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So in the auto-driven race to capitalize on new growth, which European semiconductor manufacturer is best poised to win? Europe's biggest semiconductor manufacturers — STMicroelectronics and Infineon — are ranked fourth and seventh in the world respectively. Each company is pursuing a different strategy. Infineon is determined to maintain a range of products from the highly cyclical drams — a computer chip that acts as a temporary storage depot for data while the computer performs a task — to "logic" chips used in devices such as mobile phones. Meanwhile, Schumacher hopes to offset the downturn in the dram cycle by being strong in logic chips, which are less prone to business swings. Currently, around 39% of Infineon's sales come from drams, 24% from the automotive industry, 34% from products for the communications industry and 3% from other areas.
So far, Schumacher's strategy seems stalled. The company made a pre-tax loss of €1.02 billion in 2001 and €1.14 billion in 2002. It's hard to see how Infineon can fulfill its goal of becoming one of the top four semiconductor manufacturers in the world within five years with performance like that. To cut costs, Schumacher relocated part of its accounting operations to Portugal. The company is cutting 900 jobs from a global workforce of more than 31,000. Since 2001, restructuring and cost-cutting have achieved savings of €2.8 billion. Infineon made a dramatic statement in March, threatening to move its headquarters out of Germany to a locale with lower tax. The plan is controversial, and even members of the company's supervisory board, which must approve it, have voiced opposition.
STMicro, under the leadership of Pasquale Pistorio, is taking a different tack. The company, with annual revenues of $6.32 billion, doesn't manufacture drams at all. It focuses instead on logic chips, and increasingly on flash memory cards, used to store pictures taken with a digital camera. Another difference: STMicro has formed partnerships with several key customers, such as mobile phone maker Nokia. This allows the company to involve its customers early on in the development of semiconductors. "This secures a very strong and loyal customer base," says analyst Malcolm Penn.
STMicro was criticized for not jumping in when the dram cycle was up. But analysts say it takes strong nerves and experience to survive in the dram business, and both STMicro and Infineon made valid choices. "This market is not for the faint-hearted. One good year in drams makes up for three bad years, and then profits are just obscene. But you're either big, or you're dead," says Penn.
No one doubts that Infineon is big: it is now the world's third largest manufacturer of drams behind Samsung of South Korea and U.S. chipmaker Micron. Analysts predict that the semiconductor industry will grow next year and most of 2005 before the cycle turns down again. But this recovery, if it comes, will burn on a lower flame; growth rates are lower than in the early '90s, and most analysts believe those lower rates are here to stay. Schumacher, for one, understands that the rules of the road have changed. "The semiconductor industry will not succeed in achieving the growth rates observed in the past just with faster processors and more money," he says. The key now is finding new applications for chips, such as RFID tags — chips that send signals to scanners to clock inventory and prevent theft — or by adding new audiovisual features to cell phones. The company that masters that will be the first to see the checkered flag.