Renesas works out EOL deals to survive the crunch
Renesas Electronics reported Wednesday, August 6, that its April-June quarter results outdid its own projections, with sales growing by 4.9 per cent to $1.97 billion from the previous quarter. Operating income was $264 million, an increase of $98 million over the last quarter.
The company's first quarter numbers showed both quarter-by-quarter and year-on-year growth, spurred by increases in automotive sales and general-purpose products.
This uptick, however, is hardly a proof of Renesas's full recovery, according to CEO Hisao Sakuta. During a press conference in Tokyo on Wednesday, Sakuta described Renesas as "a patient still in the hospital."
Today, the new management team at Renesas is focused on gross margin. Simply put, without an adequate gross margin, a company can't pay its operating and other expenses and build for the future. Sakuta said that the most urgent task for Renesas, "still fighting for survival... [is] to improve our gross profit rate."
Sakuta, during Q&A, asked a rhetorical question: "If you're a customer, would you do business with a company who might go bankrupt?"
Renesas's gross margin has been steadily improving in recent quarters—helped by foreign currency exchange rates, a host of structuring reforms (closing a number of its own fabs and laying off employees), and selective focus on the company's product mix. Noting that the company's estimated gross profit rate is 38.3 per cent during the second half of the current fiscal year, Sakuta said, "Our goal is to improve it to 45 per cent in three years."
Figure 1: Renesas quarterly financial results. Source: Renesas Electronics
Sakuta, former Omron president and chairman, bluntly offered a few of the "gory details" of the end-of-life (EOL) product negotiations Renesas is engaged in with its customers.
Beyond its commitment to further "structural reforms," Renesas badly needs to unload unprofitable products, even though some of those chips are in critical demand by customers, according to the Renesas CEO. Renesas simply won't be able to make certain chips due to the closing of its own fabs. In some cases, Renesas needs to end the product because the company sees that customer applications are shrinking.
While ending the production of certain parts and components is surely the most critical step in restoring the company's gross margin, it's the most controversial (and grossly unpopular) among customers.
Much of Renesas's automotive chip revenue is generated by the company's long-standing relationships with Japan's leading carmakers, including Toyota. Since automotive companies tend to need certain qualified products on a long-term basis, these EOL discussions are neither pleasant nor easy. Sakuta, however, said, contrary to some industry speculations, Renesas is making progress negotiating with carmakers.
Sakuta: Renesas' most pressing agenda is to maintain its lead in automotive MCU.
"Of course, we have been repeatedly told [by certain automotive companies], 'Never ever come and visit us again,'" said Sakuta. "But in the end, our customers will need us, and we will need them. We've been pleading for them to come back to the table, and we are succeeding to an extent." In fact, Renesas now faces more difficulties in areas unrelated to automotive, according to Sakuta.
The impact of EOL decisions on some products is already showing in the company's financial results. Because Renesas needs to stockpile EOL products in advance, the company has seen an artificial income boost in the latest quarter, said Renesas CFO Hidetoshi Shibata: "To ensure constant positive results, we need to do further reforms."
Although EOL discussions with customers can be tough, both parties need to preserve a level of mutual respect and trust. Sakuta explained that a chip supplier and customer need to agree on how long the chip vendor can keep supplying certain needed parts, and how many chips the customer actually needs over a certain period of time. The customer is relying on its own forecast of how many products it will actually sell in the future, and the supplier is heeding its needs, Sakuta explained. "If they say they need 100 chips, we'd have to make a lot more than 100 chips, because they can't be short of parts. But if any parts are left unused, who pays for them? Do we share the risk with our customer?"
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