Ladies and Gentlemen,
It's a privilege to be part of the debating team here at Scottsdale, and to share in the passion and energy our dynamic industry stirs up which is evident here at the summit. I believe the sporting theme, the Road to Victory, is spot on in its illustration of what it takes to play - and win - in our industry.
This industry is not about going it alone, but rather teamwork, strategy, passion - and of course, being fit. I'm a sports fan, in fact, Philips is sponsoring the FIFA world cup this year, and I can feel the excitement building... in anticipation of the great goals, the upsets, the defensive moves, the offensive attacks, the victories and of course, the defeats. Passion is what drives the game - regardless of the shape of the ball or where the game is being played. Passion, teamwork and fitness guide us down the road to victory. And this applies directly to how to we see Philips Semiconductors evolving.
Before I move on, I'd like to tell you a little about my background, and why I, too, have so much passion and enthusiasm when it comes to technology.
Some 15 months ago, I was leading the Philips consumer electronics business. Part of the job was buying semiconductors to enable us to create great products and applications for consumers. I thought that was pretty cool. My current job means designing and selling semiconductors and that is even more exciting. The challenge of predicting and executing on the next big market trends is great. And the margin opportunity in this business is significantly higher than in the box business.
I believe that my background as a customer of the semi industry gives me a unique outside-in perspective. I have lived in three continents - which gives me market and cultural experience. And as an economist, I can see the proverbial forest for the trees.
I joined Philips Semiconductors in 2004 and reckon the timing was perfect. Philips Semiconductors has a lot of potential. And at the same time I see that our whole industry is beginning to recognize dramatic evolutionary pressures. At Philips, we acknowledged these changes and acted swiftly by announcing last December that we will strive for scale and will place Philips Semiconductors in a separate legal structure. But more about that later on.
Let me give you the outline of my agenda this morning.
Evolutionary market pressures are creating a new landscape. This is what I want to talk about first. I would like to explore how we in the Semi industry can thrive in these evolving markets and then discuss how we leverage the new value chains.
I will also describe how we as Philips Semiconductors manage this complexity, and the tactics we are using to get fit and ready for whatever the future brings.
So let's get going: I've based this presentation on Darwin's "Survival of the Fittest." It's all about coping with change -- and managing evolution is a tough business with both winners and losers. Evolution can be bloody. I hope nobody objects to the sight of blood right after breakfast. Inevitably, slower-moving animals will get in harm's way when there are big carnivores on the loose. Allow me to come back to this comparison later.
Part 1: The Semi industry is increasingly important in the electronics world.
As I said, the last few years have seen dramatic changes in the landscape, and more is to come. Let's quickly review the topography and the main drivers for change.
Our industry continues to grow and is a bit like the mythical Titan Atlas whose strength carried the globe. Our own EUR 246 billion semi industry sustains a EUR 1.2 trillion electronics industry, and on top of that a EUR 5 trillion telecoms, internet and broadcast industry. Because dependency on semiconductors increases, we hold the keys to the future.
And with the increased role, the value at stake is becoming higher. In the digital era, the electronics industry is seeing the boxes becoming thinner, flatter, smaller and 'more empty' - which literally applies to the PC and Consumer Electronics margins too. Value is created in intellectual property, in the chips, the embedded software and enabling technologies. We see at the same time our OEM customers either struggling or successfully moving forward to leverage their brands, consumer intimacy and new services models (Apple, DELL). The middle space is being outsourced to ODMs and EMS companies, largely in Asia.
These big industry changes affect our business:
The product lifecycle is shorter. R&D bills rise. So deverticalization also means more risk and the need for higher investments by the chip maker. And the cycle of investment now is much longer at semi companies (2-3 years) versus the set makers (9-12 months).
Add together the higher investments, longer investment return cycles, more risk and shorter product cycles and it's no wonder you detect changing behavior from the semiconductor companies.
The shift to digital is prompting much greater convergence in applications, and more device interconnection. The deverticalization of device makers has, in turn, led to much greater outsourcing to ODM/EMS/Design Houses.
From a product creation perspective, it will be difficult for a single, stand-alone semiconductor supplier to be successful. As full system solutions replace single IC designs, so the position of semiconductor companies changes. What was formerly a simple value chain becomes a complex web or matrix of value creation.
Semiconductor companies have become acutely aware that the ability to compete and grow in such an environment depends on a cooperative approach. First, we work hard to understand long-term consumer needs and industry trends.
Everyone is fighting to get larger market shares to ensure return on investment. And the way to achieve that is scale. In fact, achieving greater scale is the way to take matters in your own hands to shape the future.
The ability to work together cooperatively in complex ecosystems is precisely the kind of evolutionary advantage we believe semiconductor companies need. That's because complex webs have replaced simple top-to-bottom food chains.
So we semiconductor companies find ourselves in alliances with new and unexpected bedfellows. The complex value chain looks more like a honeycomb than a linear supply arrangement.
These webs or "industrial ecosystems" involving substantial semiconductor usage form the new topology of the evolutionary landscape for the semiconductor industry. These ecosystems involve new business models and revenue streams.
The ultimate driver forcing us all to work and act cooperatively is the consumer. And we see that, regardless of how advanced it becomes, technology must be easy to experience and designed around the needs of the end-user -- not the needs of the providers.
That underlines the requirement to offer standards-based, end-to-end industry solutions, such as MPEG4, DVB, NFC, and so forth). And it forces suppliers to focus - not just on delivering at lowest cost and shortest time to market - but at the highest quality as well.
Innovation, of course, is what really drives our business - just as it drives the basic evolutionary principle. Because of the importance of scale, it might be tempting to say my theme should be "Only the Strong Survive." But it's not quite true. Evolution isn't simply "survival of the fittest", but "survival of the smartest."
Innovation works along different axes: I mean Moore's Law, of course. The trend toward ever increasing power condensed into ever decreasing size is the story of nanotechnology.
The horizontal axis - which involves the blending of System-on-Chip and System-in-Package to produce wholly new functions such as bio-chips - still needs a snappy title. At Philips, we call it "More than Moore." We see the re-emergence of smart front-end modules, MIMO, etc. SiP and MEMs technology play a role here. And let's not declare analog dead just quite yet...
And in passing, I'd add that if Moore's Law is pursued to its conclusion, chips will be so small you won't be able to see them - let alone charge for them. In fact, the current pricing model of charging by the square millimetre - or nanometer - of silicon, won't make any sense. As our semi industry invests more in silicon, but also in systems know-how and embedded software & design-in services, can we afford to make money by charging per unit?
The value-added is intelligence, not the commodity - and we should reflect on how we can get a sufficient return on the new investments we are all making, under the existing scenario. If one of the world's largest computer hardware houses (IBM) can reinvent itself as a service business, why can't the leading edge of the semiconductor industry do the same?
Precisely which is the right model is open to debate and in a few minutes' time in the Q&A, I'd like to hear your views. Should it be the "IP Fortress" idea (Qualcomm) or is the "System House" (EMP) approach more applicable?
The emergence and maturing of the semiconductor industry since the 1950s is an evolutionary story, of course. Starting from primitive life-forms that were old-style components, and evolving toward complex system solutions. Likewise the behavior of industry shows some Darwinian characteristics too...
I warned you that evolution was a tough process, and we would see some blood. Here it is:
It is not simply size or speed that determines which life-form emerges as dominant. We know from evolutionary history that the ability to work cooperatively creates a notable survival advantage. When individuals of the same species band together as in the hunting pack à a pride of lions are together very effective! These large carnivores (lions) are able to control their food chain by means of cooperative hunting.
However there's a second and usually more peaceful kind of cooperative work that creates survival advantage. This happens when individuals from different species with complementary skills cooperate to create a more benign habitat for all. This is the basis of every successful ecosystem.
In summarizing this first part, I want to highlight three important elements:
- Semis is a systems business and the stakes are rising
In so many fields, our industry has been promoted from component provider to strategic design partner, and increasingly we find ourselves at the heart of complex new arrangements or alliances delivering technology to end-users. - Value chains become more complex
There's a need for collaboration and scale. And partnering is a key element. - In this environment, Darwin's law applies.
The story of how industry players find their way in this new landscape is one of evolutionary adaptation. Will it be size or speed that determines the dominant life-form? We do know one thing: Only the fit survive.
In the second part of my speech, I would like to indicate how we at Philips deal with our new-found world.
First of all, let me give you some basic facts about Philips Semiconductors. We're a business with almost 36,000 employees, annual sales of around (EUR 4.8 billion, a top 10 position in globally in semiconductors, and a top 5 player in all of our chosen markets. We're clustered around four functional areas: Mobile and Personal; Home; Automotive and Identification; and MultiMarket Semiconductors.
This positions us very well for the convergence game. We are re-using IP across each of these domains, and we understand use-cases better than anyone.
We are a company that excels in several application segments. For example in the TV supply chain: we're the undisputed number one semiconductor supplier. And in set top box applications, 5 out of 10 digital terrestrial STBs use our modules, as do 4 out of every 10 PCTVs. In addition, Philips solutions are inside 4 of every 10 new generation phone handsets made worldwide. Not to mention that fact that we are the leader in Identification technologies.
While we have strong roots in Europe where 28% of our sales originate. 62% of our business in is Asia and 10% in the USA. In Asia, we have a strong customer base as well as important centers of manufacturing and fulfilment (in China, Taiwan, the Philippines). In Europe, we have a strong base and are key players in industrial clusters that boost competitiveness and innovation. And here in North America we have close relationships with key OEMs whose design decisions give us a strong role with Dell, Apple, Microsoft and others.
Our mission, if you like, is making it possible for consumers to connect to each other and to entertainment, to information and to services, anywhere, anytime.
Our vision that I set last year is to become a leading company that excels in serving our customers, and with great financial returns for its investors.
Therefore we have embarked on a journey of change - our road to victory.
I'm very aware there is acute interest in the future of Philips Semiconductors as a direct result of the statement we made last December 15th, announcing the creation of a separate legal structure for Semiconductors as a division of Royal Philips Electronics. I will give you as candid an update as I can - if only to save the subject from dominating question time. But to place this in its proper context, I want to explain a bit more about what we're doing, why we're doing it, and to give you some case study material. This all relates directly to the evolutionary trends I've been describing.
This part of my presentation is all about perspiration, rather than inspiration. Getting fit matters. For that purpose, we have embarked on a journey that we call our business renewal roadmap.
Getting fit requires working out to build muscle and burn fat. Somewhere near the high point in the semiconductor industry cycle when everyone's out partying, might seem an odd time to be going into the gym. But that's what we've been doing at Philips Semiconductors. We decided to get in shape, pick our battles - and really go for it.
One of the simplest ways to get fit is to get in the habit of running upstairs -- and that's exactly what we've been doing with our Business Renewal Program since May 2005. We devised a set of nine steps or action programs that escalate progressively, assign responsibility into subgroups - and measure the results. It's not rocket science.
The Business Renewal Program is our flight of ascending steps. These involve - successively -- enhanced market focus; relentless focus on execution and operational excellence; more nimble cost structures; active top down portfolio management; more assertive market share and pursuit of growth; management of innovation across businesses for higher (R&D) effectiveness; and asset-light industrial strategy; growing scale in key areas; and finally building partnerships through M&A. More on this final step later on.
We have picked some areas to work on, which we call "key battles". Two important ones are: customer base management and managing the entire value chain.
Customer base management isn't just about existing relationships - it's about creating new customers too. We recently boosted our key customer list, and we focus on direct serving some 50 key accounts. We realise that customer portfolio management is important, after all some gain share, some lose share. So we value our "rising star" customer base. Especially when we find customers who buck trends, or showing special growth trends in fashion markets and/or in emerging markets.
In terms of value chain, Philips Semiconductors has a track record of successfully partnering throughout the industry and managing ecosystems, so I want to take you through a "case study" of this, related to NFC
But first, I think it's worth a short description of what exactly near field communication is and the value it can deliver both to business and to consumers.
Near Field Communications was developed by Philips in cooperation with Sony. Together with Nokia, the two founders set up the NFC Forum and today we have more than 70 members from various industries, including Microsoft, NEC, Samsung, VISA, Mastercard, Vodafone, Motorola and many, many others. By the membership of the forum, you can easily see the potential for this ecosystem to evolve. By 2010, we expect half of all new phone handsets to have NFC embedded, while adding minimally to the total bill of materials. This holds great promise throughout the ecosystem as operators, banks, handset makers - even the entertainment industry get involved - and consumers ultimately win by getting the content they want, when they want it. We also believe it's an excellent example of simplicity in technology as all transactions are initiated simply by holding your phone close to another NFC-enabled device, whether that's another phone, a payment kiosk, a computer or even a smart poster. And we're finding with our current trials that consumers agree.
In this example, you can see a person obtain information - a url - from this smart poster on a new film. She then launches the browser on her phone, and can view the movie trailer. Later, she can take that data home, and with the simple swipe of her phone near her monitor with an NFC chip included, she can then download the specifics to her PC to find out where the film is playing or to share with friends or family. It's pretty simply and the consumer reaction is very favourable.
Allow me to illustrate how an NFC ecosystem works for customers and providers:
- You'll find one great example in Atlanta, Georgia, at the Philips Arena which is home to the NBA's Atlanta Hawks, and also the NHL's Atlanta Thrashers. Here, a club of different players in value chains with different requirements has created a new business model to deliver services to sports fans. The partners are Nokia, Atlanta Spirit, Cingular, Vivotech, VISA, Chase Bank - and of course Philips. Any season ticket holder with a cellphone, a Visa card and a Cingular account can make contactless payments at concession stands and access mobile content - like statistics on their favourite player - inside the arena.
- In the city of Caen, France, we have another NFC-based ecosystem serving retail customers who want to get the best from their visits to the local department store - and hassle-free car parking, among other applications throughout the city. Consumers can use their NFC-enabled mobile phone to pay for groceries at the supermarket, enter, exit and pay for parking at public parking lots as well as download bus schedules (and listen or view them on their phones). They can also obtain information around the city whether historic information from a monument, or downloading the latest movie trailer from a 'smart' poster and viewing it on their mobile phones. Thanks to an ecosystem that comprises a credit company, a handset maker, an operator, a retailer, content provider and city services, consumers can experience the benefits and simplicity - in essence the promise of truly advanced technology - in their daily lives.
In an "ecosystems" there is an arrangement driven by the shared need to serve customers, create value and enhance the consumer experience.
Then there's another type of ecosystem we see appearing around the world that is worthy of a mention. It covers the area of co-opetition. Pre-competitive cooperation in the technology lifecycle.
We drive this type of cooperation in the "Hi-tech cluster" or what the French call a Pôle de Compétitivité. The ganging up of large and small companies with academia to drive innovation together, often supported by Governments. We see similar innovation areas in Korea, Japan, Taiwan - and of course the United States. Albany in New York State - the best example of a hi-tech cluster - is receiving considerable Federal and State government support.
This is a good idea, it fosters innovation and helps create the know how economy. Clustering of commercial and academic research interests around semiconductor fabrication facilities creates critical mass. With the sticker price for new fabs so high, and the demand for investment in R&D running equivalent to 20% of annual sales, it makes sense to join forces where you can -- and leave the competition for later in the product cycle.
That's precisely what Philips Semiconductors does with the Crolles2 Alliance, located near Grenoble in France. There we joined forces with Freescale and STMicroelectronics. TSMC also participates and together, the partners have invested over US$ 1.4 billion and together, these R&D efforts equate to that of a company of $20Billion. We're manufacturing 90-nm SoCs on 300-mm wafers now in Crolles2. The leading-edge technology platforms being developed by the Alliance today will drive the emerging convergence of tomorrow's technologies for multimedia and wireless applications.
The French PdC are successful (another example being Airbus in Toulouse), so we are expanding this form of partnership by pursuing public-private partnerships with the creation of a Dutch/Belgian Pole de Competitivite in the Leuven-Ehv-Nijmegen corridor.
In the end though, while partnerships are great and help you leverage the best of many worlds, one's own scale matters too.. It's your own size. Revenue base. Market share. Ability to do more R&D investments. Attract the best talents. Invest in state of the art capacity.
Here is where our announcement comes from last december.
I have kept you waiting to hear the answer to the question of what we plan to do with Philips Semiconductors. The answer quite simply is that we are searching for scale, and for complementary strengths. We felt that Philips Semiconductors needed the freedom to select partners and make investments to accelerate our growth.
The rationale for our decision in December to create a separate legal structure for this division of Royal Philips Electronics was precisely to address these opportunities. We have just two criteria:
- To create long term value for Philips
- To build a strong semiconductor business at the top of the league.
We told markets that the process of "disentanglement" or ring-fencing assets and personnel, would take well into the second half of 2006. All options are open to us: we can envisage a merger, or an IPO and even a partnering through a sale or deal involving financial sponsors. I'm sure you'll understand there are sound reasons why we can't be more specific.
What I can say, however, is that Philips Semiconductors has a growing sense of identity, a real sense of momentum - and absolute determination to extend our current run of design wins and win market share.
The bottom line is that Philips Semis has decided to take its destiny in hand, and proactively shape its future, rather than be a passive agent. Making the future happen, rather than waiting to see what it holds, is our intent.
Which brings me to my conclusion.
We operate in a fascinating world where a lot is happening. Innovation, evolving value chains, new revenue streams; higher stakes and risks.
Standing still is no option. At Philips we have decided 18 months ago to take matters in our own hands and become a true leader.
We are actively shaping our destiny and place in the technology world. With business renewal, great progress has been made. We're positioning Philips Semiconductors to ensure we not only survive but thrive, solidifying our position in a technology landscape where survival of the fittest is certainly the rule.
As I said at the outset, whatever the game you play, playing with passion is what counts. And games, of course, are team events. The spirit of team play and cooperation is what informs the whole idea of ecosystems, of complex value chains, and the underlying principle that working together is a more effective way to serve customers than working alone.
Thank you very much. Now I'd be delighted to answer any questions you may have.
