On Its Own

Dec. 21, 2004
Global manufacturing gives ON Semiconductor an edge.

As a brand-new company, ON Semiconductor LLC faced a formidable challenge: to find its way as an independent entity in what is essentially a commodity business. Formerly the semiconductor components division of Motorola Inc., ON Semiconductor was sold last August to Texas Pacific Group, a Ft. Worth private investment firm, for $1.6 billion in cash, debt, and one-tenth of the stock in the new company. Motorola's remaining $5.7 billion semiconductor products sector will focus on higher-end microcontrollers and microprocessors, including the well-known PowerPC. Although Motorola wanted out of the relatively slow-growth line of standard components, CEO Christopher B. Galvin did laud ON Semiconductor's prospects as a newly independent entity. "The components business has a bright future, with an exceptionally capable management team and unique business model," he said. Much of that business model is tied to manufacturing. While ON Semiconductor already had a corporate office in Phoenix and several plants around the world, it needed to begin charting its own course as an independent firm no longer protected, or encumbered, by the sheer size of the mother ship. From a manufacturing standpoint, the company is a high-volume producer of low-priced components, typically selling from a penny up to $10 per unit. The volume is staggering: The company ships about 400 million units weekly, or almost 20 billion units annually. No wonder it ranks as the world's largest global supplier of analog, logic, and discrete semiconductor components that provide power and interface capabilities for a variety of everyday applications. The competition, not surprisingly, is fierce. ON Semiconductor goes up against at least 30 other companies in the analog, logic, and discrete components trade. Moreover, some of these are giant firms with lots of capital and market reach, such as Texas Instruments. Unlike the typical semiconductor chip fabrication plant, which requires a $1-billion-to-$2.5-billion upfront cost, a components fab may cost only $100 million. Instead of worries over depreciation on huge fixed-asset outlays, in the components business the twin costs of materials and labor are key. Therefore, the location of plants is of critical importance. "In our business, it's noncompetitive to manufacture in high-labor-cost areas such as Japan, the United States, or Western Europe," says Bill George, senior vice president and chief manufacturing and technology officer at ON Semiconductor's headquarters in Phoenix. For that reason, the company is upgrading and expanding its plants that are located in areas where labor is cheaper. These sites include a wafer processing, assembly, and test operation in Saremban, Malaysia, near Kuala Lumpur; a joint venture in Sichuan Province in China; a pair of plants in Central Europe; and one in Guadalajara, Mexico. As the company's operations become more automated, the need to keep labor costs in check becomes more important. "As our processes become more automated, our needs are no longer for semiskilled workers, but . . . for professional, skilled engineers," George says. "The cost for these professionals is much lower in places such as the former socialist countries." Part of ON Semiconductor's manufacturing strategy is to set up joint ventures in emerging economies. Five years ago, under the Motorola umbrella, the components division established a joint venture in Leshan, China, with the Leshan Radio Co. Ltd. Despite the fact that the plant is in the country's interior, 1,000 miles from the coast, "It's our highest-volume, lowest-cost plant in the world," George says. Now the company is expanding the plant by 200,000 sq ft in order to double production over the next year. In Central Europe, ON Semiconductor is involved in a pair of joint ventures that will help get the area's electronics industry back on its feet after many high-tech firms there went bankrupt. The U.S. firm became the sole customer and biggest shareholder of two wafer processing plants in Roznov, Czech Republic, and Piestany, Slovakia. Says George, "We've been very impressed with the technical capabilities and professionalism of the workforce there . . . ." ON Semiconductor is pursuing a plan to create fully integrated factories with all the necessary operations at a single site. The goal is to have each plant provide components to customers in its regional market. "The idea is to reduce cycle time," George explains. "Our business is pretty much matched to the market." As an example, the Piestany facility will supply semiconductor components to two key customers of ON Semiconductor, Sony Corp., and Volkswagen AG. "Site location near our customers is an important aspect of our supply chain," George adds.

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