Techs Try an Asian Tune After Singing the Domestic Blues
By CHRIS CZIBORR
Orange County technology companies are counting on sales growth in the Far East to help soften the effects of a stagnant U.S. market.
South Korea in particular has become a shining Asian star, with industry officials touting it as the strongest performing economy in Asia next to China.
“The market in Korea is really growing for us,” said Humphrey Chan, Irvine computer security products maker Rainbow Techno-logies Inc.’s vice president for the Asia-Pacific region. “Two or three years ago Korea was in a really bad situation with its currency devaluation. But the economy has really recovered this year.”
South Korea posted 5.7% growth in its gross domestic product in the first quarter, compared to last year.
Chan said Japan,a market that has struggled in many sectors,also could boost Rainbow’s sales.
“For Japan I have some optimism regarding security products,demand seems to be rising there,” he said.
East Asia is Rainbow’s fastest-growing region with double-digit sales growth, according to Chan.
About 10% of Rainbow’s $137 million in yearly sales go to Asia, and Rainbow has an 80% market share for its product lines in China.
For chipmakers, 2001 was a terrible year, with global markets showing the effects of the U.S. economic slowdown (see related story, page 18).
But the industry, led by Asia, is showing signs of a turnaround.
“The semiconductor sector as a whole will pick up, showing low single-digit percentage growth in sales,this business is all about growth,” said Bala Iyer, chief financial officer at Newport Beach chipmaker Conexant Systems Inc.
The San Jose-based Semiconductor Indus-try Association said earlier this month that an industry-wide recovery,buoyed by Asia,is under way. The group said semiconductor sales are expected to increase 3.1% this year to $143 billion, with growth accelerating about 23% next year.
The 27% sales increase in Asia will account for all of the semiconductor sector’s growth this year, according to Dwight Decker, Conexant’s chief executive and a board member of the semiconductor trade group.
“So far this year we have seen a significant decline in excess in-ventory and manufacturing cap-acity, and the industry has resumed modest sequential growth, indicating that we are in the initial stages of a recovery,” Decker said.
“Our expectation is that the recovery will gain momentum in the second half of the year and continue with strong growth through 2003 and 2004,the recovery will be led by strong growth in Asia-Pacific.” Jim Peterson, chief executive and president of Irvine chipmaker Microsemi Corp., also is expecting a regional rebound.
“We see a strengthening of international business for Micro-semi,” Peterson said. “Obviously the country that everybody should see growth in is China.”
Peterson said that China increasingly is home to more manufacturing and even design engineering work.
“A lot of the designs we’ve done in the U.S. in the last five years have transferred over to Asia,that’s changed for a lot of products,” he said.
Microsemi has sales offices in mainland China, Hong Kong, Taiwan and Singapore, and has a manufacturing facility in Shanghai. Asian sales count for 15% of Microsemi’s revenue, while 60% come from North America and 25% from Europe.
Conexant also has been gung ho on China.
“China is an area of tremendous interest to us,” Iyer said. “China last year was the biggest market for handsets,bigger than the U.S.”
The company has a design center in Shanghai that customizes its products to conform to Chinese requirements.
Iyer agreed that increased outsourcing to Asia is helping the semiconductor industry.
“In manufacturing, Asia tends to excel,” Iyer said. “End markets that semiconductor chips go into define market trends.”
Conexant also is having success in South Korea and Japan.
“Next-generation handset standards are making more progress in Korea and Japan than anywhere else in the world.”
It’s not just Asia that interests OC’s technology companies.
Rainbow expanded into Mexico and Brazil in the past year.
“Brazil is the biggest potential Latin American market for our security products,” Chan said. “Latin America will be a key emerging market for us next year. Right now it’s still very small, but I think it will increase over time for us.”
North America, which accounts for 60% of Rainbow’s sales, is the slowest region for the company, Chan said.
Rainbow Chief Financial Officer Patrick Fevery said that the U.S.’s heavy investment in high tech in the past has slowed current growth here.
“The U.S. has made the biggest investment in information technology and has to work off more inventory and more over-investment than anywhere else,” Fevery said. “Europe didn’t invest as much in high tech so it will recover more quickly.”
Conexant’s Iyer said telecom overspending here has led to a decimated industry.
“We are still working through a lot of those excesses in the U.S. as far as the end markets, but overseas there’s more activity,” Iyer said.
About 85% of Conexant’s sales are to global markets, with the biggest share to Asia.
Excluding Japan, Conexant’s Asian revenue in the March quarter was up 34% to $161 million.
The pickup in Asian sales helped Conexant offset declining sales in the U.S. While revenue was down $10 million in the March quarter, it could’ve been much worse, according to Iyer.
“In a number of areas where the U.S. is seeing weakness, the international markets are giving us traction and that’s what is helping us,” Iyer said.
Officials at Irvine networking products maker Linksys Group Inc. haven’t made huge inroads into Asia,yet.
The company wants sales to Asia and Europe to eventually account for 30% of the company’s revenue, according to Robert Auci, Linksys’ director of international business.
“Our expansion opportunities are mainly in overseas markets, and we’re still new to those markets since there isn’t as much room for us to expand in the U.S. anymore,” Auci said.
Last year Link-sys’ revenue doubled in the U.S.
“For us to repeat that (U.S. result) year after year would be very difficult,” he said. “We’re looking to be a player in the broadband arena in Europe. Also, there is going to be growth for us in broadband throughout Asia, apart from Japan and South Korea.”
Japan and South Korea have an installed base for high-speed Internet connections to the point where demand for Linksys’ “final mile” cable and digital subscriber line networking gear has stalled. But Linksys is eyeing Europe as a hot growth market.
Auci said the company expects the broadband market in Europe to grow from $2 billion last year to around $25 billion by 2006.
