LSI Logic Corporation
Address:
1551 McCarthy Boulevard
Milpitas, California 95035
U.S.A.
Telephone: (408) 433-8000
Fax: (408) 434-6457
Statistics:
Public Company
Incorporated: 1980 as LSI Logic, Inc.
Employees: 3,370
Sales: $902 million
Stock Exchanges: New York
SICs: 3674 Semiconductors & Related Devices; 3577 Computer Peripheral Equipment Not Elsewhere Classified
Company History:
A leading competitor in the customized semiconductor market, LSI Logic Corporation represents a defining force in a segment of the semiconductor industry that was recording robust growth during the mid-1990s. Formed in 1980, LSI Logic emerged during the nascence of the industry it dominated during the 1990s, helping to create and shape a market that was predicted to represent more than $5 billion by the beginning of the 21st century.
During the early 1980s, the global semiconductor industry was neither a fertile nor a hospitable market for U.S. companies to enter. By 1991, Japanese manufacturers had gained an early and sizeable lead over the rest of world, controlling 70 percent of the worldwide market for 64K DRAM chips--key components in computers, video games, and telecommunications systems and the most widely-sought products on the market. The few U.S. semiconductor manufacturers mustering any appreciable opposition against the Japanese during the period were large corporations based in California's Silicon Valley. These manufacturers--even those with sufficient financial clout--struggled to catch up in an expensive high-technology race most especially against the Japanese, who held considerable market share and ample funding for the expensive endeavor of designing and producing memory chips.
Such was the climate pervading the semiconductor industry during the formation of LSI Logic. Despite the overwhelming odds against a small entrepreneurial company successfully competing in a market where much larger corporations were floundering, Wilfred J. Corrigan, the founder of LSI Logic, was intent on carving a niche in the industry, and in defying what he later called the "conventional wisdom that the semiconductor industry was only for major corporations." To accomplish this formidable task, Corrigan positioned LSI Logic in a small segment of the semiconductor industry, focusing on a branch that offered tremendous growth potential and the opportunity for a small, fledgling enterprise to survive. By doing this, Corrigan gave LSI Logic a viable niche in which to begin business. No matter the strength of his idea, however, Corrigan needed money to get his venture started. The money would need to come from investors willing to take a high-risk gamble with their dollars on the slim hope that a small company could effectively compete in the combative semiconductor industry. Much, then, would depend on Corrigan's ability to convince the financial community that his company was worth investing in, a task made even more difficult by his recent, less-than-illustrious track record as the leader of another company involved in the semiconductor industry. The high risk of financing such a small, entrepreneurial company, combined with Corrigan's unfavorable record in the years leading up to his new venture with LSI Logic, presented investors with an opportunity they presumably would avoid.
Roughly six years prior to LSI Logic's formation, Corrigan, son of a Liverpool, England dock worker and a graduate in chemical engineering from the Imperial College of Science, had gained control over a prominent semiconductor company, Fairchild Camera and Instrument Company. Serving as Fairchild's chairman, chief executive, and president, Corrigan led the company through an overambitious and disastrous diversification into video games and digital watches while losing market share and falling behind in the technological race in the semiconductor business. Against this backdrop of disappointing results, Corrigan gained the reputation as a somewhat dictatorial leader who liked to show the opening scene of the movie "Patton" during sales meetings. Corrigan's troubled tenure as Fairchild's top executive ended approximately five years after it began, precipitated by Fairchild's acquisition by another company, Schlumberger Ltd., in 1979. Less than a year later, Corrigan left Fairchild to embark on a short stint as a private investor, then began effecting plans to launch his own business, LSI Logic.
With LSI Logic, Corrigan planned to enter a small segment of the semiconductor industry that produced relatively small batches of semi-finished microelectronic chips, which were then customized for each customer. As opposed to the major segment of the semiconductor industry contested by large manufacturers in Silicon Valley and in Japan, the customized chip industry produced chips that enabled its customers to differentiate their products from those of their competitors, while the major semiconductor companies manufactured standard chips in bulk. Corrigan intended to focus on one technique in the customized chip business known as gate arrays, in which the basic logic elements, or "gates," were laid out on a chip and then connected in a particular customized order during the last stages of production.
During the early 1980s, this field of the semiconductor industry was quite small, yet Corrigan believed the demand for customized chips, or application-specific integrated circuits (ASICs), would grow immensely in the coming decade. Corrigan convinced a group of venture capitalists, based chiefly in the Bay Area, to provide his company with the $6 million necessary to begin business. The company was incorporated in November 1980 and began operating in early 1981 using leased facilities in Santa Clara, California. Corrigan occupied the same executive positions he had held at Fairchild, serving as LSI Logic's chairman, chief executive officer, and president, ready to steward the company in a market that represented under $100 million at the time but was expected to become a $1 billion industry by 1986.
Although Corrigan held the same senior management titles at LSI Logic as he had at Fairchild, there the similarities ended. At LSI Logic, Corrigan shed the unsavory image he had developed at Fairchild and astutely led his small company through its formative first years. In August 1981, less than a year after beginning business, LSI Logic entered what company officials described as the "first fully cooperative semiconductor development program involving U.S. and Japanese companies" when it formed a joint venture with Toshiba Corporation to develop a line of advanced semi-custom circuits. The joint venture represented a connection that would grow stronger and deeper as the company sought to take the lead in a burgeoning market. To secure a commanding position in the market, however, LSI Logic needed ample funding for developmental programs intrinsic to success in a high-technology business. Corrigan was repeatedly able to obtain the necessary capital for development which consequently enabled LSI Logic to expand and capture market share in a field other semiconductor companies were slow to enter. Another major infusion of capital arrived in March 1982, this time totaling more than $16 million, the bulk of which came from the same venture capitalists that had provided the money to get LSI Logic started. A group of investment bankers in the United Kingdom and First Interstate Bank supplied the rest of the money, which was used for capital equipment purchases and plant expansion.
Despite the arrival of the needed funding, the year-end finances were disappointing. By the end of 1982, LSI Logic had collected $5 million in sales, but recorded a loss of $3.7 million, making Corrigan's plan of reaping profits in the customized chip market still a dream. The following year, however, the company recorded the first of many prodigious leaps in its sales volume, when revenues shot up seven-fold to $35 million. Perhaps more encouraging, LSI Logic also demonstrated its profitability, registering $12.5 million in net income for the year--an enormous sum given the company's revenue total. During the next few years, however, LSI Logic's profit total fell considerably short of the sales-to-profit ratio recorded in 1983; revenues rose vigorously throughout the decade, but profits remained comparatively low.
As before, the drive to become the leader in its market required the infusion of capital, something LSI Logic needed in 1981, 1982, and again in 1983. In May 1983, while LSI Logic was recording its first year of undeniable financial strength, Corrigan orchestrated his company's first public offering, which the Japanese investors readily accepted. Japanese investors acquired a considerable portion of LSI Logic's stock, demonstrating a willingness to invest in the company. Corrigan then allowed Japanese investors to take part in LSI Logic's growth the following year with the formation of LSI Logic's Japanese affiliate, Nihon LSI Logic Corporation. The venture financing of Nihon LSI Logic was completed in April 1984 through a private offering in Japan that raised $20 million and ceded a group of 28 Japanese investors a 33 percent stake in the newly formed affiliate. Corrigan raised an additional $20 million by employing the same strategy two months later through a private placement for LSI Logic's British subsidiary, LSI Logic Ltd.
The creation of Nihon LSI Logic and the strengthening of the British subsidiary, LSI Logic Ltd., which had been in existence since 1982, were part of Corrigan's strategy to expand internationally. Corrigan envisioned the establishment of largely autonomous operations in three major markets: Japan, the United States, and Europe. Corrigan referred to this blueprint for expansion as his "global triad strategy," a plan that would firmly root LSI Logic's presence in three critical regions and, according to Corrigan, insulate each autonomous division from downturns peculiar to each continent while enabling each part of the "triad" to take advantage of changing market conditions in its region.
By the beginning of 1985, Corrigan could claim overwhelming success in one market of his global triad strategy, when LSI Logic ranked as the number one company in the U.S. market for ASICs. LSI Logic controlled 40 percent of the market by this time and its sales volume reflected its quick rise in the industry. Sales had soared from the $35 million generated in 1983 to $84.4 million by 1984, then shot past the $100 million mark the following year, reaching $140 million. The company's net income, in contrast, did not record a commensurate meteoric rise, falling, in fact, from $15.4 million in 1984 to $10.1 million in 1985. In comparison to other U.S. semiconductor companies, however, LSI Logic at least remained profitable, a rare occurrence among other domestic rivals who were suffering debilitating losses from unrelenting Japanese competition.
To actualize his global triad strategy and help invigorate laggard profits, Corrigan moved resolutely toward the eye of storm, increasing LSI Logic's presence where the most powerful semiconductor companies existed--in Japan. In 1985, LSI Logic extended its joint development program through a multi-year agreement with Toshiba. During that same year, LSI Logic entered into a joint venture with Kawasaki Steel--Japan's third largest steel manufacturer&mdashø build a $100 million wafer fabrication plant near Tokyo.
By 1986, LSI Logic controlled 45 percent of the U.S. ASICs market and 25 percent of the worldwide market. Although the company had secured an enviable position in the customized chip market, the increasing growth of the industry's sales volume had drawn numerous competitors attracted by the enormous growth potential in the business. By the mid-1980s, LSI Logic was competing in a crowded field and one that, as the decade progressed, became increasingly unprofitable. Much attention had been paid to revenue growth in the customized chip market, but little could be said of parallel profit growth, a phenomenon borne out in the annual revenue and net income totals recorded by LSI Logic, an industry leader. LSI Logic could claim enviable victories in revenue growth, market share, and consistent advancement in technological sophistication, but these victories came with a price: alarmingly low profits. In 1986, LSI Logic generated nearly $200 million in revenues, yet recorded a paltry $3.8 million in net income. Two years later, revenues surged to $379 million, while the company's net income climbed to $23.8 million, which was a considerable increase to be sure, but it was merely a prelude to two years of consecutive losses totaling nearly $60 million. By 1991, after halting its two-year net income slide into the red, LSI Logic, still an industry leader, was a $700 million company with net income amounting to $8.3 million, or $4 million less than it had earned when it was a $35 million company in 1982. Significant changes were needed to lift LSI Logic's profitability, but the company's transformation was costly, leading to another year of what industry pundits termed LSI Logic's "profitless prosperity."
In 1992, the company instituted sweeping cost-cutting measures to reduce overhead expenses and to embark on a new path toward increased profitability. Employment was trimmed by 1,000, falling to 4,500; a test and assembly plant in Braunschweig, Germany was closed; and several operations deemed inconsistent with the company's new future were eliminated. The company-wide downsizing program reduced LSI Logic's operating expenses as a percentage of revenues from 36 percent to 27 percent, but it also resulted in an enormous $102 million restructuring charge and a $110 million loss for the year, making 1992 the third of the previous four years that LSI Logic lost money.
The changes effected in 1992 sought to propel the company back into the black and end its near decade-long inability to produce profits commensurate with its leading position in the customized chip market. Reducing overhead was not sufficient by itself to eliminate LSI Logic's ails. To more resolutely transform the company's fortunes, Corrigan also implemented LSI Logic's CoreWare program in 1992. This program offered customers access to a library of system-level building blocks and design tools. The company had always distinguished itself with its ability to provide a high level of customer service through computer software and other means, one of the chief reasons Corrigan believed back in 1980 that a small company could fare better in the customized chip market than a large company. CoreWare represented a significant leap in LSI Logic's ability to provide responsive service and, perhaps most importantly, CoreWare represented a sophisticated service that would yield higher profit margins, something the company desperately needed.
With the changes implemented in 1992, including its centerpiece CoreWare program, LSI Logic moved forward, invigorated and redirected toward a more positive future. By the end of the company's first fiscal quarter in 1995, it had recorded increases in its revenues for ten consecutive quarters. The company had also recorded consecutive quarterly improvements in its net income total during the same time span, a feat without rival in the company's history. In the first quarter of 1995 alone, LSI Logic recorded $45.3 million net income, twice the amount it had generated during its most profitable year before the implementation of its cost-cutting measures and the CoreWare program. With this encouraging financial growth fueling optimism, Corrigan and the management of LSI Logic planned for a future beyond the mid-1990s that promised to be decidedly more profitable than the company's past.
Further Reading:
"Cash Backing for LSI," Electronics Weekly, March 31, 1982, p. 4.
"LSI Corp.," Business Week, August 24, 1981, p. 42L.
"LSI Logic to Build Fast Chip in Venture with 2 Other Firms," Wall Street Journal, March 27, 1990, p. 4B.
"LSI to Buy All of Chip Venture," Wall Street Journal, January 27, 1995, p. 7A.
McCarthy, Vance, "LSI Logic Steps Away from Chip Consortium," PC Week, January 13, 1992, p. 120.
Pollack, Andrew, "A Computer Chip Maker in the Black," New York Times, November 5, 1985, p. 1D.
------, "Big Goals and Hurdles for New Chip Maker," New York Times, July 13, 1989, p. 1D.
Ristelhueber, Robert, "LSI Logic Is Turning Around Its 'Nonprofit Personality,"' Electronic Business, October 1993, p. 29.
------, "Profitless Prosperity Hits the Gate Array Market, Electronic Business, March 1993, pp. 108--09.
Russel, W. Sabin, "Ex-FC&I Chairman Starts Array Firm," Electronic News, January 19, 1981, p. 8.
Tharp, Mike, "LSI Logic Corp. Does as the Japanese Do," Wall Street Journal, April 17, 1986, p. 6.
"Try It in Japan," Forbes, June 18, 1984, p. 176.
Wilson, John W., "Selling Chips to the Japanese: LSI Logic Has an Ace Up Its Sleeve," Business Week, January 28, 1985, pp. 133--34.
Source: International Directory of Company Histories, Vol. 13. St. James Press, 1996.
