Philips Semiconductors CEO sets out platform for the future

Frans van Houten demoing a mobile phone with DVB-H TV transmission. The Philips TV-on-Mobile solution provides all the hardware and software components for full TV operation, including a TV tuner, a programmable channel decoder / demodulator, an MPEG source decoder, and a complete software stack, implementing IPDC over DVB.

Van Houten has ended his honeymoon period with a series of moves, reducing the divisions business units from seven to four, getting rid of non-essential product units, tidying up some loose ends in its approach to the multimedia sector by licensing Windows Media support and adjusting its external sales channels in Europe. Now he is ready to talk through his approach and vision for the business. The CEO maintains that coming from the outside gave him a more objective view "but everybody was happy with the changes, everybody looks for clarity of purpose and a vision of where we are going".

"I deliberately postponed making any changes for a few months. I've seen practically all of our customers and spoken to a lot of the employees, at all levels, to get an appreciation of what is going on. The picture I saw reinforced my perception from outside that there is a lot of good knowhow and assets. Customers say they like our work and what we have but want us to move faster, have improved dialogue with them, work on roadmaps with us and provide quality and execution."

Given his most recent history in the consumer electronics division it is interesting to see van Houten's reaction to a suggestion that his new charge could be seen as just a subsidiary of the equipment maker. "We have a pretty balanced customer portfolio with around 70% of sales going to the top 25 customers. The sales to our consumer division is only a fraction of our total sales, around a tenth. This does not mean that our relationship with them is not important as historically we have got a lot of application know-how from them. As the consumer division was putting more work out to its suppliers some of this has been taken on by semiconductor division."

As a result of his research he is a keen to encourage more dialogue with customers. A couple of weeks ago the division hosted an event in Eindhoven to enable key customers to look at the research currently being done. The division is spending around 20% of sales, some Euro900million, on R&D this year. "I believe that apart from the pure research that is looking several years out, we have to develop roadmaps in concert with our customers." An innovation down these lines will take place in the U.S. in August when an 'advisory board' will convene for the first time to provide feedback on the roadmaps. "This will provide us with a very market oriented, market driven input," says van Houten.

The semiconductor division has also recently made changes to its distribution network in Europe bringing in Future to replace Eurodis Electron but van Houten believes its channels to market don't need much work. "We do a lot of customer research, asking them how do they rate us. Our contactability and how our commercial network operates is good. They like it that they can do design-in with us in one region and get supplies in another and still get full transparency of the supply chain."

Van Houten is also happy to embrace the mixture of in-house and external semiconductor fabrication. The company has adopted an 'asset-lite' manufacturing strategy. "Historically we were not asset-lite, we just had assets and still have them. We have chosen to make the best use of our asset-base and the speciality processes that run in them. Going forward for advanced technologies we will work with partners such as the Crolles alliance, which has worked well for us, alongside our work with foundry TSMC, whose processes are aligned with ours." So the way forward is a combination of in-house and third party manufacturing and van Houten says, "Most customers actually like the fact that we have European-based factories and in-house specialties. That does not mean that we don't have to work hard to make them competitive."

After the recent streamlining the organization is looking to concentrate on specific market sectors - automotive and identification, mobile and personal, home - while the fourth business unit - multi-market semiconductors - covers a mixture of devices but van Houten says it has an on-going relevance within the division. "The standard products area has quite a good scale and scale is one of the elements that I think is important. If you don't have sufficient scale to provide relevant products to the customer you are always in catch up mode. It gives us good returns and helps us fill our existing European fabs."

Van Houten, who trained as an economist, does not seem perturbed that in the recent iSuppli semiconductor sales table his division dropped one place to tenth worldwide with a 9% reduction quarter on quarter. "I think that scale matters but market share needs to be looked at in terms of applications or enabling technologies. In an application sector if you are leading, you get mind share with customers and they work with you to design-in. Many customers will only do this with the first and second supplier in a particular sector. When I serve a segment I want focus and so market share is important. The same applies to enabling technologies. The good thing is that the margins in the markets that we have chosen to play in are growing faster than the average."

So is market share or margin more important to the 'economist' van Houten. "I tend to look at product lifetime and the plot of the sales/time curve. If you get the design right and the customers on-board early, you will get the reward of margin."

A cornerstone for the onward development of the division is to increase the way it goes to market with systems solutions and reference platforms.

"We are seeing a lot demand for system in package where we integrate analog devices and SoCs and this trend we expect to go further by the inclusion of other devices including MEMs. According to van Houten a lot of the SIP know-how is coming from its facility in Caen, France, where there was a fire at its wafer fab in December 2003. "We have moved some of the essential products that were made at Caen to other process and moved some of the processes have been to moved to other fabs such as Fishkill (U.S.) and Nijmegen (The Netherlands). So the critical products that were made in Caen are now being made in other fabs. We still have a pilot line there and a research centre with 900 engineers. We have just laid the first stone for a new R&D lab and we see it as along term innovation centre."

Around 15% of the whole semiconductor group are now involved in system design, with a lot of them involved in software development. "Historically we have had a platforms approach for step top boxes and mobile phones. I see more people coming in to these areas and we have vacancies which are not always easy to fill due to the broad application scope that is required."

As the cycles become shorter, more customers are demanding this platform approach. "One group in Caen has produced a production ready reference design of a set-top box and the size of the unit is just dictated by the Scart connector. A design like this is readily appreciated by the customer who see their transportation costs coming down and this in not something that is typically thought about by a semiconductor company. Increasingly as we get more application-oriented people coming in from the consumer side we will discover even more benefits."

Sales to the mobile sector at 36% of total sales are obviously key and the here the on-going development of the platform approach is seen as essential if the company is to maintain the share of mind of the ODMs and in fact, says van Houten, non-availability of an evolving platform will in future disqualify suppliers to the ODMs.

Intellectual property is also seen as a key component to growth. "As part of the systems approach we constantly ask ourselves if we can we be best in class in what we are doing or should we work with a partner. We actually sell some of our silicon IP to some of our competitors. In some areas, such as RFID and Near Field Communication (NFC) technology we have enabling technologies where we are best in class and to allow it to scale in volume we can sell it in our own systems solutions and also sell as components for others to use in their systems. It is a question of getting a return on the R&D investment.

"We have recently set up with STMicroelectronics an IP sharing partnership. We have come to the conclusion that more standardized IP blocks are important and bringing them to the next process node are better not done in isolation."

Another example of where partnerships are increasingly important are in middleware solutions. "We have 1200 software engineers but we don't want to make all the software. In the mobile phone area we have 12 to 15 software partners that can help us build the systems." Another key fundamental also high on van Houten's hit list is quality. "Coming from the consumer equipment sector you learn that there is no room for error. We have to embrace quality. You can always stop poor quality at the gate by introducing more testing but you have to take an integrated approach of designing quality in. You have to overcome potential problems in design and not during manufacture," stresses van Houten.

So as Van Houten settles in to the long term role of CEO of a leading semiconductor organization he is quick to dismiss suggestions of any move to match the structure of the other two European top ten chip producers in establishing Philips Semiconductors as an independent company. "It is absolutely not in our strategy." Being sold off is another action that he is quick to pour scorn on but the chance of bringing in new operations is not so completely ruled out, conceding "I am interested in strengthening the portfolio in the company." Philips Semiconductors has made acquisitions in the past like VLSI but van Houten believes there is a lot of potential to improve with what is already in-house to meet the demand for a 5 to 15% income for its operations.