Executives at Conexant Systems Inc. make no secret of their desire to pinch pennies during these tough times for the semiconductor industry.
But the chip maker’s money-saving resolve in the face of slowing sales and mounting losses has led some analysts to wonder whether Conexant will go all the way by selling or closing its Newport Beach chip fabrication plant and laying off the hundreds of employees that staff it.
Last week, Dow Jones reported that Taiwan’s United Microelectronics Corp. is looking to acquire Conexant’s Newport Beach plant in a move that could pave the way for Conexant to exit chip production.
Conexant declined to comment on its plans for the Newport Beach facility, which employs 650 people. United Microelectronics also declined comment.
The plant sale theory is being entertained by some analysts who say the sheer cost of running a chip plant, called a fab, could prompt Conexant to reconsider the Newport Beach facility. The high cost of operating a fab in Orange County, a trend toward shifting production to contract chip makers and the need for Conexant to save more cash are all cited as reasons for closing the site.
“They will have to,” said Kalpesh Kapadia, an analyst with New York-based C.E. Unterberg, Towbin. “They have costs associated with running the fab.”
Fabs require huge cash infusions to maintain equipment, update processes and keep them running at full capacity. With fabs in Newport Beach and Newbury Park and two other test and assembly facilities in El Paso, Texas and Mexicali, Mexico, Conexant’s property and plants comprise nearly a quarter of the company’s assets.
The facilities, which are the second-biggest item in Conexant’s asset column, represent huge liabilities to the company since they aren’t operating at full capacity. That’s a problem Conexant laments in its most recent Securities and Exchange Commission filing.
“The Company’s cost of goods sold for the fiscal 2001 periods has been adversely affected by the underutilization of its manufacturing capacity,” the company said in the filing. “We expect that reduced end-customer demand, under-utilization of our manufacturing capacity, changes in our revenue mix and other factors will continue to adversely affect our operating results in the near term and we anticipate incurring additional losses through fiscal 2001.”
Conexant officials acknowledge that in the current chip market,where there is plenty of capacity available to produce generic chips,the company is at a disadvantage to rivals without fabs. They include Irvine-based Broadcom Corp.
“When you have fabs in a time of limited capacity, it’s a good thing,” said Conexant spokesman Scott Allen. “When you have fabs in a time of overcapacity, it’s a bad thing.”
The problem is the same at other chip makers with fabs, including Intel Corp., Advanced Micro Devices Inc. and Motorola Inc. Many big chip makers have sent production of their most generic types of chips to contract fabs, known as foundries, in Asia.
“While there are some advantages to having your own fab, it also has to be operating up to a certain level,” said Joanne Itow, an analyst with Phoenix-based semiconductor research firm Semico Research Corp. “But on the other side, there are some cost advantages to sending production out to foundries.”
Several large foundries have emerged to produce chips exclusively for other companies and forego producing any of their own designs. Among the leaders: United Microelectronics, Taiwan Semiconductor Manufacturing Corp. and Chartered Semiconductor Manufacturing Corp. All three produce at least some chips for most major chip makers, including Conexant.
Last year, Conexant invested $150 million in Taiwan Semiconductor to ensure manufacturing capacity. It also inked separate five-year production deals with United Microelectronics and Chartered Semiconductor.
“The Company is also exploring wafer manufacturing alternatives, including increased use of outside foundries, entering into joint ventures with respect to wafer manufacturing or other actions in respect of its wafer manufacturing facilities,” Conexant said in a 1999 federal filing.
Since Conexant’s 1998 spinoff from Rockwell International Corp., company officials have looked to shift more production away from its own fabs, which were inherited from Rockwell.
Following the company’s spinoff, Conexant closed a plant in Colorado. And, in April of this year, Conexant said it is looking at alternatives for its design and assembly plant in El Paso.
In conjunction with its plans for the Texas plant, Conexant instituted several other policies to stop its seepage of cash, including: a 10% reduction in pay for senior executives until the company reaches profitability; temporarily idling the company’s plants; reducing its workforce by 1,500 employees; and looking at alternatives for the company’s digital imaging business.
In all, the cost-cutting measures are designed to generate nearly $200 million in savings annually starting next year.
The restructuring follows a year in which Conexant posted net losses totaling nearly $647 million. Consequently, the company burned through nearly $707 million in cash reserves at the hands of slowing business and about 10 acquisitions.
But there is good news. Many analysts anticipate that companies will start to spend money on technology again at the end of this year. That should benefit Conexant’s Mindspeed Technologies division, they say. The maker of networking chips is set to be spun off to Conexant shareholders this year.
“While visibility continues to remain low at this point in time, particularly for the Mindspeed portion of the business, we believe that Conexant remains well positioned,” said BancBoston Robertson Stephens analyst Arun Veerappan. “Moreover, we believe the company remains a key player in the communications semiconductor industry.”
The question is whether Conexant can eke out enough savings to see it through the current downturn. If it can’t, then further cutbacks,including possible fab closures,may be in store.
Of the two fabs the company could close, Conexant acknowledges that the Newport Beach fab produces more generic chips that could be produced more cheaply elsewhere.
Analysts agree, saying that the Newbury Park plant, which produces specialty chips available in only a few chip plants in the world, isn’t likely to be sold.
“If you are one of the few places in the world that produces those types of chips, you probably won’t sell it,” said Cody Acree, an analyst with Dallas-based Frost Securities Inc.
Even if the company decides to sell its Newport Beach facility, it would face plenty of challenges finding a buyer. For one, the plant is old. Though the company has upgraded the facility, chip fabrication equipment is specialized and most likely would have to be removed by a non-chip-making buyer,an expensive proposition.
And even if Conexant wanted to find a chip maker to buy the plant, the fact that it’s in California,which has been racked by a power shortage and is hindered by regulations and high costs,could scare off buyers. Any buyer faces expected higher electricity costs for the next decade as a result of the state’s power crisis.
At least one other OC fab that belonged to Motorola still is on the market three years after its closure.
Conexant could choose other routes,including operating the plant with another company or selling the plant to a buyer with a clause to buy a certain amount of chips from the plant’s new owner.
Another scenario would be to sell the Newport Beach fab site for redevelopment. Conexant owns 633,000 square feet of space along Jamboree Road,prime OC real estate. A sale would bring an infusion of cash that could help Conexant through until the chip market rebounds.
Regardless of the path it takes, analysts call the Newport Beach fab part of a dying breed.
“There are very few new fabs in the U.S.,” Semico’s Itow said. “Most of the new capacity is being added in Asia.” n
