STMicroelectronics: The Turnaround That Created a European Semiconductor Giant

STMicroelectronics: The Turnaround That Created a European Semiconductor Giant

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Two semiconductor companies.  Both alike in dignity. In fair Europe, where we set our scene. From ancient roots break to new silicon. In 1987, Italy's SGS Microelettronica  and France's Thomson Semiconducteurs   decided to join forces. It was a  historic alliance that created a   European semiconductor giant - a  globally competitive one at that.

The stories of these two star-cross'd silicon  lovers are fascinating. In today's video,   we talk about the merger that created  SGS-Thomson, now STMicroelectronics. Oh, and I do want to sincerely  apologize for totally mangling   these European pronunciations. Feel  free to make fun of me in the comments. ## An Urgent Need Let us start in Italy. Because the history of SGS  is far simpler. And also because I like pasta.

SGS begins with the iconic Italian industrialist  Adriano Olivetti. Adriano was the son of the   founder of an iconic Italian typewriter company.  A visionary leader with immense drive and energy,   he pushed his company into the  computer space in the mid-1950s. Their first prototype - the Elea 9001  - had been built with vacuum tubes.   It worked fine, but Adriano and the brilliant  Chinese-Italian leading his computer team Dr.  

Mario Tchou decided to redesign and rebuild  the computer using solid-state transistors. The resulting success convinced Olivetti and Tchou  that transistors were the future. But Adriano did   not want to import these critical items from  the United States - where they were first   invented - or West Germany or the Netherlands.  They wanted to make them here in Italy. However, the Olivetti Company had its  hands full with the work of producing   computers. Fundamentally, they saw  themselves as a mechanical company  

ill-equipped to handle the challenges  of solid-state device mass-manufacture. While debating the merits of starting  a full research laboratory themselves,   the two hear about another Italian  company working on transistors. ## Starting SGS Born in 1906, Virgilio Floriani grew up believing  in the value of technology and innovation. During the war, he worked as a designer and  engineer for a military radio factory. After   the war ended, he founded the Italian  telecommunications company Telettra   in 1946. The name is an amalgamation  of "Telephony, Electronics, Radio". Telettra introduced a series of new  technologies to post-war Italy. So  

when Floriani realized that nobody else  in the European telephone industry thought   these transistor things were important,  he saw a chance to seize the high ground. So Telettra bought a license from  Bell, and then in 1956 traveled   to the Murray Hill laboratories to join a  hundred-person symposium to learn transistors. He did not learn much, since  his English and theoretical   solid-state physics knowledge  were limited. But upon his return,  

he set up a very small laboratory in Milan  to build solid-state diodes and transistors. More than a year later, Telettra publicly present  their work in early April 1957. Olivetti and Mario   Tchou hear about this and paid him a visit. After  some discussion, Olivetti and Floriani decided to   join forces - combining research from Tchou's  lab in Barbaricina and Telettra's processes. Thus in October 1957 we have the "Società  Generale Semiconduttori", or SGS. The name literally means the “General  Semiconductor Society" and they presented   themselves as the first Italian company  expressly founded for the "research,   study, and manufacture of diodes and transistors".  Their products would be available to any company.

SGS would set up a research lab and  factory in the small town of Agrate   Brianza along the Milan-Bergamo motorway to  take advantage of Milan's big industrial base. Starting with a license from General Electric,   they start producing their first germanium  diodes for their parent companies in 1959.   Their transistors accelerated Olivetti's work,  helping them ship the Elea 9003 computer. ## SGS-Fairchild SGS was founded the same time  as Fairchild Semiconductor.

Fairchild quickly distinguished itself with  several innovative moves. For instance,   making silicon transistors when everyone else -  except Texas Instruments - was doing Germanium. General Electric was a famous name,   but their transistor technology quickly  grew outdated in the fast-moving industry. Between 1957 and 1961, the company  lost nearly 700 million lire. Which  

I think is over a million USD in 1960 dollars,  assuming an exchange rate of 600 lire to 1 USD. SGS soon realized they needed a new technological  partner. So Olivetti and Floriani reached out   to Bob Noyce of Fairchild through Adriano's  brother Dino and asked about a partnership. The resulting deal made Fairchild an equal  partner to Olivetti and Telettra - a third   each. Fairchild transferred their silicon  technology and sent over their staff to   start converting those Germanium lines over  to silicon. SGS began building factories  

across Europe - England in 1963, West Germany in  1964, France and Switzerland in 1966, and so on. SGS-Fairchild was a fairly successful endeavor.  They turned a profit in 1963. And in 1967,   they generated about 17.5 billion lire - or about  $30 million USD. 75% of that revenue came from   outside Italy. They had about 3,200 workers and  owned 30% market share of the Italian market. However, the arrangement did not last.  Fairchild wanted SGS to just stick to sales   and manufacturing. But SGS and the Italians  wanted to do R&D right in Agrate, Italy where  

they were founded. They argued that the European  semiconductor market was different from America's. For instance, the American semiconductor market   in the 1960s leaned heavily towards  the military - space and missiles.   Europeans on the other hand were focused  on telecommunications and consumer items.

This disagreement led to a split in 1968.  Fairchild allowed SGS to keep the licensed   technology, but sold their shares. A year after  that, Telettra was sold to the massive Fiat Group,   dumping their SGS shares as well. Thus by  1970, Olivetti was left the sole shareholder. Despite these troubles, SGS emerged from the  1960s and the transition to integrated circuits   as one of the few European semiconductor  successes. Their partnership with Fairchild   gave them a valuable planar IC technology  targeting consumer and specialty devices.

## Going to France Let us step away from the guys in Italy and pick  up a new - very messy - thread over in France. The company that we will eventually call Thomson   is the result of a series of mergers that  occurred throughout the 1960s and 1980s. It gets messier than the Habsburg  family tree so we will do our best. Keep in mind this is not a general  history of French semiconductors. I   highly recommend these two resources on whom  I leaned greatly for this section - Andrew   Wylie's French Vintage Semiconductors Page, and  Mark Burgess's French transistor history page. There are two dominant semiconductor  groups that will eventually merge to   create Thomson Semiconductors - COSEM  of CSF and SESCO of Thomson-Houston.

We shall start with COSEM. Yes, I know we  are going two levels deep here. Bear with me. ## COSEM & CSF COSEM was the semiconductor manufacturing   arm of "Compagnie Générale de  Télégraphie Sans Fil" or CSF. CSF was a radio and telephone company with  roots dating back to the 1880s. By the 1950s,   they produced military and telecommunications  electronics hardware. Being vertically integrated,   they also produced their own vacuum tubes,  ferrite cores for memory, and so on. CSF was one of the very few transistor  companies that did not start their journey   with a Bell Labs license. Rather, they relied  upon technology transferred over from the  

state's telecommunications laboratory - "Centre  national d'études des télécommunications" or CNET. In addition, they leaned on the connections of  critical members in the French semiconductor   community to the US. Notably, Claude Dugas, a  French-born physicist who studied at Carnegie   Mellon and had been good friends with  scientists in Bell Labs and others. In the mid-1950s, CSF founded "Compagnie Générale  de Semi-conducteurs" or COSEM in Saint-Egrève,   a western suburb of the town of Grenoble. The  area was chosen for its nearby university as  

well as its dextrous female workforce - deemed  suitable for delicate transistor manufacture work. In 1961-1962, COSEM had become France's  largest semiconductor-maker with 17 to   45% share of the French market. While they  largely serviced the local market - selling   to French computer makers like IBM France and  Bull - up to 30% of its output was sold abroad. ## SESCO & Thomson SESCO hails from France's other  major semiconductor maker - Compagnie   Française Thomson-Houston or just Thomson-Houston. Thomson-Houston was founded all the way  back in 1893 as the French subsidiary of   the American Thomson-Houston company - one  of the predecessors of General Electric.   They sold electric trains, railway  signaling, telephones and the such.

A wild series of restructurings, mergers,  transfers, and one 1936 nationalization later,   we have the French Thomson-Houston company. French  is in the name because of the nationalization. During this period, they spin off  their heavy engineering divisions.   That eventually becomes Alstom, the French  Rail company. What a coincidence, right?

In the 1940s, Thomson-Houston is making  radars and radio transceivers for the   professional market, as well as consumer  radio sets and telephones. Transistors   make a lot of sense for radios. However  resistance from the vacuum tube people   prevented them from going as hard  into transistors as they should.

They fell behind. So in 1956,  Thomson-Houston teams up with   its former American owner General Electric  to work on semiconductors. Later in 1961,   the two found a semiconductor subsidiary, "Société  Européenne des Semi-Conducteurs" or SESCO.

In 1966, Thomson-Houston merged with  the electronics arm of the French arms   company Hotchkiss-Brandt. Hotchkiss is somewhat  famous for their Hotchkiss Revolving Cannon,   capable of firing 43 shells per minute.  The new company is called Thomson-Brandt. Okay, just to recap. We have CSF, the  telecommunications company, and Thomson-Brandt ... which itself was a merger  of the electronics divisions   of a French-nationalized American  company and French cannon company.

## Merger to SESCOSEM French theoretical solid state  physics knowledge was very strong. However, French companies struggled to  translate that knowledge to the market.   Notably, their telecommunications  and electronics companies stuck   with vacuum tubes and then Germanium  for longer than they should have.

France is known for having numerous  foreign companies operating there,   which offered substantial competition to  domestic firms. So with Thomson-Brandt   struggling to compete and CSF over-leveraged  thanks to its expansions throughout the 1960s,   the two decided to merge in  1968 to create Thomson-CSF. Soon afterwards, their semiconductor  divisions - COSEM and SESCO - joined   together to create SESCOSEM, "Société  européenne de semi-conducteurs",   or literally "European Semiconductor Company".  Whew. SESCOSEM began as a second-source producer   for companies like Motorola, helping the  latter more easily enter French markets. ## The Pull of Computers The end of the 1960s saw a spate  of European countries trying to   domestically produce their own computers.

The most famous of these efforts was France's  Plan Calcul, which Charles de Gaulle initiated   in 1966 after General Electric acquired  the last French computer-maker, Bull. One of the companies involved was Compagnie  Internationale d'Informatique, or CII.   This was a non-vertically integrated  company partly owned by Thomson-CSF   and subsidized by the French government. That same year, the United Kingdom  government also midwifed their own   domestic integrated computer giant -  ICL. I covered it in a previous video. Calcul should have presented a great  opportunity for SESCOSEM. After all,   they were CII's sister company.  And Plan Calcul did allocate 20  

million francs for SESCOSEM to build  semiconductor TTL plants for CII. But CII - not to mention ICL and the other  European computer companies - opted to   build around Texas Instruments. SESCOSEM did  manage to receive the second source contract,   but nevertheless suffered damage  from CII arguing that if they   were forced to buy local then their  products would be inferior to IBM's. Throughout the 1970s, SESCOSEM struggled to  turn a profit. Their volumes were too small,   which management naturally blamed the domestic  market for. But one could also point at SESCOSEM's  

own business practices, which forced it to  offer too large a range of niche products. For instance, its "controlled  delay" ("retard contrôlé") strategy,   which targeted a 2-year lag behind American  leaders. Ostensibly to avoid taking excessive   risks on potential flops. In 1972,  Thomson-CSF absorbed SESCOSEM into   its own corporate structure for tax reasons.  Meaning, SESCOSEM were losing a lot of money. ## Italy Intervenes Let us step away from France and go back to SGS.

It is 1970, and after Telettra  and Fairchild left the business,   SGS suddenly found itself in a rough spot.  Fairchild provided a good portion of its   technology and there were too many unprofitable  factories across Europe that needed to be closed. Its sole controlling shareholder was Olivetti,   which was suffering its own turmoil.  Adriano Olivetti and Mario Tchou had   died in the early 1960s, leaving them  in a bit of a lurch, leadership-wise.

They were also in financial straits due  to intense Japanese competition and an   ill-advised acquisition. So Olivetti could not  cover for a struggling semiconductor company,   and they started looking for a financial  partner to take the business off their hands. Motorola sniffed at a possible acquisition,   but the Italian government - recognizing SGS's  strategic importance - stepped in. In 1972,   they bought out Olivetti via a state-owned  telecom/electronics holding company called STET. Then STET merged SGS with a small Italian  semiconductor company ATES to make SGS-ATES.

ATES ("Aquila Tubi e Semiconduttori") was founded  back in 1959 as a vacuum tube manufacturer. Two   years later, they got a license from RCA  and Marconi and built a factory in the city   of Catania in Sicily. Their management team  took over running the combined organization. ## SGS-ATES The Italian government saved  the company from falling into   American hands, but did not improve  their loss-making financial status. The company did have some interesting  products. They held a license from   Zilog to produce the Z-80 and  Z-8000 microprocessors. Zilog  

cofounder Federico Faggin once worked  at SGS-Fairchild before he joined Intel. That was basically the only digital  integrated circuit they sold. But they   also had some good RF germanium, analog  integrated circuits, and power stuff. Yet despite these good products, the company  lost money throughout the entirety of the   1970s - $20 million in a good year,  $50 million in a bad one. Each year,   the government compensated them for  exactly the amount of that loss.

The government did this because they - like  many other people in Europe - thought that   semiconductors would always lose money. You must  do them because they support critical things like   nuclear weapons and other strategic industries.  But don't expect to make money from it. In an atomic bomb, who cares if  a transistor costs one dollar or   a thousand dollars? So just make the  best darn transistor you can make,   and forget about the cost. So volumes cratered,  product lines expanded, and costs rose.

This arrangement made sure that everyone  stayed employed - not unimportant in Italy   those days with its leftist bent - and  some high quality products got made. But it also left the company in limbo.  They were perfectly satisfied to sell   small numbers of chips solely into Europe -  itself a declining semiconductor market. So   the 1970s saw SGS-ATES gradually lose  share and money in the overall market. ## Turnaround In 1979, the company hired a  new CEO - Pasquale Pistorio. Pistorio was born in 1936 in one of  Sicily’s poorest villages. He studied  

electrical engineering at Turin and then became a   salesman for Motorola - turning  down a job offer from Olivetti. Over many years, he worked his way  up to be vice president of Motorola's   international semiconductor division  and the most senior non-American in   the world's second largest semiconductor company. The SGS job offered a 40% pay cut and  required him to take an armored car   thanks to terrorists. But Pistorio embraced  the professional challenge of turning around   what he called a "basically broken" company  that still held national importance to his   home country. It would also allow him to  move home to be with his aging parents. Upon arriving, Pistorio set out three  goals for SGS-ATES: To make a profit,   to enter the US market, and to become a  billion dollar company. And to show that  

things really had changed, he started firing  people. He recalls in an oral history later: > A guy ... says, "Look, yeah, our company's  a disaster. The quality's terrible. The cost   is high. The service is a disaster. It's  still a miracle that we get some orders."

> I said, "You are the  marketing manager?" He says,   "Yeah." What can you do? So you simply  ask him to leave, because it cannot be. Pistorio started from the top and  worked his way down. His first month,   he fired 20 out of the 80 top  managers. Once that was done ...

> The second month, I attacked the lower  level. Absenteeism was 22 percent. Can   you imagine 22 percent absenteeism? And  then I fired some 17 ... absenteeists,   and their track record was more than 50  percent of the time for three years in a row Over a thousand employees were fired  and money-losing factories like the one   in Scotland were closed. Naturally  this led to a huge huff. SGS-ATES   was a government-owned company, and  firing people seemed unimaginable.

Many of the lost jobs were in  Catania, and involved the poorest,   least educated workers. But the company had  lost money for a decade. Italy in 1980 was   itself going through political upheaval over  these questions. Pistorio stood his ground,   and the government backed his plans.  They knew that things had to change.

## Return to a Profit Their new culture would be centered around  hard work and globally-minded expansion. Pistorio is known for having what Businessweek  calls a "passion for his work". He gets to the   office at 630 AM, when everyone previously came  in at 930 AM. And then he would work until 10PM. SGS quickly adopted American-style management   techniques, and dramatically upped their  work hours. They were only working 1,500  

hours a year rather than 2,000 in the  US and 2,200 in Japan or Singapore. To convince the unions to accept this,  he assigned all top management including   himself to work a few graveyard shifts.  The tactic succeeded and in doing so,   SGS became the first company in  Italy to employ women at night. Another thing crucial to the SGS  turnaround were its strategic   alliances with big companies like IBM  or Hewlett-Packard for computers. These  

close relationships allowed them to  co-develop special custom chips that   go into products. These were high-margin  chips in popular, high-volume electronics. Going into the 1980s, all the big four European  semiconductor companies - Siemens, Philips, SGS,   and Thomson - were losing money. They had  lost money all through the prior decade. In 1983 SGS became the first of the four to  turn a small profit. Pistorio had promised   to do it in four years, but managed  it in three. The other three European  

companies now saw that it can be done,  and pushed for the same thing as well. All this time, Pistorio wanted  SGS to become big. He knew that   volume and scale were key in the global  semiconductor game. The higher the volume,   the better the yields, the  better the profitability. They were one of the first European  semiconductor companies to build a   wafer fab in Asia - in Singapore in 1984.  Its Southeast Asian facilities would  

eventually contribute 30% of total  volume in less than half a decade. SGS revenues had grown over three times what  they were when he took over - hitting $375   million in 1986. But looking ahead to the  1990s, Pistorio became convinced that the   future belonged only to the biggest  companies making at least a billion   dollars in revenue. The fastest way to  achieve that was a merger. But with whom? ## Thomson and SGS Thomson was looking to scale up  throughout the 1980s as well.

In 1982, the Mitterrand Socialist  government nationalized five of   France's biggest companies, including Thomson. Alain Gomez was appointed by the  government to be chairman of the   Thomson parent company. Harvard-educated,  Gomez brought sweeping change and focus   to the electronics company just  like what Pistorio brought to SGS.

Pistorio knew the management of Thomson  Semiconductors - including its CEO Jacques   Noels - quite well. The two companies seemed like  a natural fit. Both were largely government-owned,   were similarly large at about $400 million in  revenue, and were following the same strategy. Over time, the idea of a combination  began to percolate. They started to   cooperate in a formal manner in  1986, when they jointly applied   for funds for a big memory chip project  via EUREKA - Europe’s big R&D initiative.

Gomez approved, though they did keep some bits.  Thomson Semiconductors was one of the world's   largest military chip suppliers. But for national  security, this stayed with the larger Thomson   company. Anyway. So in 1987, it was announced  that SGS would merge with Thomson Semiconductors. ## Digestion The new company - named SGS-Thomson  - made about $800 million in revenue. This made them the second largest European  semiconductor company after Philips,   and the 12th largest in the world.  It tripled the product offering and   added many customers in segments like  industrial and telecommunications.

But the new company needed extensive  reform. In 1987, SGS-Thomson turned about   $200 million in losses - all from Thomson  - and had $350 million in debt - all from   SGS. Critics in the media called it a  case of the "blind leading the blind". Pistorio was appointed the new CEO. He held a  meeting with people from both companies. There,   he told them that they were  one company now and needed   to integrate as fast as possible. The  longer it took, the worse it would get. Within a year of the merger, Pistorio  closed five plants - three in France   and two in Asia - and started moving  more production over to the remaining   Asian facilities. All the sales offices  were merged together and top management  

was cut by a third - with an eye  to balance French and Italian. These changes were tricky with SGS-Thomson  now having two national governments as its   shareholders. It caused issues with things like  choosing a headquarters. In exchange for accepting   an Italian CEO, the French government mandated  that the headquarters be in Paris for ten years. From 1987 to 1991, SGS Thomson lost a  cumulative half billion dollars. They   would have gone under had it not been for  a strategic $800 million loan from their   governments. That money was eventually paid  back with interest after their later IPO. But in 1992, the company finally turned around,   making a tiny profit of about $4  million. The year after that, 1993,  

the company made $100 million in profit. The  worst was over. Pistorio was quoted in a news   article at the time: "I am glad to say that we  made it, that this has been a successful merger." ## Conclusion A year later, SGS-Thomson went public on  the Paris and New York Stock Exchanges. In 1998, they changed their  name to STMicroelectronics - an   abbreviation of their respective halves. The company's corporate alliances with  Nokia in wireless, Western Digital and   Seagate in disk drives, and Bosch  in automotive had given it a highly   diversified portfolio of products powering  MP3 players, smart cards, and phones. They hit a particularly big home run with  their bet on analog and mixed-signal chips.  

Such chips have important roles in cars,  industrial machinery, and power applications. In 2005, Pistorio retired from STMicroelectronics   and became its honorary chairman. He  has since spent his life focusing on   environmental and social issues like  water conservation and inequality. As of this writing, he is 88 years old  and still kicking. His semiconductor   legacy is secured. The company he once  led back from the brink is now one of  

the largest chip companies in Europe. What a life!

2024-04-20 13:58

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