Wireless Signals
The industry may be struggling, but two communications chip makers are forging ahead with plans to create the largest provider of semiconductors for cellular and other mobile telephones.
The merger of the wireless division of Conexant Systems Inc. in Newport Beach, already the leading maker of power amplifier chips, and Alpha Industries Inc. in Woburn, Mass., is expected to close in mid-June.
The new company, named Skyworks Solutions Inc., will be pushing hard in what it sees as its biggest area for growth: providing all the silicon content and software needed in cellular telephone handsets.
Few companies worldwide can put the whole package together, said David J. Aldrich, who will become Skyworks’ chief executive. The ability to provide that package will become more important, especially for low-end and entry-level phones, as manufacturers concentrate on putting more functions, such as video, onto cell phones.
Those new functions are going to require speedier communications, which is the promise of the so-called 3G phones--the third generation of wireless cellular mobile devices.
But when that happens depends on how soon demand picks up, said Aldrich, now Alpha’s president and CEO. He said he will run the company from Massachusetts but might move the headquarters to Newport Beach at some point.
Aldrich talked about the future of the industry--and Skyworks--now that chip and cell phone makers are digging themselves out of the backlog of products that has plagued them for the last year or so.
Question: Reports about the industry’s health and prospects have been all over the map the last few months. What is your take on it?
Answer: In the post-Sept. 11 period, the past two quarters, there’s always been the sense that there’s a rebound that’s about to occur, and that the rebound is going to reflect in the equity markets and in the capital markets. That’s been a sort of around-the-corner situation that’s created a lot of confusion.
The people who provide the services need to get very proactive about promoting new services, selling cheap and convenient cellular phones to consumers. Recently, they’ve been a little bit less willing to do that because they’re concerned about their own cash flow and operating model. So that’s moderating the growth rate. That’s where we are today.
Q: And where are we heading?
A: If you move forward, the inventory’s flushed out almost entirely. So now we’re going to have equilibrium throughout, and that’s a really good thing. Now you can predict. And you’re starting to see the emergence of some of the newer services being promoted, like the new stuff that Verizon’s rolling out.
So consumer appetite for wireless remains strong. The worst of the correction is behind us, and now we’re going to go back to a growth rate that’s going to be less than the 40% compounded that we had, but will be growth nonetheless over the next 1 to 1 1/2 years, while the whole capital market sorts out the degree to which there’s going to be a big push for 2 1/2G and 3G.
Q: The promise of 3G is gadgetry, such as color video, TV clips, digital camera functions. Are consumers going to want to pay the price? Will they want a telephone to be so much more than just a phone?
A: That’s the dilemma around 3G. There’s no doubt in my mind, and I don’t think there’s any doubt from an industry perspective, that voice has been the killer application--voice in combination with data, some ability to check e-mail, messaging, some access to the Web, scheduling, all integrated with a wireless widget, whether it’s a cellular telephone or a laptop with cellular phone or voice technology. That’s the sort of 2 1/2G play.
The real question is: What’s the killer application for 3G? What do you want for 1 megabit per second of throughput [amount of data that can be moved] to your cellular telephone? Do you want to stream video while you’re driving your car and talking on the telephone? What is it you want to do?
That very debate is what has caused a delay in rolling out 3G. Most people believe now that 3G will come in 2004, 2005 in some markets, where we hoped it would be late this year and next year.
Q: What are manufacturers and suppliers like Skyworks doing to generate demand?
A: The industry’s going through quite a radical transformation, and it’s really the maturation of the cellular handset market. It’s become much more a consumer electronics business with shorter product life cycles.
Consumers have a lot of expectations for what their next cellular telephone’s going to do, and the prices are dropping substantially. That’s forcing our customers to do a couple of things. One is they’re trying to figure out with whom to partner to produce that phone much more inexpensively than they can today. They’re doing things like moving much of the production offshore.
But the biggest element of growth in the handset market is what we call ODM, original design manufacturer--the design manufacturing houses in places like Taiwan and China. That business is growing 50% to 60% a year. Companies in Taiwan, for example, are designing and building entire [lower-end] phones for Motorola.
Q: How does that affect a company like Skyworks?
A: Those folks [in Asia] want to have a complete semiconductor solution. They want a supplier to come in and say, “We’ll give you a reference design and all the chips that it takes to manufacture a cellular telephone. You know how to manufacture electronic products, and we know how to help you make a cellular phone.” Now, we can get $20 a phone in that arrangement. So that’s the biggest push for us.
Q: Skyworks will have 4,000 employees, half in a Mexicali assembly plant and most of the rest in U.S. plants. Many companies go offshore for cheaper labor and resources. How are you going to compete?
A: First of all, ODM customers truly need somebody with the height and breadth of technology and systems and solutions to provide the reference design, if you will. And there are only a handful in the world that can do that, and we’re one of them.
The way we compete on a cost structure is that we’re vertically integrated only in those processes that we need to be.
So we need to be vertically integrated in gallium arsenite HBT [a compound semiconductor] today because the process we use is proprietary and the cost of having that in-house is far more advantageous than outsourcing. And the outsourcing people aren’t where they need to be yet. When you’re in [basic, standard chips], it’s really a different play. [Fabrication plants] are huge, billion-dollar investments in some cases, and you simply use an outsourcing fab.
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AT A GLANCE
Name: David J. Aldrich
Position: President and chief executive of Alpha Industries Inc.
New post: Chief executive of Skyworks Solutions Inc.
Base salary: $336,615 last year
Born: Jan. 31, 1957
Personal: Wife, Janet, and three children
Home: Andover, Mass.
Education: Master’s degree in business administration from the University of Rhode Island in 1981; bachelor of science degree from Providence College in 1979.
Career: Joined Alpha as chief financial officer in 1995; held senior management positions, including finance director and vice president for strategic planning, at M/A-Com Inc. from 1989 to 1995; previously worked at Adams-Russell.
