Freescale's new ceo tells Graham Pitcher that, while he's not 'dancing' yet, progress is being made in turning its fortunes round.
Freescale has had a rocky childhood. Spun out of Motorola in 2004, the company went private in 2006 when it was acquired by an investment consortium for $17.6billion. The timing, as far as the investors and the company were concerned, could have been better. The consortium bought at the top of the market – some believe it paid well over the odds – and loaded Freescale's balance sheet with a big part of the debt. When the 2008 financial meltdown hit, Freescale found itself in the unfortunate position of having to make large debt repayments from declining product revenues. The company was regarded by many as being in 'intensive care'. Gregg Lowe, the company's president and ceo, is a 'new boy' at Freescale, replacing previous incumbent Rich Beyer in June 2012. Until then, Lowe had built a career within Texas Instruments. "When I joined," he said, "we spent the next quarter doing a deep strategic analysis, asking the question 'what do we need to do to grow revenues and margins?'." Lowe said the process involved four questions: "What differentiation do we offer?; what value do customers attach to it?; what are the characteristics of each market?; and can we win?." Its latest financial statement, released at the end of January 2013, appears to show the company remains exposed. Yet while sales in 2012 were 14% down on those in 2011, tighter financial control meant the net loss in 2012 was $102million, against 2011's $410m. Can that be called progress? Lowe said: "Our fourth quarter sales of $957m were at the upper end of our guidance and we've shown steady growth across a range of markets. We're not dancing, but we have made good progress with the new strategy. But we're coming off a year when we lost 14%, while the industry as a whole shrank by less." Lowe believes semiconductor companies are hostage to market sentiment. "Confidence is generally down across most economies. There's worries about the US debt, the situation in Europe and the Chinese economy slowing. That has brought negative sentiment and it looks like the semiconductor industry might see its seventh consecutive quarter of decline, which would be unprecedented. That tells you an upturn should be expected, but there's nothing we can point to." While Freescale – and similar companies – waits for demand to improve, Lowe is left to pull the usual levers: keeping costs tight and a lid on manufacturing capacity. "We're being cautious," he agreed. But the fruits of his strategic review are beginning to be seen, he contends. "One of the conclusions was that we needed to focus more on how we fund R&D," he pointed out. "While Freescale has strong positions in automotive, microcontrollers and networking, the R&D investment was being spread over too many areas." So focused R&D will be the order of the day. "Our objective is that, by 2015, 90% of our R&D spend will be in those three areas. It's already 81%," he noted, "so we are moving rapidly." Over the last decade, similar companies to Freescale have moved their focus away from R and almost entirely to D. How does Lowe position Freescale? "We do a lot of development," he said, "but we are now highlighting the need for innovation, which pushes the focus back towards research. Innovation is a really important element for the future." Research inevitably has a longer gestation period than development. "Take our automotive sector," Lowe offered, "which generates 40% of our revenues. We're now working on things that won't go into production until 2025. We need that long term perspective or we won't maintain our position. While innovation means risk, the biggest risk is not making the investment. Companies die otherwise." Lowe said Freescale is pursuing three broad themes of automotive product development. "Overall fuel economy is an area where electronics has already done a lot and which drives demand for semiconductor content. Then there's making cars safer; beyond the obvious things like airbags, there's such technologies as pedestrian recognition and radar. But the big trend is connectivity, including infotainment. When someone gets in a car, they want their gadgets to interact and be part of what they do. There are huge opportunities here." He also sees good prospects in the communications sector. "We're expecting increased demand in Q1 of this year," he asserted. "A lot of people have been talking about pent up demand for more infrastructure. Everyone is carrying around more electronics and doing more through the cloud; all this needs more bandwidth." The third main focus is microcontrollers; Freescale is now making a concerted effort to transition its 8bit customers to 32bit devices. "We're strong on ARM," Lowe said, "and have been a partner for some time. Our Kinetis range is one result." But what other markets will emerge? "There will be a lot," he admitted. "Medical is one. This has been talked about for a while, but is poised to explode, but in a methodical way. But the semiconductor industry is always surprised by new things – 10 years ago, we wouldn't have talked about an iPad, let alone an iPhone – so we have to keep investing and hitting the obvious trends, such as low power. We have to keep trying to build that better mousetrap so people will figure out a way to use it in apps that we can't imagine." The day job is still there, however. "Freescale has struggled over the last decade," Lowe admitted, "and lost share in nine of 10 markets. I have to turn that around. We have identified areas to drive growth and are investing. We can't do it overnight," he concluded, "but Freescale will be in a better situation in a couple of years."