Nowhere to go but UP

Date:   Thursday , March 04, 2010

Last month, Microchip Technology’s Chairman, CEO & President Steve Sanghi began his company’s annual shareholder meeting greeting his executive assistant—Loretta Torens—on her birthday. “She has been working for me for the last 16 years,” he announced to make all his board members and shareholders sing “The Birthday Song.”

Sanghi is a no-frills person. He turned Microchip from a dead division of General Instrument in 1989, into a semiconductor heavyweight with a $7.5 billion market cap that has remained highly profitable. Year after year, Microchip makes a brand new record, achieves higher sales with significant growth, and gains more market share in the microcontrollers business. Microcontrollers are tiny computer brains used in many household appliances, automobiles, computers, telecommunication devices and many other day-to-day gears.

With $80 million revenue in 1993, the company hit the $1billion mark [trailing twelve month results]. Since its public offering in 1993, Microchip rocket-shipped its stock up nearly 6000 percent—60 times the original initial public offering price. With a customer base of over 50,000, Microchip is also the best performing semiconductor stock. Out of 200-some companies in related semiconductor businesses, Microchip’s stock has had the best performance for the last 13 years. Even though the semiconductor industry continues to be cyclical, Microchip has shown the lowest volatility in revenues and earnings than any company in the semiconductor industry. The company has grown every year in the last 13 years being public, excepting one during the tech bust of 2000-2001. It’s a strong financial company, profitable, and the highest dividend paying company in the semiconductor industry. “Financially, we’re among the most profitable semiconductor companies, one of the top three or four,” says Sanghi.

The 8-bit controller
For Microchip, 8-bit microcontroller market is a clear winning story. “We are numero uno company in 8-bit microcontrollers. We continue to gain more territory, quarter-after-quarter and year-after-year,” says Sanghi.

Microchip started in 8-bit marketplace back in 1990, as a small private company, underfunded with non-standard product architecture. Back then, the company was in the 20th position among market players. It started competing in a market which was crowded by some of the largest competitors from the U.S, Europe, Asia and Japan. By 2002, Microchip became No.1 in this market, and its market share since then has continued to grow. What contributed to Microchip’s rise up was the significant innovation it brought into the market. Microchip’s 8-bit microcontrollers were better architected, offered superior performance at lower power. The company’s low overhead and tight-fisted manufacturing policy has propelled it steadily to rank among the leaders in this crowded market.

While, over-all 8-bit microcontroller market is starting to slow, the Flash 8-bit microcontrollers are growing very rapidly. Microchip is also finding additional areas within the 8-bit microcontroller market where it has a smaller share and plans to grow. In the last two years, the company has announced new 8-bit microcontrollers such as the USB microcontrollers, the Ethernet microcontrollers, microcontrollers with a display driver, lots of very low cover microcontrollers with nano watts of power, many other microcontrollers with much larger programming density with higher performance. “So we are introducing additional products to number of areas in microcontrollers and, they are all becoming home run driving our growth quite significantly,” says Sanghi.

The 16-bit controller
Innovation seems to be the differentiator. The company came up with a brand new 16-bit microcontroller architecture that has won industry accolades. “I think that clearly shows that it was a very innovative architecture we introduced, and it is doing very well in the marketplace, winning a lot of designs,” says Sanghi.

16-bit microcontrollers are about $3.5 billion market. Microchip stepped into this market a little over three years back and has a very small share. Just like how Microchip gained leadership position in the 8-bit space, Sanghi wants to repeat his strategy here too. “Over the next 10 years or so, we will garner a more significant share of the 16-bit market by continuing to innovate and producing large number of products at a better cost, better feature set, better performance, however with lower power than the competition. And we are well on our way,” says Sanghi.

Today, the company has 75 products in volume production and is targeting 100 products end of the fiscal year. These 16 bit products are getting lot of attraction and are being readily accepted in the marketplace.

Analog Products
Despite the noise about digital all the time, the real world is analog. The time, temperature, sound, music, video and many more are all analog functions. This calls for products to convert the signals from analog to digital and then process them within a microcontroller or a microprocessor, but you still need to convert it back to analog to light a bulb, to make a sound, to turn a power switch on. “Therefore, there is a continuous need for analog that Microchip continues to benefit from,” says Sanghi.
“Because the analog market tends to be very diverse with hundreds of products, it is tough in a short amount of time to cover the breadth of it, but we are committed to bringing significant innovation into that marketplace,” he adds. Today, Microchip is a leader in low-power operational amplifiers technology. Microchip’s analog business was up 40 percent Q4-over-Q4, surpassing every single analog company in the industry.

To manufacture these microcontrollers and analog products, Microchip has two fabrication facilities—Tempe, AZ and in Gresham, OR with a combined capacity of about $1.7 billion. In addition, Microchip has $200 million outsourced capacity with various professional foundries overseas. “Over the next several years it will not be very difficult to get $100 million more. We have laid out a plan how we need to get to $2 billion on the capacity size.

The Strategic Plan
With these three—8-bit microcontroller, 16-bit microcontroller, analog—promising segments, Sanghi is marching towards the $2 billion revenue for his company. He knows his game plan. But he is not going to share with us when he will hit the mark. For almost 12 months now a blueprint on how to get to the $2 billion mark is in place. And importantly, he’s damn serious about achieving this target. He has comprehensively communicated his plan to all his leaders.

Probe him a little more about the plan and he rattles out the outline of his next $1billion target:
“The blue print details the plan for product lines, how much each product line has to contribute, where the manufacturing capacity comes from, where are the people we are going to need, how are we going to hire them, train them, nurture them, communicate with them.

With his sales force his talks are different:
How the sales would look like? What sort of sales will come out of the U.S, Europe, Asia, and Japan? What percentage of sales would come from Microchip’s direct OEM customers, channel distribution and web sales? This is broken out into, what portion of the business had been created by what kind of demand creation channel? The challenges he did not find in each of those areas and what are the challenges in quality? How would Aggregate system have to change if any change is needed?

Next month, all of Microchip’s worldwide leadership teams are getting together in Phoenix to do an intermediate check of how the blueprint is getting executed.
What has been achieved so far? What are the new challenges? Which of these challenges are untracked? Which of these challenges need additional resources? How are these challenges changing? Are we still on track? What should we do different? How is the market environment changing? Has the competition changed? Are there more competitive challenges today than there were before? Is there any reason to change the product lines? If you are short somewhere, where does the difference come from? Sanghi would have answers to all of these in October. Once he knows the answer, he knows the solution the market wants.

The Culture
“Microchip is a much empowered company. We have a powerful culture,” says Sanghi proudly. He likes to look at the organizational chart upside down, where customer is at the top and the CEO is at the bottom. Between them are the engineers, managers, and divisional heads, in that order. This is true for the design team or the sales team. “The reason why we turnaround the org chart is to do with our culture. We think we get the best performance of people through this structure. We need to make people at the top—design engineer, sales people, production operators—more efficient,” points out Sanghi.
What’s behind Microchip’s turnaround story is the Aggregate System that Sanghi and his management team has developed. This is an approach whereby workplace values, leadership, customer service, teamwork proliferated into the enterprise. It guided employees’ strategies, decisions, actions and job performance. It has been designed to simultaneously improve all of a company’s business processes by aligning and uniting the processes and the elements that lead to success. This has been detailed in the book: Driving Excellence.

“Companies have to have a system in place where they are continuously measuring the culture they are implementing, and measuring the correlation between what is being perpetuated, versus what the CEO says the culture is,” he explains. “If there are differences then there should be a corrective action mechanism. Either you [the CEO] change what you’re saying or say what the real culture is.”

Today microchip employees fill out a yearly confidential survey that asks them to rate what percentage of the time Microchip practices the values it teaches. This is Sanghi’s insight into the real internal direction of his company. The results have been positive. “The latest survey which was done in January 2006 showed that our alignment to the culture and Microchip’s employee’s performance to the guiding values actually improved over the previous year,” notes Sanghi.

Good to Great?
Recently, on a Sunday late evening, Sanghi took up an interesting task. He compared the performance of the Microchip stock with the 11 great companies that Jim Collins talks about in The Good to Great. “Not a single Good to Great company came close to Microchip’s performance since its IPO. I felt so good about it that I sent those graphs to Jim Collins,” says Sanghi. For which he’s not taken a break for the last ten years. Now you know what Sanghi wants to build.