend toward disequilibrium,” stated Randy Bane, VP and chief economist at Applied Materials. That view seems opposite to the tendency toward self-balancing of markets and pricing that Alan Greenspan, former Fed chairman, ruefully said had driven his decision-making in testimony before Congress some weeks ago. The results support Bane’s view.
Bane elaborated, saying that regulation, involving oversight and expertise, is required to assure stability. He also stated that asset pricing is flawed, partly because there is no provision for asymmetric risk. Also, it is now clear that the global economy is not at all decoupled, as some policymakers had claimed before the recent turmoil in world financial markets. Bane added some suggestions about survival, including what kind of company and management team are needed.
Dan Hutcheson, CEO of VLSI Research, made some cogent comments about recent events.
“Money is a storage mechanism for labor,” he said, adding that a huge amount of it had been wiped out. He made some financial comparisons, such as that the $89B being spent for homeland security is more than the $86B spent on the Marshall Plan after WWII. The recent tax cuts went mostly to buy goods from China, and thus did little for the US economy, he suggested. If the government paid for all health insurance it would add up to about $2000 per car sold in the US — the Toyota cost advantage, according to Hutcheson.
Facing bad downturn, innovate
The major question many CEOs have is how deep will this recession be, and how long will it last. Aart de Geus, president/CEO of Synopsys, took an informal survey of tech execs to see what the consensus might be. His dividing line for “shallow” and “deep” was 10% US unemployment; for “short” and “long” it was the upturn starting before/after January 2010. He put the numbers of responses to these two questions into a matrix, and the “center of gravity” fell well up into the upper right quadrant — suggesting a long, deep recession.
de Geus sees this recession as more than a normal downturn in the economic cycle — he believes it is a rebalancing between our standard of living and a huge debt overhang. As of early January, he estimated government bailouts and stimuli at $2.6T and loan guarantees at $2.7T, on top of a national debt of about $10.8T.
Navigating the next few quarters will be a severe challenge, but de Geus recommends a favorite management mantra: “Never let a crisis go unused.”
He believes that cost-driven execution will not be enough, so it must be combined with systemic innovation. While Moore’s Law has “made our careers for 40 years,” he says the present calls for adaptive leadership. Current trends will continue, he believes, but reaching goals will prove very turbulent.
“The usual approach won’t work,” de Geus said. As problems multiply, no one will know how to solve them all because of their novelty and variety.
“We have lots of smart people; we’ll need all hands on deck,” he advised. Problems must be clearly defined, solutions worked out, and the right people chosen to tackle them.
Out of all this struggle, he sees the high-tech industry as the bridge to the future economy. Critical mass must shift in every sector, he believes. In energy, for example, every phase will change to provide cleaner sources and greater efficiency in generation, transmission, use, and accounting.
Global productivity can be greatly enhanced through the efforts of the high-tech industries. Current trends in the world economy can be a great opportunity, according to de Geus.
Klaus Rinnen, managing VP, Gartner, echoed a comment of Steve Hillenius, VP, Semiconductor Research Corp., about strategy in tough times: “We must not let research slip,” they said.
Opportunities in energy — and big changes
While several opportunities for new markets in the energy field were cited, none appear to offer the explosive growth of notebook PCs or cell phones, requiring chips by the millions or even hundreds of millions. Instead, there appears to be potential for growth in niche markets. One possible exception is on photovoltaics, if many massive arrays for central utilities are seen as alternatives to conventional power plants, but PV costs are still too high.
Instead a number of niche markets may spring up. Some examples were cited by T.J. Rodgers, CEO of Cypress Semiconductor, for controlling air conditioning in buildings over whole floors, or optimizing the operation of steam traps in power plants. Additionally, Rodgers said that economics will drive the path for a smart grid even without government help with great opportunity for energy savings. Large numbers of controllers and other chip-based devices will be needed throughout the electrical grid, including for power-line communications, he believes. Rodgers said that Cypress’ Envirosystems subsidiary had just been formed to serve this emerging market.
One hope of the industry is that if good solutions for green energy are developed, they will move rapidly around the world as other countries seek greater energy efficiency and lower emissions. But this business will be quite different from the mass markets of the past. Many of the devices needed use trailing-edge technology, which would stretch the life of older fabs and allow chips to be spun out on already-depreciated equipment.
Learning from See’s Candy
Will this mean that more chip companies will become like traditional businesses, not driven by the frantic quest to stay on the Moore’s Law track? Perhaps this was the reason Dan Hutcheson used the story of See’s Candy as a sort of allegory for the industry.
In 1972, he explained, Warren Buffett bought See’s Candy for $25M. This small family business had operated for years with a CAGR of 2%, but it had built a solid reputation for quality. Why was the world’s most successful investor so interested in such a small business?
Since then, Hutcheson said, total earnings have been $1.35B, with reinvestment of only $32M. Sales in 2008 were $383M, with gross profit of $82M (over 21% margins), and there are no accounts receivable. The company makes its money when it sells its product to selected upscale retailers, and places like the SF airport. “You won’t see it in Wal-Mart and Walgreens,” he added.
Hutcheson compared this to the semiconductor business, which sells twice as much products next year at the same price as this year.
“This industry takes excessive risk,” Hutcheson emphasized — while showing a goat clinging to a sheer cliff to lick some salt, with no apparent route to a safe perch.
The only good side, he suggested, is that there is a huge moat around the industry with no sustainable entry for the past three decades. Now the trick is to make it through very tough times.
T.J. Rodgers of Cypress gave his simple answer: “How do you beat the recession? Energy!” — B.H.