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Freescale Needs to Divide to Conquer

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Freescale should get ready for change. I visited the Austin-based chip maker yesterday to talk about wireless and networking chips as well as broad trends in the industry, and walked away realizing that the firm needs to split itself up in order to survive.

The company has some very cool technology — especially around its multicore processors for embedded systems such as printers, storage arrays and routers — and a huge base of users for its Power architecture. But it has too many areas of focus. In the next two years, it’s unlikely that the company will have the same combination of businesses it has today.

Specialization is key in the chip-making industry because it allows a company to allocate its R&D more effectively, optimize manufacturing processes and generally improve profits. Freescale, which makes chips for automobiles, RFID systems, cell phones, base stations, networking equipment and industrial applications, designs both high-volume chips at advanced process nodes and low-volume chips that require a lot of manufacturing tweaks.

It’s likely that Freescale’s private equity owners will divide the company along the lines the firm established late last year: networking and multimedia; microcontrollers; cellular; and RF, sensors and analog. Each of the divisions made more than $1 billion in 2007 and could be combined with similar divisions at other firms such as Infineon, Broadcom, STMicroelectronics or even Intersil. Earlier this year, Freescale got a new CEO (from Intersil) with M&A experience, so change is certainly in the air.

8 Responses to “Freescale Needs to Divide to Conquer”

  1. Stacey Higginbotham

    @David, I’m arguing less for a split into independent businesses and more likely a split as a result of another firm buying out some of Freescale’s businesses. My thought is the buyer could either subsume or crush the dysfunctional Freescale culture while keeping the tech intact.

  2. Stacey, I too am confused by your rationale — given Freescale’s track record. Yes, it’s been a while since they were spun off from Motorola, and clearly the core company culture is still very much intact at Freescale (regardless of the infusion of new leadership).

    That said, what did the team at Freescale tell you that led you to believe that splitting the company up would enable them to cast off the negative shadow from their Motorola business culture legacy?

    It would appear that Freescale’s failure to grow is the result of some deep-rooted issues that still aren’t being addressed by the current leadership team.

    My point: ignoring the obvious legacy white elephant in the board room discussions only perpetuates the apparent denial — substantive change at Freescale will require more than merely creating smaller, but otherwise equally dysfunctional, independent businesses.

  3. Shimon

    Lets split the discussion in to 2:
    1. The R&D efficiency
    2. Attractiveness to a potential buyer.
    The latter – I’m not an expert, so I’ll not include it in this comment.
    Back to R&D efficiency.
    A huge efficiency gain from cinergy exists in the company:
    both Power Quick and DSP lines enjoy same basic sub modules:
    Quick engine, sRIO interface, cash engines, multi-core knowledge, and many others.
    So I really see only less efficiency in a split !!
    The challenge of Freescale’s managers is to build a strong IP foundation,
    and keeping the product teams focused on their delivery.

  4. Stacey Higginbotham

    Aee you talking about SigmaTel? The acquisition closed after Beyers arrived, but was agreed to before he was named CEO. Specialization makes better use of R&D dollars because it’s expensive to design chips,so putting more money in two or three designs rather than five or six gets you farther. It’s not the only way to do it, but is more efficient.

    As for the split, I think Freescale has failed to grow much since its spin off. In areas like wireless, it’s losing market share, while it’s merely holding ground in automotive. To keep moving forward as it is would be turning its back on reality. It has good technology, but it’s hard to see one buyer wanting all of it. That’s why I argue for a split of some sort. I hope that helps.

  5. Anonymous Coward

    why do you believe that specialization is the only path to proper R&D allocation? What leads you to conclude that Freescale will split? The last move they made was an acquisition and this was with the new CEO in place, no? Do tell, pls.