LSI Innovated While It Had The Shot

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lsiBrian Halla joined a country club in July, but he has yet to set foot on the green. He hasn’t had time. But the vice president of products at LSI Logic Corp. doesn’t lack for competition. In fact, Halla’s job–turn around a chip company mired in red ink and selling the wrong products–was a lot tougher than shooting a birdie at the 18th hole at Pebble Beach.

In the ’80s, LSI built its business selling core logic to practically every player in the PC, minicomputer, and mainframe markets. As a custom chip maker, its time-to-market strength was a key selling point. But when the bottom dropped out of the minicomputer and mainframe markets–and margins fell in the PC business–LSI’s fortunes tumbled and not even its quickness could save it. In 1992 alone, the company lost $110 million.

So it had to find new markets, fast. And it had to become an expert in all of them or face being an also-ran. Halla, working with CEO Wilfrid Corrigan, came up with this solution: partner with the top-tier end-product manufacturers in a wide variety of markets, leverage their expertise, and offer mix-and-match chip technology to cut product design time. Instead of depending on the computer market alone, LSI spread its risk to include telecom, consumer electronics, and video companies. To stabilize its fina nces while the new strategy clicked in, LSI laid off employees, closed plants, and pared down its customer base dramatically. It was a gamble, certainly, but in this competitive environment, where today’s innovation is a commodity tomorrow, it was the only choice.

The new tack seems to be paying off. Last year, LSI posted net income of $108.7 million on revenues of $901.8 million. The stock is now trading at about $51 per share, up from $30 per share last August. But what will most impress any industry veteran are the company’s margins: a respectable 44 percent in the fourth quarter of last year, up from 39.5 percent in the same period for 1993.

It’s not surprising that a company long known for partnering would work even harder at it when the going got tough. But today, instead of manufacturing or distribution deals, the new LSI is forced to depend heavily on its customers to tell it what to make, how to make it, and where it should end up. Partnerships let LSI get in and out of a new market without the start-up costs, and it gets the added benefit of name recognition from such well-known partners as Sony, Sun, Apple, and Hewlett-Packard.

LSI asks three questions when evaluating any potential relationship: Is the market fast-growing and strategic? Can LSI uniquely add value? Can LSI continue to add value for multiple product generations? If a venture doesn’t meet these requirements, LSI isn’t interested. The company scrutinizes its partners carefully before tying the knot, because a lot is at stake. “Their success is your success and vice versa,” Halla says.

If the game goes according to plan, LSI and its partners enter the market with a product before everyone else–in effect, setting the standard–and both sales and margins are high. By the time competitors arrive, LSI and its partner will have moved on to the next generation. To prove the theory, Halla points to a recent deal with Oki where together the companies managed to introduce the first laser printer priced at less than $500. LSI’s contribution was putting an entire system on a single chip. “Part nering is a way to achieve the [lower] cost goals of the consumer marketplace,” says Halla.

What makes it possible to pull this off is LSI’s CoreWare strategy, where basic chip building blocks can be quickly assembled to create a product, not unlike the way in which software developers reuse objects. Halla calls it the “Garanimals approach” to chip design, in reference to the well-known mix-and-match kids’ clothing company.

In this rough-and-tumble market, analysts believe LSI will continue to do well. “What’s really changed in the company’s business model is that it’s gone from being a commodity gate-array supplier addressing a large number of low- to medium-volume customers, to a high intellectual-property content, cell-based IC supplier that addresses a smaller number of accounts,” said Charles Boucher, technology analyst with Hambrecht & Quist, of San Francisco. “Barring any collapse in the semiconductor business overall,

LSI is in a position to outperform the industry. It will deliver solid double-digit growth over the next few years,” he predicts.

LSI does have competitors to worry about, all of whom have recently announced similar core-based programs. The greatest threat is posed by Motorola, a company famous for its tenacious pursuit of markets. Motorola has expertise in communications and 32-bit processors, whereas LSI shines in video and graphics, says Linley Gwennap, editor in chief of The Microprocessor Report, of Sebastopol, Calif. “But Motorola seems to be taking their time doing it, whereas LSI is aggressively offering processor cores and l ibraries,” he adds.

And LSI isn’t standing still. Halla says the company is looking at partnering with wireless suppliers and even broadcasting stations. “We want to be a participant when the computer goes away,” he says, so the company is getting ready today. Until then, it looks like good timing will keep LSI at the top of its game. And maybe one day Halla will actually be able to make a tee time.

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