From Rival to Partner: Conexant Plant Seeks Work With Former Foes
By ANDREW SIMONS
Could rivals Broadcom Corp. and Conexant Systems Inc. end up calling each other partners?
Company officials and industry observers don’t rule out the prospect after last month’s split off of Conexant’s chip plant into a separate company. The new company hopes to land business making products for other chipmakers, many of which are rivals of Newport Beach-based Conexant.
Counting Irvine’s Broadcom among potential customers isn’t outlandish, said Chu Li, the chip making company’s new chief executive. But there’s one hitch, he said: most of Broadcom’s chips aren’t the type of “high-tech” gear that’s made in Conexant’s former plant.
“Once they get into the high end, it could be a possibility,” Li said.
A Broadcom spokesman didn’t rule out contracting with the Newport Beach plant, saying it would work with any contract chipmaker that provides low-cost, efficient production.
The new chip making company isn’t as generic as it’s temporary name,SpecialtySemi Corp.,suggests. A relic from Conexant’s days as the chip division of defense contractor Rockwell International Corp., Conexant has spent more than $1 billion to upgrade the plant in the four years since it was spun off from Rockwell.
The plant can make 20,000 chips a month, produce test versions of the industry’s smallest chips and features 100,000 square feet of clean room space where dust,a chip’s mortal enemy in production,dares not tread.
“The plant is state-of-the-art,” boasts Li, an alumnus of Honeywell International Inc. who came to Conexant in January 2000 to lead the company’s drive to separate its fabrication facilities.
SpecialtySemi hopes to ride an industry trend of outsourcing chip production since plants require huge cash infusions to maintain equipment, update processes and keep them running at full capacity.
The company is banking on its silicon germanium production process, which yields faster chips than those made using the processes employed by Taiwan’s dominant contract chipmakers. SpecialtySemi hopes to lure work with optical chip upstarts as well as select product lines from big companies.
The sale of the plant has been a long time coming. Last year, Conexant, which burned through nearly $700 million in cash in 2001, was looking for a buyer for the plant,the second largest item on the company’s balance sheet.
Conexant reportedly talked with several companies, including Taiwan’s United Microelectronics Corp., about acquiring the facility.
With plants in Newport Beach and Newbury Park, and test and assembly facilities in El Paso, Texas, and Mexicali, Conexant’s property and plants comprised nearly a quarter of the company’s assets before the SpecialtySemi sale.
Conexant has moved away from in-house production. In 2000, it invested $150 million in Taiwan Semiconductor Manufacturing Co. to ensure production capacity. That same year, it also inked separate production deals with United Microelectronics and Chartered Semiconductor Manufacturing Ltd.
“As long as this company was held captive in Conexant, we knew it wouldn’t flourish,” Li said.
But even with slick features, SpecialtySemi has an uphill climb. Having spent its life inside Conexant, SpecialtySemi may find customers, especially Broadcom, uneager to sign up with what used to be a competitor, said Jodi Shelton, executive director of the Dallas-based Fabless Semiconductor Association, an industry group of chipmakers that contract out production.
“It’s only been a short time since the spinout happened,” Shelton said. “They need to make potential customers feel comfortable there’s a China Wall between Conexant and themselves. My guess is that could take a long time.”
The ties to Conexant are undeniable. While SpecialtySemi is majority owned by Washington, D.C.-based investment firm The Carlyle Group, Conexant still owns 45% of the company. SpecialtySemi’s facility is just 50 yards away from the office of Dwight Decker, Conexant’s chief executive.
And SpecialtySemi has signed long-term contracts with Conexant and businesses it intends to spin off. That could concern potential customers that Conexant and its offspring would receive favorable treatment if production schedules became tight.
That’s hogwash, contends Li, who points to the 22 customers SpecialtySemi already has signed up and several large accounts he hopes to land before the company adopts a permanent name in May.
“It’s just like if there’s a guy who’s working at Conexant who has a friend at Broadcom,” he said. “It doesn’t mean they share information. We are completely separated out of Conexant.”
Besides, Li argues, since Carlyle is the controlling shareholder, there’s more of a tie to them than there is to Conexant.
“We report to our controlling shareholder,” Li said.
SpecialtySemi counts $150 million in yearly sales out of the box, and officials suggest the company could grow at a 25% to 45% clip in coming years.
“We believe we are in a high-growth market,” Li said.
Other estimates concur. Only 20% of chip companies have ridded themselves of wafer fabrication plants, or fabs,a number that is projected to grow to 50% in the next couple of years, according to the Fabless Semiconductor Association.
“It’s an absolutely booming market,” Shelton said.
Several other contract chipmakers have sprung up. IBM Microelectronics, a division of IBM Corp., is making silicon germanium chips too. Another company with backing from Intel Corp., Communicant Semiconductor Technologies AG, sprouted in Germany last July.
The growing competition has kept Li on planes traveling around the country trying to get deals signed and making plans for the company’s growth. While SpecialtySemi only has the Newport Beach facility now, company officials reportedly are looking to open facilities overseas once the business gets up and running, according to sources.
“Our goal is to become the head of the pack,” Li said.
