National Semiconductor Corporation History

Address:

2900 Semiconductor Drive
Santa Clara, California 95052
U.S.A.

Telephone: (408) 721-5000
Toll Free: 800-272-9803
Fax: (408) 739-9803

Public Company
Incorporated: 1959
Employees: 9,700
Sales: $1.98 billion (2004)
Stock Exchanges: New York
Ticker Symbol: NSM
NAIC: 334413 Semiconductors and Related Device Manufacturing; 334419 Other Electronic Component Manufacturing

Key Dates:

1959:: Dr. Bernard Rothlein forms National Semiconductor in Danbury, Connecticut.
1967:: Charles Sporck joins the firm as president.
1968:: The company moves to Santa Clara, California.
1969:: Fierce price wars erupt in semiconductor manufacturing.
1970:: National reaches sales of $42 million.
1976:: Company sales top $365 million, and National enters the computer mainframe market.
1981:: Sales top the $1 billion mark for the first time.
1987:: National buys Fairchild Semiconductor.
1989:: National's mainframe unit, Datachecker, is sold.
1991:: Gilbert Amelio is named National's new president and the company reorganizes.
1996:: Brian Halla comes on board as the firm's new president and chief executive.
1997:: National buys Cyrix, a manufacturer of microprocessors, and sells Fairchild.
2000:: National and Taiwan Semiconductor Manufacturing Corporation partner to produce chips in Maine.
2004:: The company opens its first manufacturing facility in China.

Company History:

National Semiconductor Corporation is a leading U.S. manufacturer of semiconductors used in a broad range of electronics applications. During its rapid rise to prominence in the late 1970s, National Semiconductor gained a reputation as the most efficient producer of semiconductors in the world, turning out a wide array of standardized, reliable parts at very low cost. National's prosperity relied less on high-tech genius than on low-tech frugality and hard work, qualities instilled in the company by its longtime president and chief executive, Charles E. Sporck. In the increasingly crowded world of semiconductors, however, National suffered during the 1980s from Asian price competition, turned around in the 1990s under another chief executive, Brian Halla, and used its expertise in analog chips in the 2000s to stake its claim in the evolving consumer products market. National's microprocessing chips power a multitude of portable electronics, such as cellular phones with cameras and Internet access, personal digital assistants, global positioning systems, tiny handheld television screens, and MP3 and iPod music players.

Humble Beginnings: Late 1950s

"Semiconductor" is the name given to a group of elements that under normal conditions do not conduct electricity, but that when slightly modified can be used as conductors with great precision and reliability. The development of the modern electronics industry, beginning with the 1949 invention of the transistor, depended on the use of semiconductors to control and direct electricity in very small packages known as integrated circuits or "chips." In 1959 Dr. Bernard Rothlein, formerly of Sperry Rand Corporation, joined the burgeoning semiconductor industry by creating National Semiconductor in Danbury, Connecticut (the company moved to Santa Clara, California, in 1968). The firm was tiny by industry standards, with only $5.3 million in sales by 1965, but it offered a variety of fairly sophisticated semiconductors and was operating at a profit.

Dr. Rothlein's former employer filed a suit against National for patent infringement, however, and the case depressed the company's stock price when it reached the courts in the mid-1960s. The low stock price encouraged a substantial investment by East Coast financier Peter J. Sprague (son of the chairman of Sprague Electric Company), who became chairman of National in 1966 and set out to make the company a major player in the semiconductor industry. Sprague recognized that National needed an injection of strong management if it was to make the transition from small research lab to commercial manufacturer, and in the spring of 1967 he surprised the industry by hiring away five top executives from Fairchild Camera & Instrument Corporation, then the nation's second largest maker of semiconductors.

Sporck Taking Charge: The Late 1960s and Early 1970s

Chief among the new recruits was Charles E. Sporck, 39-year-old head of Fairchild's semiconductor division, who accepted a 50 percent cut in pay to become National's president (and owner of a chunk of its stock). From then until 1991 National Semiconductor would remain, in large part, the creation of Peter Sprague and the hard-driving Charlie Sporck.

Sporck and National Semiconductor were ideally suited to each other. National had some excellent products but lacked management control, while Sporck was not a technical genius but knew how to run a tight ship, market his wares, and make money. With the full financial and moral backing of Sprague and the board of directors, Sporck turned National upside down in the year following his arrival. He marked down the value of National's inventory of transistors by $1.5 million (giving the company a $2 million loss in fiscal 1967) and focused its energies on selling large quantities of standard semiconductors in three different market areas: linear, Transistor-to-Transistor Logic (TTL), and metal-oxide semiconductors (MOS).

Sporck also kept a tight lid on corporate overhead, using outside sales representatives whenever possible, farming out basic engineering and accounting work to independent contractors, and generally promoting a corporate ethic of austerity. In an industry rapidly flooding with new competitors, Sporck's penny-pinching proved key to National's survival in the coming price wars. As he told Business Week in 1970, "We make money because we have to."

Although it might not have been apparent to the casual observer in 1967, National Semiconductor had assembled a trio of powerful business advantages. First, National was in an industry about to undergo tremendous growth, as the spread of computers made semiconductors critical to every aspect of modern life. Second, National was able to draw on the financial strength of its investors to raise the large amounts of money required for expansion, and third, the company was run by a man naturally inclined to efficiency and thrift. The combination of these elements allowed National to grow with amazing swiftness, from 1965 sales of $5.3 million to $42 million in 1970 and an incredible $365 million in 1976.

For less well-prepared companies, the same period was fatal as bitter price wars erupting in 1969 and 1970 drove even giants such as General Electric and Westinghouse out of the semiconductor business and kept profit levels minuscule. Silicon Valley was suddenly very crowded and from among its scores of visionary entrepreneurs only a few would survive to dominate the national scene.

Sporck brought a global awareness to National. It was one of the first semiconductor companies to move its assembly operations to the Far East, where labor was available at a fraction of its cost in the United States. The company also sold about 20 percent of its finished products overseas, much of it going to Europe at prices that stirred charges of unfair trade practices. On the other hand, Sporck appeared to have grossly underestimated the long-term potential for competition from the Far East, where the growth of an indigenous semiconductor industry drove prices ever lower on the kind of standardized semiconductors made by National. Sporck's preference for selling a high volume of standard items generated National's prodigious growth, so long as its competition was limited to American firms operating on similar cost bases.

When the Japanese made semiconductors a global business in the 1980s, this formula brought consistent losses and a desperate appeal from Sporck for federal trade protection. National was at the forefront of political pressure leading to the 1986 Semiconductor Trade Agreement.

Failed Diversification Efforts: The Middle and Late 1970s

Sporck was aware of National's vulnerability and beginning in the early 1970s he made a number of attempts to diversify the company's sales base by "integrating forward," making consumer products as well as the semiconductors that went inside them. National leapt into the manufacture of calculators, digital watches, and video games, enjoying initial success as the public responded to the novelty of these high-tech gadgets. Within a few years, however, National's emphasis on low-price mass merchandising again left it vulnerable to the crush of competitors entering these markets. National had no experience in retail manufacturing and before long its products were saddled with a reputation as low-end junk, without the style or cachet needed to survive in a maturing market. By the time every American was wearing a digital watch, National had been driven from the marketplace, suffering minor losses that, fortunately, were overshadowed by its roaring success in semiconductors.

Two other efforts by Sporck to widen National's product line had more complex histories, though both also ended in failure. In the mid-1970s National became interested in the possibility of electronic point-of-sale terminals for use in supermarkets. In association with a group of California supermarkets, National developed the "Datachecker" system for the scanning and recording of sales, with which it built a substantial and modestly profitable business over the following decade. Of greater potential was National's decision around 1976 to enter the computer business, originally as a producer of mainframe computers for sale by Itel Corporation, a San Francisco-based marketing and finance company. As many others had tried before, Itel and National hoped to cut into IBM's domination of the mainframe market by selling similar machines at a reduced price. At first, National was satisfied simply to make computers for the Itel name. In the late 1970s, however, National tried to push into the market with its own line of mainframes and minicomputers encouraged by the huge profits it was making on the Itel IBM-compatibles.

National's System 200 and 400 lines of large computers never got off the ground, due in part to renewed competition from the ever vigilant IBM. Itel had similar but more severe problems, forced by IBM price pressure in early 1979 to ask National for cheaper computers with which to compete. Sporck recognized a golden opportunity: He agreed to supply Itel with cheaper computers only if they agreed to buy more machines. Itel did so and when the market softened later in the year, Itel was stuck with computers it could not sell and an obligation to buy many more. Faced with a complete disaster, Itel essentially gave its inventory and sales force to National in exchange for a release from its contracts. As one former Itel executive told Fortune, "National blackmailed us and then stole the business."

Be that as it may, Sporck had "stolen" little more than a distraction and headache. National enjoyed sporadic success selling a line of mainframes made by Hitachi in Japan, but again its timing and approach were all wrong. During the 1980s National, aside from the inherent difficulties of competing with IBM, faced a general decline in the mainframe segment of the computer industry that even IBM was not able to withstand. The monolithic mainframe was being replaced by combinations of mini and microcomputers, and in a shrinking market National's chances of success against IBM fell from slim to none. The company eventually sold its National Advanced Systems division in 1989.

Buffeted by Asian Competition: The 1980s

Despite its mainframe difficulties, National's semiconductor business continued to boom. Sales for 1981 reached $1.1 billion--tripling in four years--and the company employed 40,000 workers, two-thirds of them in Southeast Asian assembly plants. Its strength continued to be the manufacture of linear and bipolar logic integrated circuits in large quantities and at low cost; as a competing executive told Fortune, National was the "sweatshop of our industry--a pipe-rack, low-cost, survival-oriented company." National, however, soon faced a number of grave problems. In 1981 a handful of key National executives left the company to accept more lucrative offers elsewhere, among them Pierre Lamond, who had been National's chief designer and engineer.

While job hopping was common in the electronics industry, the defection of Lamond was a significant blow. National had never been particularly strong on technical ingenuity and the company had relied on its brightest designer. Worse yet, competition from the Far East had increased and National would soon feel its impact. National's line of staple items was easily reproducible, and although it was the cheapest semiconductors manufacturer in the United States, it was not the cheapest producer worldwide.

The recession of 1981-82 plunged National into the red. Its losses totaled only $25 million, but they set the tone for the coming decade. The company was solid in the following few years, suffered a sharp downturn in 1985 and 1986, and then recovered again in late 1987. At this point Sporck made a purchase that must have given him great personal satisfaction, whatever its permanent value to National Semiconductor. For $122 million National bought the semiconductor division of Fairchild Camera, the same Fairchild from which Sporck and his management team had emigrated back in 1967. Fairchild had been one of the pioneers in semiconductors, but since Sporck's departure it had staggered through many losing years and was now available at what some observers thought was a bargain price. Sporck felt that Fairchild's strengths in chips for mainframes and supercomputers and its excellent military ties would complement National's relative weakness in these segments.

The timing of the Fairchild deal, however, was poor, as the mainframe market continued to shrink and military spending declined from its peak during the Reagan administration. Moreover, Fairchild had lost $265 million in the two years prior to its purchase by National, and the latter already had plenty of its own problems.

Changing Directions: The 1990s

From 1987 through 1992 National posted an aggregate loss exceeding $500 million. President Sporck and Chairman Sprague took vigorous measures to right their floundering ship, getting out of computers and point-of-sale equipment, dropping the two least profitable semiconductor lines, and in early 1991 replacing Sporck himself with Gilbert F. Amelio. Under the leadership of Amelio, a former Rockwell International executive who had a Ph.D. in physics from Georgia Institute of Technology, National turned more of its energies toward the market for analog semiconductors, used increasingly by the telecommunications industry. Analog chips not only made consumer products simpler, but lengthened battery life and powered audio and visual components. National was already a top producer of analog chips, which for years had been all but lost in the excitement over digital chips for computer applications, and Amelio hoped the changing demands of the market would make National's analog expertise far more valuable in the 1990s.

The immediate signs, unfortunately, were not encouraging. Even after writing off $144 million in the massive reorganization of the company in 1991, National came up with a $120 million loss in the following year. As the restructuring took hold, National began to post healthy profits and saw revenues increase with each year. In addition to selling off noncore assets, Amelio also divided the company's chip lines into two areas: lower-margin, more cyclical logic and memory chips (the so-called "commodity chips" upon which National gained prominence); and higher-margin, value-added analog and mixed-signal chips.

Amelio's divisional shift seemed to point toward the eventual divestment of the commodity chips but before he was able to make this dramatic move, Amelio left National in early 1996 to become CEO of Apple Computer Inc. and attempt another turnaround. Amelio's replacement was brought on board in May 1996. National's new CEO and president (soon chairman as well) was Brian Halla, a former executive vice-president at LSI Logic Corporation who also had spent 14 years in marketing at Intel Corporation. The month after Halla's arrival, National announced the consolidation of its commodity chip lines within a new unit, Fairchild Semiconductor, resurrecting the name of the pioneering Silicon Valley chip company National had bought nine years earlier. Within months, however, in March 1997, National sold the Fairchild unit to an investment company for $550 million, retaining a 15 percent stake.

Halla also gambled on the "system-on-a-chip," new technology able to handle all functions, including processing, logic, and memory, on a single chip. National's initial plans for the system-on-a-chip was to drive down the costs of PCs, essentially creating a PC-on-a-chip. National was not the only company pursuing this technology, rivals Texas Instruments and the France-based SGS-Thomson also were developing their own versions. Although Texas Instruments was bigger and SGS-Thomson had the clout of the French and Italian governments behind it, National seemed to be the most aggressive. The company made a number of acquisitions designed to gain the combination of technologies needed to make the PC-on-a-chip a reality. In March 1997 National paid $74.5 million for Mediamatics, Inc., a Fremont, California-based maker of audiovisual chips for the PC market.

Cyrix Corporation was acquired in November 1997 for about $540 million. Cyrix specialized in lower-priced Intel-compatible microprocessors used in PCs under $1,000. Halla planned to use Cyrix chips as a base for the revolutionary new chip, telling Electronic News (April 6, 1998), "First the PC goes on a chip. Next, the PC becomes a plug-in behind the dashboard of your car, behind a flat-panel display in your kitchen, or inside a set-top box. The PC disappears just the way electric motors are invisible in our lives. We use them all day long, but we only think about the appliance, not the motor."

Even though Cyrix seemed the most valuable piece of the system-on-a-chip puzzle, National acquired several other firms to make the chips a reality. Unfortunately, the road to fruition was not smooth. Workforce reductions occurred in 1996, 1997, and 1998, along with the closure of a manufacturing plant in Scotland. While National was certainly pouring research and development dollars into the system-on-a-chip technology, the company also inked a deal with Three-Five Systems, Inc. to develop liquid crystal silicon microdisplays for electronics and initiated a $2.5 million program to give teachers free training on the Internet.

In May 1998 National paid $122 million for ComCore Semiconductor, Inc., a manufacturer of integrated circuits for computer networking and communications. Sufficient progress had been made on the PC-on-a-chip for several top companies including Compaq and IBM to sign on, but delays, a softening PC market, and Intel's highly functional, competitively priced Celeron chip sent National into a tailspin. National sank into the red for both 1997 and 1998 despite overall sales of $2.68 billion for 1997 and $2.54 billion in 1998.

In 1999 National left the PC-on-a-chip business by selling most of Cyrix's assets for less than $200 million, keeping only the firm's MediaGX microprocessing products. MediaGX technology was used in National's new Geode line of chips for the rapidly expanding "information appliance" market. Information appliances, such as PDAs (personal digital assistants), MP3 players, and phones with Internet capabilities, used Geode chips to share data and power their many functions. The first Geode products included tiny handheld television screens for Philips Electronics and AOL. Other National product launches included a miniscule analog amplifier in protective packaging called "micro SMD" and "Merlin," the industry's first high-performance single-chip color scanner.

The New Century: The Early 2000s

The new millennium brought National renewed focus and vigor in its core operations. Analog products, while less glamorous than its sibling components, continued to be the mainstay of the company with new innovations in display screens, wireless technology, and interface capabilities. National also turned increasingly toward a wide array of information appliances, as well as informational infrastructure (Internet and related technology). In addition to finalizing a deal with Taiwan Semiconductor Manufacturing Corporation (TSMC) to produce chips, National unveiled a new slogan, deeming its mission to be the "sight and sound of information" to its many customers around the world.

National finished 2000 with fiscal sales topping $2.14 billion and net income of slightly less than $621 million. The next year, however, was particularly tough on chip manufacturers, despite strides made in technology such as National's joint venture with IBM for remote Internet access and the acquisition of Wireless Solutions Sweden AB, Vivid Semiconductor, and InnoCOMM Wireless. The cost of the acquisitions, ongoing research and development, and a weak chip market took its toll in 2001, forcing National to lay off about 10 percent of its workforce. The company finished the fiscal year with sales of $2.11 billion and income of $245.7 million.

In 2002 and 2003 National continued to hone its amazing technological breakthroughs, with its chips becoming smaller, more sophisticated, and more reliable as the demand for handheld consumer products swept the world. Cell phones with Internet access and cameras dominated the market, along with a new generation of PDAs and musical devices (such as MP3 players and Apple's new iPod). National seemed to be ahead of these trends, but fierce competition and a still struggling economy forced sales well below the $2 billion mark to $1.49 billion for 2002 with a loss of $121.9 million for the fiscal year ending in May.

In 2003 National fared only slightly better: Sales reached $1.67 billion and income was still a loss but at $33.3 million. By 2004, however, National had begun another turnaround, hitting its stride with new product introductions, the opening of its first manufacturing plant in China, and the sale of its imaging sensor unit for small handheld appliances and cellular phones to Eastman Kodak. Sales for 2004 climbed only to $1.98 billion, but income rose to just shy of $283 million, a healthy leap from the previous two years' losses.

For early 2005 National's sales continued to fluctuate, though earnings were strong. Worldwide economic woes, however, did not bode well for continued strength in the chip market. Despite National's strong showing at the end of 2004 and in the first quarter of fiscal 2005, a round of layoffs was announced in January to keep the firm on the straight and narrow. Although National's outlook for the future was somewhat shaky, the company had come though several years of repositioning itself as a worldwide leader in analog technology. National already owned the color display market, with the majority of the planet's half-billion cellular phones using its chips for sight and sound functions. The future of National Semiconductor continued to lie within the tiniest of possibilities: creating microscopic chips with ever more tremendous capabilities.

Principal Subsidiaries: National Semiconductor A.B. (Sweden); Semiconductor Asia Pacific Pte. Ltd. (Singapore); National Semiconductor (Australia) Pty. Ltd.; National Semiconductor B.V. Corporation; National Semiconductor Bangkok Ltd.; National Semiconductor Benelux B.V. (Netherlands); National Semiconductor Canada Inc.; National Semicondutores do Brazil Ltda.; National Semiconductor France S.A.R.L.; National Semiconductor GmbH (Germany); National Semiconductor Hong Kong Ltd.; National Semiconductor (Israel) Ltd.; National Semiconductor Japan Ltd.; National Semiconductor Korea Limited; National Semiconductor (Maine), Inc.; National Semiconductor S.R.L. (Italy); National Semiconductor Technology Limited (China; 95%); National Semiconductor (UK) Ltd.

Principal Competitors: Analog Devices, Inc.; Cirrus Logic Inc.; Intel Corporation; LSI Logic Corporation; STMicroelectronics N.V.; Texas Instruments Inc.

National Semiconductor Corporation History

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