ChiefExecutive.net

When the Chips are Down

January 1 1999 by Charles Darwent

There’s a story that Pasquale Pistorio, president and CEO of STMicroelectronics, relishes. In July 1980, Pistorio, then head of Motorola’s international semiconductor business, decided to take a job as CEO of Italian microelectronics outfit, SGS. “I went to my boss at Motorola and told him I was going back to Italy,” recounts the Sicilian, a Santa-ish twinkle in his eye. “He said, ‘I guess SGS is very profitable?’ So I said, ‘No, John, actually they’re losing their shirts.’ At the time the company was losing 20 percent in a good year, 50 percent in a bad one, and losing market share as well. So he said, ‘Oh. Then you’re going back to Italy because it’s a nicer environment?’ I said, ‘No, the Red Brigades are killing one industrialist a week. It’s chaos there.’ He thought about that; then he said, ‘SGS must be paying you a lot more, right?’ So I said, ‘Well, no, they’re paying me half what I’m earning here.’ So he looked at me for a minute and said, ‘Pasquale: are you crazy?”

Well, maybe. A brief survey of Pistorio’s subsequent career suggests otherwise, however. Having turned around the ailing SGS”I just added my manufacturing and mass marketing experience to what was basically a lab,” claims the uncharacteristically self-effacing Italian Pistorio set about looking for a partner. In 1987, he found one: the French microelectronics business, Thomson Semiconducteurs. “Thomson and SGS were the same size and had many things in common,” says STM‘s CEO. “One of them being that they were too small to succeed. Scale is vital in this business.”

As anyone who has followed the wranglings of the EC knows, acquiring scale is one thing; getting an Italian and a Frenchman to share a corporate culture is another. Pistorio’s answer was to transplant STM‘s headquarters to a remorselessly neutral Geneva, which seems to have done the trick. In what has been a brutal year for the microchip business generally, STM‘s worldwide sales for 1998 are estimated at just short of $5 billion an increase of 7 percent on 1997-with profits at a shade more than $2 billion. Analysts’ reports on the group, floated in New York and Paris in 1994, are peppered with words like “strong buy” and “long-term attractive.”

How has Pistorio managed this? The answer has less to do with his talent for gluing things together than for taking them apart. The Italian’s Roman genes have left him with a taste for conquering through division. First, there is STM‘s structure, based on its CEO’s belief that “the only way to be a global player is by being a regional player with an integrated presence.

“This means you cannot do all your manufacturing or all your product design in one country and sell in others,” explains Pistorio. “We have tried to build our global approach by being an integrated supplier in each major microeconomic system-Europe, America, and Asia. We are more integrated in the U.S. than any American company in Europe; we have strong marketing, but also three major manufacturing plants and a multitude of R&D centers in San Jose, Boston, Detroit.”

Pistorio’s goal is to build a “macro-corporation that behaves like a collection of microcorporations,” he asserts. “Ideally, I’d like to see STM as 100 microcorporations of $100 million or even less.” This structure also chimes nicely with STM‘s product development strategy, based as it is on tailoring bespoke products to its individual customers, which include household names like Alcatel, Ford, Hewlett-Packard, Motorola, Nokia, and Sony.

“Something like 62 percent of our sales are now in differentiated on-chip products,” says Pistorio. “It’s a different kind of business, because your customers are effectively your partners. You can only do that by getting close to them, not just to their purchasing departments but to their designers, their manufacturing activities. But you also get greater stability in margins, because you’re not competing with Samsung or Toshiba all the time. Our margins have been in the 38 percent to 38.7 percent range for eight successive quarters.”

The real point about Pistorio’s little-big beliefs, though, is that they make STM a very fast player indeed. “In our business, you have to be ready when the market opportunity is there,” says STM‘s CEO. “Product generations are evolving so fast that the only way you can operate is by decentralizing decision-making, turning individuals into the key actors in the business process. That’s how we’ve managed to reconcile the need for scale in a business as capital intensive as ours with the dynamism necessary to cope with its changing market.”