The heads of Israel's high tech industry keep warning of the far-reaching impact the fall in the shekel-dollar exchange rate could have on them. But with all due to respect to Israeli companies, the ones that will really feel the effect are the international companies operating here, since their revenue is in dollars, and the salaries they pay tens of thousands of Israeli engineers are in shekels.
"This is not the first time, and nor it will be the last time, that dollar exchange rates change as part of the economic cycle," says Dr. Sandeep Chennakeshu, senior VP and chief development officer at semiconductor giant Freescale Semiconductor Inc., in an exclusive interview with "Globes." "Our outlook is long-term. When you build capabilities, the short-term doesn't faze you."
Globes: But some companies looking to expand their activity might prefer places where salary costs are lower, which is partly a function of the exchange rate.
Chennakeshu: "I take a different view. When I expand our activity in a cheap country, it may offer low costs, but it might not always have the requisite skills. And then you have to move specialists to these regions to help with R&D and the costs mount up. I always tell our R&D centers that they not only need to develop capabilities at the knowledge level, but also to be efficient. For example, if 15 employees in Israel can develop a chip that it takes 75 employees elsewhere to develop, this is an enormous difference. An R&D center should reinvent itself every two to three years. I believe that a center that doesn't change every few years becomes a dinosaur and dies by itself."
And as if to illustrate Chennakeshu's doctrine, Freescale itself has been going through a period of changes - both strategic and personal. They included, among other things, the appointment of Chennakeshu to his present post nine months ago, and the appointment of Rich Beyer as CEO three months ago. In addition, the company has introduced a streamlining process that included job cuts. 150 of Freescale's 24,000-strong workforce were fired in the first quarter of this year. Chennakeshu himself is personally responsible for Freescale's R&D centers in Brazil, India, Romania, and Israel, and oversees development in all the company's lines of business.
Chennakeshu avoids commenting directly when asked about the plans for the R&D center in Israel, which is managed by Israel Keshet. "It's still too early for me to make any comment, and I am currently focused on creating a long-term road map for our R&D centers," he says.
Freescale, which is part of the old guard of chip producers (alongside Texas Instruments and NXP Semiconductors, as opposed to younger companies such as Broadcom and Marvell), was the seminconductor division of Motorola until 2004, when it was spun off and floated. At the end of 2006, Freescale became a privately-held company when it was acquired by a private equity group for $18 billion.
A graduate of Ericsson
Chennakeshu is considered one of the leaders of the cellular industry, after spending twelve years at Ericsson where he was head of the company's mobile platforms business unit, and was one of those that contributed to the company's success in 3G infrastructure platforms. His move to Freescale has been accompanied by a substantial challenge. Telecommunications equipment giant Motorola, Freescale's natural partner, has for some years been reporting falling revenue, profit and market share in its mobile phone business.
Three months ago, Motorola announced its intention to spin off its mobile phone business as a separate company, amid mounting losses (a 40% decline in sales and a $400 million loss in the first quarter), and the loss of considerable market share (down to third place behind Samsung and Nokia). The effects of this have also been felt at Freescale, 90% of whose sales of wireless chipsets are to Motorola.
Freescale had $320 million sales from its wireless segment in the first quarter, 23% of total sales, most of which was to Motorola. So it was hardly surprising when the first questions the analysts asked at the conference call after its results, were about its relationship with Motorola.
"That Motorola has lost market share is not good for them or us," says Chennakeshu about the relationship with Freescale's older sister. "In addition to continuing to supply technology to Motorola, we have been expanding our product portfolio with the aim of finding new customers. We have collaborations with two major handset producers, one of which is already using our products (Research In Motion. S.S.), and the other is currently conducting trials. "
Company CEO Beyer also noted recently that the company hoped to see revenue from new customers at the end of the year. "The mobile phone world is changing," says Chennakeshu. "No one wants to rely on a single supplier, and certainly not a dominant one. So everyone is looking to see who has the most competitive technology. For many years we didn't have the software capabilities that Motorola traditionally had, but in the last two years we have been developing our capabilities in software as well, and this has enabled us to compete far more effectively."
Parting company with Motorola, and not for the first time
The close relationship with Motorola has led, over the years, to a correlation between the technologies Freescale supplies, and Motorola's needs. But in one area at least, Freescale has a slightly different approach - devices for high speed wireless telecommunications, better know as the fourth generation of wireless with two primary standards - LTE and WiMAX. Motorola provides close support for WiMAX, in network infrastructure and mobile devices, a fact which Dan Coombes, senior VP and CTO, wireless broadband networks, networks business at Motorola made abundantly clear in a recent interview with "Globes." Freescale, claims Chennakeshu, has a different set of priorities. At least for the time being. "It's difficult to say, at this point, which of these networks will be the more successful," he says. "We provide network support for both standards and are building technologies for both. That said, as far as mobile devices are concerned, we are currently building technologies principally for LTE, and we won't be looking at other things until a later stage."
Freescale has developed a system that can integrate LTE technology with existing standards, mostly 3G, forming a sort of interim generation between LTE and 3G.
When do you expect 4G to be up and running?
"It will take just over two years until we see any noticeable sales of products supporting LTE. We will, however, see a lot of networks attempting this during the next two years."
First time buyer in Israel
Among the technologies in the field that Chennakeshu says are interesting are technologies for efficiency in electricity consumption, multi-integration of RF standards on one chip, harmonizing standards such as GPS and Bluetooth, 3G technologies and others.
All of these are the focus of developments that Israeli start-ups are working on. Companies such as Altair Semiconductor Ltd., ASOCS Ltd., and DesignArt Networks Ltd. (in which Motorola recently invested $15 million) are all developing high-speed wireless communications chips for mobile handsets based on 4G technology.
Freescale is one of the few global semiconductor giants that has never invested in Israel or acquired a local activity. This, however, is about to change. The company does not have a culture of purchasing technologies externally, but rather, in-house development, an inheritance from the days when it was part of Motorola, with almost total control over the market. Beyer said recently that he "is a firm believer in making acquisitions in order to reach the market faster." Chennakeshu confirms that the new CEO's approach is most definitely being felt. "We're in the process of mapping out our intellectual property for the next few years, so that we can understand what we need to buy and what we should develop ourselves," he says.
Freescale has not yet explicitly defined the fields it is interested in making acquisitions in, but some clues can be found in those fields it has defined as its target growth engines - energy efficiency, health and security (including homeland and vehicle security), and multimedia content consumption on handset devices. Chennakeshu claims Freescale is active in all these fields, but the company clearly has a very short time window in which to gain a foothold in the market alongside a number of strong and established competitors for a share in the next generation of telecommunications for handheld devices.
Published by Globes [online], Israel business news - www.globes-online.com - on June 19, 2008
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