VLSI Technology, Inc.

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VLSI Technology, Inc.

1109 McKay Drive
San Jose, California 95131
U.S.A.
(408) 434-3000
Fax: (408) 263-2511

Public Company
Incorporated: 1979
Employees: 2,738
Sales: $719.92 million (1995)
Stock Exchanges: NASDAQ
SICs: 3674 Semiconductor & Related Devices; 5054 Computers & Computer Peripheral Equipment & Software

VLSI Technology, Inc. is known as a pioneer in ASIC technology. It designs, manufactures, and sells customized integrated circuits called application-specific integrated circuits (ASICs) and application-specific standard products (semi-custom chips designed for a particular market application). In addition, the company has become a leader in the chipset business through its personal computer division, where it develops and manufactures computer peripheral devices.

Starting Out

VLSI Technology was started in the late 1970s by Douglas Fairbairn, Jack Balletto, Dan Floyd, and Gunnar Weslesen. The latter three had been friends at California Institute of Technology before getting together in Los Gatos, California, to start VTI, the company that would soon become VLSI. Fairbairn met VTFs founders in 1979 when he interviewed them for an article in his semiconductor magazine. The three were so impressed that they offered Fairbairn a job. Shortly thereafter, the company was incorporated as VLSI Technology, Inc.

The name VLSI was taken from the acronym for “very large scale integration.” Semiconductors from earlier years had been dubbed SSI (small scale integration) and then MSI (medium scale integration), before progressing to LSI (large scale integration). That progression tracked the increasing numbers of transistors that were being placed on single chips, culminating in VLSI, which came to describe chips with more than 100,000 transistors. VLSI started out offering software design services that helped semiconductor manufacturers develop and produce advanced integrated circuits.

VLSI pioneered the development of some design technology related to ASICs. Prior to ASICs, chips were designed to be mass produced and utilized in a broad range of applications. ASICs allowed manufacturers to tailor chips to perform a specific job. VLSFs first major innovation was a workstation system that allowed semiconductor engineers to effectively design and tailor their own chips. Introduced into the burgeoning market in the early 1980s, the invention helped VLSI boost its revenues from less than $20 million to more than $100 million within four years.

Fairbairn received much of the credit for the development of VLSI’s ASIC technology and the creation of the workstation. In fact, Fairbairn lead VLSFs ASIC and chip-design tool division into the 1990s as the only remaining founder of the company. Fairbairn was known as a highly intelligent workaholic. Born in 1948, he grew up in a suburb of Los Angeles where he delivered newspapers and worked for his father selling seeds. His technological skills surfaced early. After watching the Soviet Union’s 1957 launch of Sputnik, the nine-year-old Fairbairn, built his own model rocket, complete with fuel and an electrical system that deployed a landing parachute. By the time he was 15 he was building ham radios out of trashed electronic gear.

Fairbairn enrolled at Stanford in 1966, where he studied electrical engineering and worked part-time for Hewlett-Packard. He started his career in 1972 in Silicon Valley, working with a number of legendary inventors and on several groundbreaking projects including the first personal computer (“Alto”) and the first laser printer. It was in 1976 that Fairbairn, after listening to a speech by technology guru Carver Mead, decided to design software that would allow engineers to design their own integrated circuits. He teamed up with Mead’s prize pupil, Jim Rowson, to start developing his software. Investing only $20,000, Fairbairn simultaneously launched Magazine Lambda, a slick periodical developed specifically for semiconductor engineers.

It was through Magazine Lambda that Fairbairn came into contact with the progenitors of VTI. Fairbairn sold Magazine Lambda in 1979 (to a big publisher, and at a large profit), and quit his part-time job at Xerox so that he could devote his energy to the VLSI venture. Rowson went with him, and would remain his right-hand man into the 1990s. When VLSI hit the jackpot with its innovative workstation, the founders’ took the company public in 1983 to raise expansion capital. That move allowed VLSI to expand from a developer of chip-design systems to a manufacturer of chips. “The software and design system was only meant as a way of getting into the silicon business,” Fairbairn explained in Financial World. In fact, VLSI often sold its design software at a loss as a way to establish a presence with its customers.

A New Direction for the Mid-1980s

To shepherd VLSI into the role of chip manufacturer, the company’s board brought in semiconductor industry veterans Al Stein and Henri Jarrat. Stein, who became chairman and chief executive of VLSI, had served in key executive positions at Texas Instruments and Motorola. Jarrat, who became president and chief operating officer, had also worked at Texas Instruments and then with Stein at Motorola. Together, they planned to lead VLSI into the semiconductor manufacturing industry. Meanwhile, Fairbairn and Rowson remained in charge of the company’s ASIC and chip-design tools division, helping to develop new technology and products that complemented VLSI’s manufacturing initiatives.

By mid-1985, VLSI operated chip design centers and sales offices in San Jose, Irvine, Boston, Dallas, and Chicago, as well as overseas in Germany, Paris, and the United Kingdom. Through those centers, VLSI worked with clients to design chips for specific applications. It could also produce ASICs, as well as more conventional chips, through its high-tech foundry (wafer processing facility). Indeed, VLSI became a sort of one-stop shop for companies that needed semiconductors; it helped its customers design application-specific chips using its proprietary design technology, manufactured the chips, and then helped the customer employ the chips.

VLSI’s advantage came through its ability to help clients quickly develop advanced chips at a minimum cost. Indeed, VLSI gained a reputation for being able to design and produce high-quality ASICs as fast as any company in the industry. Its reputation allowed it to land some of the biggest buyers in the market, such as Apple, which used VLSI’s chips to give its successful Macintosh computers many of their distinctive features. By 1985 VLSI was employing more than 600 workers and generating sales of nearly $80 million annually. Despite a general slowdown in the semiconductor industry during the mid-1980s, VLSI continued to post successive revenue gains; sales grew to $112 million in 1986 and then to $171 million in 1988.

Despite VLSI’s technology prowess and reputation for excellent customer service, profits remained elusive throughout the 1980s. Revenue growth was huge, but the company posted meager and inconsistent net income figures. Between 1985 and 1989, for example, VLSI’s total net income amounted to less than $3 million from a total of more than $800 million in sales. That shortfall was hardly the result of VLSI’s failure to compete technologically. Instead, the failure was linked to problems with its manufacturing operations.

The problem stemmed primarily from management’s decision during the industry slowdown of the mid-1980s not to expand production facilities. In 1987 Stein decided not to build a $70 million production facility, but to wait one year and see if demand picked up. Until then, he would contract production to outside foundries, if necessary. Unfortunately for VLSI, semiconductor demand ballooned in 1987 and the company was swamped with orders which it didn’t have the manufacturing capacity to fill. Furthermore, it had trouble finding outside contractors that could handle its orders. In its race to get its production facilities up-and-running, VLSI bobbled many of its customers’ orders and lost sales and profits. “VLSI has been a disappointment,” Shearson Lehman analyst Tom Thornhill said in Financial World. “They found out they had to be good at a lot more than design.”

The 1990s

VLSI increased sales to $288 million in 1989, but profits remained evasive. However, going into the 1990s its manufacturing facilities were up-and-running at full capacity and the company seemed positioned to profit from ongoing growth in demand, particularly for its ASIC chips and technology. At the same time, VLSI was branching out into other niches. It had begun targeting the market for application-specific standard products, which are semi-custom chips designed for a particular market application and can be used by several different customers. It also began focusing on the computer products industry during the early 1990s, developing personal computer peripheral devices that utilized its proprietary semiconductors.

Company Perspectives

Customer satisfaction is fundamental to our business. Their success is the basis of our success and their perception of our service is reality. Our people are our most valuable resource. We encourage mutual trust, integrity and open communication throughout the organization. We strive for technical excellence through the development of innovative products. Our goal is to achieve consistent profits to ensure continued prosperity for all who depend on us. Through our Customer Excellence philosophy, we strive to inspire those with whom we work. We foster an environment where teamwork, risk taking, and willingness to change define our culture. We are pledged to continuously improve, to create a challenging and rewarding work environment, and to be good world citizens.

By 1990, Fairbairn had become disenchanted with the direction in which VLSI was moving. Furthermore, the ASIC division, which he headed, was accounting for less than 50 percent of VLSI’s sales and the original chip-design tools business was only contributing about ten percent. Stein wanted to let VLSI focus on manufacturing chips and spun off the chip-design software and tool division, as Compass Design Automation, in 1990. Before that move was completed, however, Fairbairn left VLSI. Rowson went with him, as did Dan Yoder, director of corporate strategic planning for VLSI. Together, the three founded a new company called Redwood Design Automation to focus on chip- and software-design tools.

Meanwhile, VLSI, still under the direction of Stein, sustained its drive to establish itself as a leading manufacturer of ASIC semiconductors, and to branch into complementary market niches. In mid-1992, for example, the company announced that it would be working with Intel Corp. to manufacture chips that would enable computer manufacturers to build powerful handheld computer devices. Intel agreed to provide proprietary chip technology to VLSI, which would produce the microprocessor cores (or chipsets) for the devices. This “chipset” business would quickly grow to become a significant portion of VLSI’s revenue base.

As it had since its inception, VLSI increased revenues throughout the early 1990s. Sales grew to $324 million in 1990 and rose to more than $428 million in 1992. But poor profit numbers continued to plague VLSI. Partly to blame was a temporary industry slowdown in the early 1990s, which caused many chip manufacturers to decrease output significantly. VLSI managed to recover from the slowdown in 1993, when big sales gains were mirrored by a rise in net income to about $16 million. That success was diminished in December of 1993, however, when Apple Computer decided to cancel a large portion of its chip orders from VLSI. The announcement sent VLSI’s stock tumbling 30 percent in a single day.

Despite the setback with Apple, VLSI managed to increase sales in 1994 to $587 million, a record $31.7 million of which was netted as income. That success was underscored by IBM’s decision in October of 1994 to use VLSI as the chipset supplier for its Pentium-based desktop computers. That development highlighted the growing importance of VLSI’s chipset business. By the mid-1990s VLSI had become a recognized leader in the chipset business, designing and building the chips that were the core logic components in computers and linked microprocessors with various peripheral devices. Largely as a result of its surging chipset business, VLSI boosted sales to $720 million in 1995. Going into 1996 it was employing 3,000 workers throughout North America, Europe, and Asia.