See: Ten Point Plan For NXP's Recovery
Challenged by a reader to come up with a ten point plan for the recovery of NXP, I am now thinking, and asking questions, and trying to figure out what could be done. It is a task far beyond my competence so I'd be more than grateful for any suggestions you care to make, either by replying to this post, or by emailing david.manners@rbi.co.uk.
Of course the main problems of NXP are the ones caused for it by its private equity owners, KKR. They bought the company for 1.6 times sales revenues at the peak of the Silicon Cycle which was a very high valuation, they then loaded it up with $6 billion of debt when chip companies don't normally operate with debt, and they put a high interest charge on this debt ($480 million a year).
If any one of you is a financial genius who can figure out how NXP could get out from under this debt burden, then that would be good.
But, failing that, if NXP has to trade its way out of its predicament, what is the best way for it to try and do it?
I'll be asking people, and will look forward to hearing from you.
NXP has a few businesses (still) under its wings. BU Home is one of the bigger ones. So, I'd like to look at that.
1. De-focus from Philips as the primary (and in most cases, the only) customer. Philips Consumer Lifestyle is a company beset with several problems of its own, so stop betting on a losing horse.
2. Sending a "friend request" to Intel makes a lot of sense. Intel is making noise about MIDs, low power etc..but has not managed yet to make a dent in the "living room" silicon market. Can be a win-win.
3. Kill the fantasy of "own software" and/or "garage based software ecosystem". Given NXPs market share, neither are warranted / feasible. Take a fresh look and get a credible partnership going. Heard of Android?
4. Add value to your TV customers' business by tying up with the panel guys to reduce manufacturing costs. LCD is probably a (half?) gone case. But OLED is a likely great opportunity.And we are talking real big money here.
5. Understand / accept that USA leads the technology race. Digital happened first in USA. Now Internet is happening there. (Europe, basking in it's diverse digital dogmas and Belgian bureaucracy, still thinks internet is for PCs). So, find and focus on a credible customer active in the USA market.
6. Consumers expect eye-candy. If it aint looking good (meaning, like the iSomething), it's not on her wish list. Picture Quality is a dead street. Graphics is the new "downtown". Put your money where her heart is.
7. Kill the tech-fantasy of DSP design. The codec wars, the format wars etc of the last decade are over. So, keeping a "programmable" white elephant such as Trimedia alive will get you no where. Also, sheer horse power (as in a single general purpose CPU core) outsmarts a bunch of trimedias without breaking into sweat.
I stop at seven.
Thanks Cheese that's really great.
Hi David,
Although cheese had some interesting suggestions, they were very superficial and that none of his comments has any direct relations to money. With these comments citing which markets to reap money from, I am assuming NXP will currently not have the leading edge in these markets and that a lot of time and money is required into R&D to try to get ahead, of which money is very difficult to get hold of given that NXP now has more debt than the value of the company.
What we do not know is the current and future revenue & operating costs of NXP. Without this information, it is very difficult to calculate their ability to repay the debt. Given the current economic situation, just the $480m needed annually to service the loans is likely to cripple NXP, because they need a minimum annual profit of $480m, otherwise they will be further in debt which makes them even harder to re-negotiate.
If NXP is able to re-negotiate the loans, I can see them having to consolidate to manufacturing and sales, with a heavily reduced R&D budget. This means they will have to spend the next few years trying to reduce their debt level. This will decrease its competitiveness. It is going to take them a number of years after that just to catch up. A merger or a takeover can help matters a lot.
Outsider I think you you are most likely to turn out right. I've always rather thought that an EC-promoted consolidation is the most likely way out of this.
But if you look at the debt there's something interesting happening. Some of it is trading at under 30 cents on the $. The worse NXP does, the lower the value of these bonds, which means, in effect, the less it will cost for NXP (or a well-wisher) to buy the bonds and wipe out the debt, so getting rid of the obligation to pay $480 million a year in interest charges.
The par value of the debt is $6 billion. If it starts to trade at 10 cents on the $, then iall the bond debt could be bought back for $600 million, which is not a lot more than one year's interest payments.
That would get NXP out from under its main problem.
OK it screws the people who bought the bonds for at par, but who are they? They're the same stupid bankers who caused the mess the world is now in.
OK that probably means we, the taxpapayers, will have to pay for the stupid bankers' losses. But at least NXP will survive to fight another day.
Hi David,
I am an employee of NXP. Thanks a lot for your long term
attention on NXP. We really appreciate your care on us
and this company.
In your blog and the feedbacks, I found a lot of comments about
the faults of Philips, KKR, Frans & his TOP100. Many peoplpe
tried to find the reason of current situation NXP is in and
the ways to get NXP out. But I am thinking following questions:
1, If there is a way to make NXP recover to the company it was many years ago?
2, Are current problems only due to some guys(inside and/or outside)
faults, or due to the semi-industry's trend?
3, Is this a common tragedy of a company, or a tragedy of whole
European hightech industry?
4, When we (Slow European Giant) meet Mediatek (Fast small Asian),
what will happen is only by accident or our fate?
Thanks Question Mark. I think the answers to your questions are:
1. Yes NXP can be as great a company as it ever was but not as an IDM, I think the IDM model, except for analogue, MEMs and other specialist processes, is broken. But everyone in the world knows NXP is second to none at innovation.
2. Mainly trend. The IDM model has been becoming less and less profitable. But the KKR purchase was clearly a big blow to NXP. It's OK to borrow $6bn if you're going to get some benefit from it but, if you get absolutely zero benefit from the debt, yet still have to pay $480 million a year to service the debt, it's a huge burden to impose on any company, let alone a semiconductor company where the norm is to operate without debt.
3. Well at the moment, clearly the European industry is in disarray. But the EC and National governmentsd are still putting up substantial amounts for high-tech R&D - i.e. Eureka, with CATRENE and ENIAC for microelectronics, so I don't think Europe has given up on the high-tech industry. It just needs the companies to sort themselves out and to work out how to make profits from the science and technology strengths which Europe has.
4. I don't think it has to be Asian vs European. Europe has enormous technical and scientific strengths. Asia is not universally healthy - look at the dire state of the Japanese semiconductor industry which seems in permanent denial of the obvious fact that it needs to re-structure.
It has to be asked: What major semiconductor innovation ever came out of Asia?
It's not Europe's scientific capabilities that are in question but its management skills. ST has been pretty ruthless in continual cost-cutting. ST claims to have the lowest tax rate in the industry by doing clever accountancy-type tax arrangments. And, of course, Infineon is really struggling because it hasn't been allowed to cut its cost-base as it should. So the companies are struggling with their business model.
Europe has to think its way out of its problems. When MEDEA and MEDEA+ came up very early, some time before other companies, with the idea of developing programmable platforms, within a few years that had helped ST, infineon and NXP up the top ten on the back of the trend to SOC.
So, in brief, I think Europe will rise again, and I think NXP with its great history and best-in-class technology will rise again also.
It's just a question of getting rid of these financial people like KKR, and getting some semiconductor-savvy CEOs in to run the thing.
Europe has the science and the brains to succeed in any science-baseed insdustry. What it lacks, sometimes, is the business model.
In all fairness, the Eu-vs-RestOfWorld is a complex discussion. It is too simplistic to conclude that Eu has the brains to succeed in *any* science based industry.
Let's not ignore the fact that the true innovation fountainhead lies to the western side of the atlantic. That is the birth place of everything from iSomethings to google to youtube to netbooks etc. Yes, there have been (albeit sporadic) stars shooting from the eastern side of the atlantic, but in numbers, impact, value and consistency, uncle sam rules. Meanwhile, the far east has created a niche of productivity, with no barrier of socialism coming in the way. As you have pointed out in another article, TSMC stands as a shining example of this. And yes, again (perhaps sporadically / serendipitously), Europe has had it's rightful share of the "productivity" pie via interests / investments in asian ventures. But clearly Europe is sandwiched between American innovation and Asian productivity, preventing it from becoming the king of either.
I wouldn't want to digress too much, although you might want to consider this as the subject for a separate blog...
Coming back to NXP...for it to succeed, a number of factors need to be addressed. A history of great scientific achievement alone is no guarantee of any success in the future. As cliched as it may sound, the world is now flat. Anybody with a bag of money can start a fabless operation and put together a family of chips that include IPs available commercially off the shelf. What PCB designers did a decade or two ago is emulated by today's fabless cos. So, NXP needs to bootstrap and hunt for the elusive combination of market and technology innovation. Cutting costs and selling off assets might bring temporary bottom line relief, but will not help in the mid-long term. Yes, the short term issues such as the debt need to be tackled, but strategic investments (including partnering) are equally vital if NXP wishes to live to see the next decade.
Thanks Cheese you're absolutely right, though a little hard on Europe in the field of telecomms, wired and wirleless, where I think it has been the leader and major innovator.
In the 90s, GSM undoubtedly drove the wireless industry worldwide.
Can I ask a simpler question yet, why is it that the "vertically integrated" model of semiconductor company ownership has broken down? Motorola, Philips, Siemens all divested themselves of this potentially valuable resource and how is it that the model works (Worked?) for Japanese Companies and particularly in Korea with Samsung?
Anon, there's a simple answer:- fabs got too expensive
David,
Did I miss something or did they not get expensive for everyone? How is it that some carried on investing and betting the company on future products and some thought, this cyclical stuff , you know we don't know how to manage it, we out to sell and get out of this game, then we can buy what we want from whom we want, this is going to work.
Then the guys who have the gadget ideas, like Apple and Microsoft thought you know? we would have more leverage if we made our own ICs, It isn't a simple story of fabs getting too expensive, but not having the right products for the times.
The consumer of tomorrow is leading a very different life and is not economically active and probably on pocket money, but within one or two product design cycles may come to dominate the buying market. Marketing needs to understand that, habits are changing and needs are changing and we had better keep up.
Spot on, Anon. If you compare the cost of a fab and the revenues of the industry over time, the ratio is pretty constant.
So, you are absolutely right, the industry's making the wrong products!
Is this possibly because the financiers are in control of the technology companies and will not listen to the techies?
Apple dropped their non-technical leadership after continuous disasterous sales and brought Jobs back in and look what happened - must have products rolled out the door thick and fast.
Was this because the ideas were properly invested in, the knowledge was retained and the development cycles were realistic?
Spot on, RoryS, top-flight techie companies are not yet ready to be handed over to the MBAs and accountants - the crucial decisions are just too technical. It's all part of the ages-old battle between the creative classes and the managerial classes. The creative people make something happen through imagination, creativity, persistence and intellect, and the managerial people scheme to get their hands on it and squeeze cash out of it. In doing so, the managerial types often ruin the creation of the creative types. It is a tussle that's gone on for centuries. There is no more creative industry than engineering and, the chip business grew most rapidly in the 60s, 70s and 80s when it was wholly in the hands of engineers. The managerial types have infiltrated it since then, R&D has been cut back, new ideas are nowhere to be seen, profitability has faltered, growth is problematic. Put the IC industry back into the hands of the engineers!