Company to Watch: Motorola fine-tunes chip strategy to catch up

Company to Watch: Motorola fine-tunes chip strategy to catch up
AUSTIN, Tex.--Just where is Motorola Innc.'s semiconductor business headed these days? Indeed, its new management seems to be rethinking some of the group's strategies to be more flexible and to catch up with the industry's strong growth rates.

After a major restructuring in the past three years that resulted in selling off the Motorola's standard components business and setting a new strategy that called for outsourcing half of its manufacturing, the chip maker's growth has lagged behind the overall markets.

While global semiconductor sales last year rose 19%, Motorola's chip revenues climbed by only 1%, dropping the company from third to fifth largest global supplier. Part of this falloff was due to spinning out its components business into a new Phoenix-based company, called On Semiconductor, which accounted for $700 million in annual sales.

But this year Motorola is still trailing overall industry growth. Its chip sales in the first half grew 25%, while the industry overall was up 37%, according to IC Insights Inc. That dropped Motorola to sixth place in the leading semiconductor companies, said the market researcher, based in Scottsdale, Ariz.

What all this means is that the new management team at Motorola's Semiconductor Products Sector really has its work cut out. Running the show since early September has been a two-person office of the president. President Fred Shlapak is in charge of strategic direction and Bill Walker handles day-to-day operations as general manager. The semiconductor sector had been under the interim stewardship of long-term Motorolan Fred Tucker, who took over when Hector de J. Ruiz resigned suddenly to take the president's job at Advanced Micro Devices Inc.

During Ruiz's tenure as president, he became well known for forecasting that 50% of Motorola's chip manufacturing would move outside the company. Motorola now has important relations with the three largest silicon foundries: Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), United Microelectronics Corp. (UMC), and Chartered Semiconductor Manufacturing Pte. Ltd.

But with new management going ahead now with major new IC plants in China and Scotland, some industry observers suspect that the chip maker is backing away from its plans to shift half of its chip production to joint-ventures and outside foundries.

Instead, management appears to be shooting for more flexibility so that it can adjust to changing market conditions. Shlapak says he feels more comfortable with the term "balanced" manufacturing, rather than talk about a 50-50 split.

The 56-year-old Motorola veteran maintains the $1.5 billion MOS-17 wafer fab in China and plans for a $2.1 billion complex in Dunfermline, Scotland, are in line with the company's efforts to maintain its competitive edge and keep up with strong growth in key communications chip markets. These moves are partly a response to today's tight conditions in chip making, but "the overall strategy has not changed," claims Shlapak, a 30-year veteran in Motorola's chip unit.

Mixing & matching

"The trick is how do you maintain the proper balance; you also have to be at the forefront of new technology," he explains, maintaining that silicon foundry companies are generally still a year or eight months behind the leading integrated device manufacturers (IDMs). But in recent months, the foundries have been closing this gap, observers note.

Another reason why Motorola is more concerned now about maintaining its own fabs is the growing importance of the specialized process technologies for power ICs, gallium-arsenide (GaAs) devices, and other products needed for its targeted market applications in networking, transportation, advanced digital systems, and wireless systems.

While Motorola now outsources about 38% of its total chip manufacturing, most of it is going on in backend production steps for final test and assembly. Wafer-processing foundries still handle only about 12-to-15% of Motorola's chip processing, Shlapak says. And with some foundries now strapped for capacity, he says that Motorola is moving "very, very aggressively" to bring up fabs capable of 0.13-micron processing.

A number of industry observers think they see a shift in direction at the company. "Motorola is rethinking its whole manufacturing strategy," comments Gary Smith, chief analyst following electronics design automation at Dataquest Inc. "It is building more fabs because, like everyone else, it can't get capacity in Taiwan. It's the same thing with other companies: NEC, Fujitsu and Toshiba are all adding capacity."

Something else that has hurt Motorola have been all the reorganizations that were described as Ruiz's legacy, according to some analysts. "Ruiz got rid of some top-level managers to stop the fight between the different kingdoms within the semiconductor sector," Smith says. "But then the company lost direction because those guys weren't there to get things done. Now there seems to be more direction from the center," he adds.

Motorola's system-on-chip design technology effort has also been suffering. It was being sabotaged last year by managers reluctant to submit to a design-for-reuse methodology that threatened to slow down design teams, according to Dataquest's Smith.

But the picture may be changing here. "What I'm hearing from the EDA companies is that Motorola definitely is using more high-end tools, and they are keeping them in use when they get to the end of a project. I get the sense that they are getting it back together overall," says the San Jose-based Dataquest analyst.

300-mm not really ready

Another strategy that changed recently at Motorola is its 300-mm (12-inch) wafer program. Even though Intel, Texas Instruments, and others are busily building the next-generation fabs, Motorola has decided to pause in its efforts until the new tool set becomes "manufacturing-worthy," company executives say.

Motorola is delaying its 300-mm efforts, even though it has been operating a 300-mm development and prototyping facility with Infineon Technologies in Dresden, Germany, as far back as 1993.

"What we learned from Dresden is that the tool set is not manufacturing-ready," points out general manager Walker. "There are two or three tools that are far from being ready, which is why I think it will be the 2002-2003 time frame before we are ready to begin producing on 300-mm wafers."

The same kind of problem cropped up when Motorola was making its transition to the current 200mm wafer, according to Walker. "Our MOS 11 facility was one of the first fabs to convert to 200-mm wafers, and we suffered because the first-generation i-line steppers were just not manufacturing-ready on 200-mm wafers." On the other hand, he adds, "our competitors entered with second-generation tools and we learned that you have to enter a new manufacturing generation at the right time."

Now, Motorola "probably won't want to build a 300-mm wafer fab alone," Walker says. "We would like to do it with some form of partner. To get the economies of scale, you have to spend about $2.5 billion to $3 billion, and to justify that you have to get a product up to the billion-dollar run rate. For us," he says, "that probably will be our wireless chip sets."

Another problem that Motorola is facing is that it has become a fertile place for recruiters to find experienced technical talent. Many Motorola engineers have moved on to greener pastures, lured by lucrative stock options at high-growth startups, and by recruiters searching for microprocessor designers to work at such hot spots as the Intel Corp. design center in downtown Austin

"It is true that we've been targeted in areas like design and software," acknowledges Walker, "areas where it is pretty hard to find people." To fend off recruiters, he says, Motorola has to work harder to "put in place a culture where rewards come with success."

One key loss recently was a senior engineer who had been driving Motorola's design-reuse strategy. Mark McDermott joined Intel, where he reportedly is designing a new x86 processor at Intel's Austin center. That high-profile loss, following others, eventually brought the two companies to legal blows.

To stop such defections, Motorola is now improving its stock-option packages. In addition to better financial returns, Shlapak says that Motorola is trying to attract engineers by offering them "the opportunity to work with the latest technology. We are designing products now that will take advantage of our 0.13-micron process that comes on-stream next July. We have a leadership position in different architectures, and that is very important to many of our engineers." In addition, Shlapak says, the chip company's new design center on Palmer Lane in Norlth Austin includes a recreation center with pool and ping-pong tables.

--Reporting by J. Robert Lineback of SBN, as well as David Lammers and Margaret Quan of EE Times, a sister publication of Semiconductor Business News.