Cyrix Is High on Low End of the PC Market

When your key competitor is Intel, any misstep can be hard to recover from. And National Semiconductor, which makes microprocessors for computers, networks and cellular phones, has stumbled badly and repeatedly in its efforts to take business away from the industry leader.

Manufacturing delays at National’s Richardson, Texas-based Cyrix subsidiary recently cost Cyrix its most important contract: supplying Compaq Computer with central processing units (CPUs) for its budget-priced Presario desktop computers.

The case in point--delays in moving to the latest, fastest version of Cyrix’s MediaGX chip for low-cost computers--followed years of on-again, off-again problems with Cyrix manufacturing that have scared off PC makers tempted to use its high-performance, low-price processors.

“You’ve got to be operating on all cylinders if you’re going to compete with Intel,” said Michael Feibus, a chip analyst at Mercury Research in Scottsdale, Ariz. “Cyrix missed one speed gain, and lost their biggest design win.”

Then last month National Semiconductor announced 1,400 layoffs--10% of its work force--citing softness in the semiconductor and PC markets, particularly in Asia. And the company, like other large PC and chip makers, expects a weak second quarter.

Yet surprisingly, National’s future looks brighter than such problems would suggest, analysts say. A unique combination of technology advantages and strategies--such as its recently announced PC-on-a-chip plan--could help the company emerge as a central player in the PC industry sometime next year.

In the first quarter of 1998, Cyrix accounted for 7% of the market for Intel-compatible PC microprocessors (including about 3% sold by IBM under its own brand), the brains that power the vast majority of personal computers. This is about the same share as competitor Advanced Micro Devices but far behind the 85% sold by Intel, according to Mercury.

Unlike its chief competitors, however, National plans to increase its share of the CPU market by creating chips for use almost exclusively in sub-$1,000 computers. That segment has rapidly grown to about 45% of total PC sales, up from about 30% during the last quarter of 1997, according to ZD Market Intelligence.

“Cyrix’s strength has been at the very low end of the market, in the sub-$1,000 space, where we still see significant growth,” said Linley Gwennap, editor in chief of Microprocessor Report. In contrast, Intel released its first product designed to capture this burgeoning category only last month.

“Like AMD, Cyrix can target the low end of the market,” said Gwennap. “They don’t need to charge Intel-like margins.”

As a result, PCs using Cyrix’s newly announced, top-of-the-line M II processor, as well as its MediaGX, offer superior performance to comparably priced computers using Intel central processors.

“What Cyrix also has, uniquely right now, is the integration strategy,” Gwennap added, which gives it an edge in efforts to pass AMD and become the clear No. 2 in the CPU business.

Cyrix keeps costs dropping by progressively combining the functions of secondary chips on its CPUs so that one chip does the job of several. The MediaGX CPU, for example, absorbs control of the computer’s memory, some communications with peripheral devices and video acceleration, functions traditionally handled by separate chips.

Last month Cyrix announced the ultimate extension of integration strategy--a PC on a single chip that incorporates all the major functions of today’s PCs. That innovation is expected to appear in products in mid-1999. It should push PC prices substantially lower than today’s sub-$700 levels and allow a relatively smooth transition to other markets, such as smart information appliances.

“AMD’s only advantage is that they sell a little bit cheaper” than Intel’s products, said Steve Tobak, National Semiconductor’s vice president for corporate marketing. “Our advantage is that we’re doing something new and different.”

But integration and strong price-performance have never been problems for Cyrix. Manufacturing has. Unlike Intel and AMD, until recently Cyrix has been strictly a design shop--it had no chip fabrication capacity, instead depending primarily on IBM to produce its processors. Delays or production mishaps at IBM hurt Cyrix repeatedly in the last several years--most recently in the case that caused Cyrix to lose the Compaq deal.

This changed when Cyrix was acquired by National last year. National’s modern and growing production facilities may alleviate computer makers’ doubts about Cyrix’s ability to deliver on its promises. Tobak said National plants can already produce more than 20 million chips a year--well above current sales totals.

As part of National, Cyrix also gains a strategic advantage over AMD because of long-standing cross-licensing agreements between Intel and National. The pacts permit Cyrix to use Intel’s proprietary PC architecture, known as Slot 1, introduced with the Pentium II processor last year. Most of the industry that produces PC system boards--the platform for microprocessors and other components--are adopting the Slot 1 design as a dominant standard. In future years, this could give Cyrix products both cost and performance benefits.

If the low-cost PC trend continues--and analysts predict it will--this combination of low-cost, integrated chips and access to Intel’s architecture could make National a much more formidable player in the chip business.

“They’re tied with AMD for second place,” Feibus said. “But National’s road map at this point looks more like it has a viable future.”

Of course, the company will have to move quickly and effectively--a big if, given its track record.

In the near future, Cyrix needs to find new customers among the top-tier computer makers--partly to build partnerships to exploit the PC-on-a-chip strategy next year. Most top PC makers are solidly committed to Intel products. They are reluctant to risk a disruption of their relationship with Intel by partnering with an alternate CPU supplier--even if there are significant cost advantages.

Right now the only big name Cyrix has won over is Compaq. And that’s only for notebook computers that sell at much lower volumes than the desktop Presario deal Cyrix recently lost.

“Cyrix has predicated much of its market to date with second-tier [PC] vendors,” said Nathan Brockwood, an analyst with San Jose-based Dataquest. “Now that Cyrix is part of a company that is known for manufacturing, it puts them in a different league. I’d look for National to announce relationships with some significant vendors.”

Of course, this would require Cyrix to maintain a price-performance edge over Intel and AMD--a Sisyphean task given the pace at which chip technology advances. Intel got a slow start in the low-cost PC market with its new Celeron processor, which is inferior to others in the same price range, according to testing by various trade publications.

The next Celeron chip, which Intel says will emerge in products in the second half of the year, will be much better. But Gwennap predicts the new Celeron won’t appear until late in the fourth quarter of this year--too late to affect holiday shoppers. That leaves an opening for Cyrix and AMD, if they can woo customers and meet the demand.

Tobak predicts that Cyrix expects to power “sub-$600 desktops--full, high-performance, multimedia computers with all the bells and whistles” in time for the holiday buying season.

And analysts expect the 266-megahertz version of the MediaGX, as well as faster versions of the M II, to appear in the next few months and to be strong performers.

“There’s a huge opportunity in place for us if we can execute,” Tobak said.

But can they? “I’d say that the strategy that they’ve been articulating is ambitious--achievable but ambitious,” said Dataquest’s Brockwood.