With NXP Deal, Qualcomm Would Add New Businesses and New Risks
September 30 2016 - 4:02PM
Dow Jones News
By Don Clark
Qualcomm Inc. is the biggest of a large crop of companies that
design computer chips but leave production to partners. Now the San
Diego-based company is considering a deal that would turn it into a
manufacturer, a strategy shift that adds to the substantial risks
of buying NXP Semiconductors NV.
A successful bid for Netherlands-based NXP -- likely to cost
more than $30 billion -- would bring seven factories in five
countries that turn silicon wafers into chips. Besides those
fabrication plants, known as fabs, NXP operates seven facilities
that package and test chips before they are sold.
NXP, which became a bigger manufacturer through the purchase
last year of Freescale Semiconductor, churns out more than half of
a vast line of products from those factories. Many of those chips
end up in cars, a fast-growing market where NXP is the No. 1
supplier. Analysts believe the potential to sell chips for cars,
which are evolving toward self-driving models, is a major
motivation for Qualcomm in entering deal talks first reported by
The Wall Street Journal on Thursday.
Qualcomm, by contrast, pioneered what the semiconductor industry
calls the "fabless" business model. The company's popular wireless
chips, used in the smartphones of Apple Inc. and other vendors, are
mostly manufactured by Taiwan Semiconductor Manufacturing Co. and
others that build products to order for chip designers.
Analysts and industry executives say running factories requires
a different set of management skills than designing chips. Those
include tracking the age and performance of manufacturing
equipment, overseeing a supply chain of materials and managing
production workers, who are represented by labor unions in some NXP
locations.
"It's a very, very different thinking process," said Alex Lidow,
chief executive of chip designer Efficient Power Conversion
Corp.
He opted for a fabless model when co-founding the Southern
California startup after a 12-year stint as CEO of International
Rectifier Corp., which operated a global network of factories with
similarities to NXP's. "I don't want to do that again, frankly," he
said.
The fabless model allows chip designers to avoid the cost of
operating and building advanced fabs, which can cost more than $10
billion each for facilities that can create the most advanced
chips. Qualcomm will continue to need that level of production
technology from partners to keep its wireless chips competitive
with rivals such as Intel Corp., which both designs chips and runs
its own factories.
NXP, by contrast, has older factories that couldn't be easily
adapted to make Qualcomm's chips, analysts say. The company
inherited operations that began more than 60 years ago as part of
the Dutch giant Philips NV and Motorola Inc., which spun off its
chip business to create Freescale.
Mature plants like NXP's are maintained throughout the industry
to produce some kinds of chips, particularly those that use analog
rather than digital technology for applications such as radio. Dan
Hutcheson, an analyst at VLSI research, said NXP's fabs are highly
profitable, in part because the cost of production equipment was
written off years ago.
Mr. Hutcheson said Qualcomm executives have developed a
sophisticated understanding of manufacturing issues by overseeing
work handled at partners such as TSMC. "They won't understand how
you actually run a fab, " he said. "That could potentially trip
them up, but I don't think that is a big deal."
There are other management challenges to consider that are
associated with a deal for NXP, which people familiar with the
situation don't expect to be signed for two to three months. One
comes from NXP's sheer size. The Dutch company has about 45,000
employees, according to public filings, substantially more than the
33,000 Qualcomm disclosed last year in its most recent annual
report.
Another challenge concerns sales. Qualcomm gets most of its
revenue from a handful of smartphone makers, including Apple and
Samsung Electronics Co. NXP sells chips to thousands of companies
through a large sales team that couldn't easily be combined with
Qualcomm's, analysts say. Reducing the number of salespeople at
combined companies has been a major motivation in other
semiconductor deals.
On the other hand, a deal for NXP would substantially diversify
Qualcomm's business beyond mobile handsets. "You have significantly
spread out your revenues and you are less susceptible to a loss of
one critical customer," said Chanan Greenberg, a vice president of
the high-tech division of Model N Inc., which makes software that
chip makers use to manage the sales process.
NXP has a broad set of technologies that could become
particularly valuable in connection with the Internet of Things, a
phrase that refers to adding sensors, communications and computing
capability to all kinds of everyday devices. It is a major supplier
of chips called microcontrollers, for example, that manage
calculating functions in many categories of office and industrial
equipment as well as cars.
NXP also has a leading position in chips for near-field
communications, or NFC, a short-range wireless technology used for
applications such as completing payments on smartphones and
unlocking car doors.
Write to Don Clark at don.clark@wsj.com
(END) Dow Jones Newswires
September 30, 2016 15:47 ET (19:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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