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Electronics: Lean, Mean, And Ready For Growth

Electronics companies see a payoff from cost-cutting measures implemented during a four- year slump

With worldwide sales of semiconductors on track to exceed $214 billion this year, up from $166 billion last year, electronics manufacturers have reason to smile. Sales of PCs, cell phones, and digital cameras were strong through the summer. But despite prospects of a record year and predictions of continued (albeit slower) growth next year, the downturn that has dogged the tech sector since the last election remains on the minds of many in the electronics industry.

"It's encouraging that things are starting to strengthen," says Ed Mahoney, VP of IS at Micron Technology Inc. "But we're really in the fourth year of weathering one of the severest downturns we've ever seen."

Like just about all companies in the tech sector, Micron coped by cutting costs. As a result of strategic initiatives in the past year, the company cut its IT spending from 8% to 3.6% of annual revenue, while adding value and services. "Costs have always been an issue for us," Mahoney says.

Micron reduced controllable costs such as service contracts, telecom spending, and depreciation expenses. It also introduced more processes for demand and change management and other business activities to increase efficiency.

Standardization has been another means to that end. Micron has been driving efficiency through the consolidation and elimination of redundant tools, technologies, and applications. "By forcing as much of the company as possible into a homogenous environment, we reduce total cost of ownership," Mahoney says. Belt-tightening has paid off: The company's IT efforts contributed to its first profitable quarter after 14 consecutive quarters of losses.

National Semi IS manager Bob Neuberger says his group is cutting IT costs while increasing value to the company.

National Semi IS manager Neuberger says his group is cutting IT costs while increasing value to the company.
The major issue at National Semiconductor Corp., which lost money in 2002 and 2003, also has been keeping costs down. IS manager Bob Neuberger says his group has focused on reducing IT costs but at the same time offering value to the company. "We've actually tried contributing more toward revenue with what's traditionally been a cost center," Neuberger says.

Many semiconductor companies are using IT-based initiatives to redraw the bottom line. John Greenagle, director of communications for the Semiconductor Industry Association, suggests that IT initiatives have played a part in the industry's recovery. Still, while the industry as a whole may be doing well, some companies aren't meeting sales expectations. Greenagle attributes this to intense competition in certain segments.

Competition isn't always in the form of price wars. In emerging markets like China, there's competition for employees. National Semiconductor opened a manufacturing plant in that country about five months ago. "It's a whole different set of dynamics compared to opening something in Singapore or Europe, with the government regulations and security considerations and a just-barely maturing infrastructure," Neuberger says. Perhaps the biggest challenge has been finding and keeping the right people. "It's an incredibly competitive workforce," he says, "especially in the IT world. People are job-hopping like crazy. You work your way up the ladder in three months now."

Government regulations remain an issue in the United States as well, especially with regard to the Sarbanes-Oxley Act, which requires strict compliance with financial and accounting standards. "The biggest challenge is in the lack of clarity about what needs to be done," Neuberger says. "You get two paragraphs from the U.S. government saying, 'This is what you need to do.'" In the past year, National Semi implemented a formal IT control framework to satisfy the legislative requirements. "It's a really big effort that's going to take us away from what we would be doing as far as adding value to the company," he says.

At Marvell Semiconductor Inc., Sarbanes-Oxley compliance has complicated IT efforts. "The implementation of systems is frozen through the end of the fiscal year, in a lot of cases, because they have to be tested and certified by external auditors," says Walter Curd, director of global IT. The tests are meant to evaluate the security and segregation of duties surrounding financial applications.

Like other companies in the industry, Marvell has focused on standardization as part of its IT strategy, and the effort is proving to be fortuitous. Because Marvell uses a single instance of Oracle 11i worldwide, it has to conduct far fewer compliance tests than would a company with multiple financial processes and systems. "The work that we did to standardize and simplify the processes globally is paying off up and down the audit trail," Curd says. The company reported $297.2 million in revenue in the second quarter of fiscal 2005, up 54% from the same quarter a year ago.

At Texas Instruments Inc., compliance is less of an issue. CIO Brian Bonner says he's not concerned about Sarbanes-Oxley because of the way TI's systems have been designed. "We have a single instance of SAP that drives a lot of processes, so we're comfortable," Bonner explains. "We've got a few minor things we're working on, but we'll be able to meet all the requirements. It's not anything I'm spending any time on personally."

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