U.S. chip maker muscles into rival's turf

Freescale seizes on break from '11 Japan quake

Uze: Automotive opportunity in Japan

TOKYO -- Japan's killer 2011 earthquake was an unprecedented knockout to the country's auto industry. But for one U.S. company, it has been a business breakthrough.

Freescale Semiconductor Inc., which makes the tiny microcontrollers that run everything from automatic windows to fuel injectors, has become inundated with orders.

It's top rival, Japanese giant Renesas Electronics Corp., had its chip factory jolted offline during the disaster. And Freescale seized the moment to develop a stand-in for the missing chips. It raced to crunch a process that normally takes four years into just nine months.

In doing so, it scooped up its first-ever Japanese order for a powertrain product.

Now, Freescale has parlayed that pinch-hit victory into unexpected expansion.

Thanks largely to post-quake Japan's newfound obsession with dual sourcing components, Japan's auto market is Freescale's fastest growing revenue source for automotive chips.

"We've never had this quality of relationships in Japan," Freescale Japan President David Uze said in an interview last week. "We've never had this much automotive opportunity in Japan. We've never seen this much revenue in automotive in Japan.

"The Japanese market, automotive especially, is desperately trying to find a reliable non-Japanese source."

Cracking the market

Sales to Japanese customers, once locked up by Renesas, are expected to grow 20 percent this year and average annual increases of 20 percent from 2012 through 2018, Uze said.

"There's a list of seven or eight companies I was always complaining to my team here that we don't have any business with, big international Japanese Tier 1s," Uze said. "Without exception, everyone of those names has now given business to Freescale."

Freescale's inroad into what used to be a hard-to-crack market is a rare success story for a U.S. company. It underscores how new Japanese r&d strategies that focus on parts commonality and diversified risk can open doors for foreign companies.

Carmakers such as Toyota Motor Corp. are demanding that their suppliers have backup sourcing of critical parts so that auto production won't grind to a halt when supply chains snap.

"We have aggressively communicated the comprehensiveness of our business continuity program," Uze said. "In the past, that wasn't seen as a selling point, but after the earthquake and tsunami, that became a major advantage of Freescale in the eyes of our customer base."

Globally, Freescale is the No. 2 supplier of automotive microchips, with market share of 18 percent, behind the 43 percent held by No. 1 Renesas, according to Strategy Analytics.

German Tier 1 supplier Continental AG is Freescale's biggest global customer, followed by Toyota Group affiliate Denso Corp. and Robert Bosch GmbH, also of Germany.

Still, its presence in Japan is tiny -- just less than 10 percent of the market. Uze's goal is to boost Freescale's share of the Japanese market to 20 percent in the early 2020s.

New strategies

While the quake cracked the door for foreign suppliers, Uze says Freescale rushed in ahead of rivals such as Germany's Infineon, the global No. 3.

Freescale, of Austin, Texas, and a spinoff of Motorola, wedged its way into the Japanese market in a couple of ways. First, it began collaborating through joint ventures with smaller domestic rivals such as Fuji Electric Co., Alps Electric Co. and Rohm Co.

Then it set up dedicated sales teams for the east and west sides of the country to focus solely on pitching directly to the auto assemblers, as opposed to suppliers.

Freescale decided this month to double the staffing of those two-person teams.

But Uze's next step enters uncharted waters. The idea is to work with rivals to develop a common architecture for either microcontroller modules or their software, to allow one company's chips to be more easily substituted for another's.

Despite carmakers' demands for dual sourcing, today's microcontrollers can't easily be swapped with each other, like piston rings or light bulbs. Tier 1 suppliers trying to double source microcontrollers, from say, both Renesas and Freescale, would need to set up costly parallel lines for part of the manufacturing process.

Uze's gambit: Convince Toyota and microcontroller rivals of the benefits of establishing more commonality in the design so that dual sourcing won't be so costly.

"The next step is to understand the engineering possibilities," Uze said. "It's no longer a business conversation. We know that the end customer is interested. We know that the other microcontroller supplier in the industry is also interested."

You can reach Hans Greimel at hgreimel@crain.com -- Follow Hans on Twitter: @hansgreimel



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