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This is the 883rd article in the ongoing series.
An unconventional start
In 1987, two struggling semiconductor companies merged.
One was Italy’s SGS Microelectronics, and the other was France’s Thomson Semiconductors. At the time, industry insiders thought this was two nearly-dead companies huddling together for warmth.
But 35 years later, this company became the world’s largest MEMS sensor supplier, with an annual revenue of $12.76 billion and a net profit of $2 billion. Eight out of every ten smartphones use its sensors.
It is called STMicroelectronics (ST), headquartered in Geneva, Switzerland.
There lies a key question: How did two second-tier companies merge to defeat first-tier companies?
True mergers are not just addition
Most people think that a merger is simply 1+1=2.
But STMicroelectronics achieved 1+1=10.
So what did they not do after merging?
They did not cut redundant departments, nor did they unify their technology paths. Instead, they retained the analog technology from the Italian plant and the digital technology from the French plant.
Why did they do this?
Because the sensor business is essentially a mix of “analog + digital”.
For example, an accelerometer first uses analog circuits to sense physical movement, then uses digital circuits to process the signals, and finally outputs the data. Companies that only focus on analog or digital can only capture half the orders.
STMicroelectronics has both sides covered, allowing them to provide complete solutions to customers. This is their first leverage: technological complementarity.
A neglected time window
In 2007, Apple released the first-generation iPhone.
At that time, everyone was focused on the touchscreen and processor, and no one noticed the inconspicuous component inside: the accelerometer.
What does this sensor do?
It allows the phone to know whether you are holding it horizontally or vertically, automatically rotating the screen.
STMicroelectronics seized this opportunity. They used MEMS technology (Micro-Electro-Mechanical Systems) to make the sensor the size of a fingernail, reducing the cost to under $1.
What was the result?
In 2007, the global MEMS sensor market was only $3 billion. By 2020, this number grew to $15 billion. STMicroelectronics captured 30% of the market share, becoming the industry leader.
Here lies a key insight: It is not the company with the best technology that wins, but the company that makes the right product at the right time.
An intuitive strategy
STMicroelectronics has a peculiar practice: they never focus on just one product.
If you look at their product line: automotive chips, industrial sensors, consumer electronics, IoT… they do everything.
Isn’t this a big taboo?
Traditional business theory tells us to focus and specialize. But STMicroelectronics does the opposite.
Why?
Because the semiconductor industry has a brutal rule: the cyclicality of a single market is too strong.
During the 2008 financial crisis, demand for automotive chips plummeted by 50%. However, demand for consumer electronics chips increased because people stopped buying cars but still needed phones.
STMicroelectronics’ wide product line allowed them to offset losses in one market with gains in another, resulting in an overall revenue decline of only 15%. In contrast, Infineon, which focused solely on automotive chips, saw a 40% drop in revenue.
This is their second leverage: market hedging.
A misunderstood asset
STMicroelectronics possesses something that others do not: their own factories.
Today, most chip companies operate on a “fabless” model, designing chips and outsourcing production to TSMC. But STMicroelectronics has 11 owned factories worldwide.
Isn’t this a burden?
On the surface, maintaining factories is heavy and costly. But in reality, this is STMicroelectronics’ moat.
Why?
Because sensors are different from ordinary chips; they require a combination of “analog + digital + mechanical structure”. This process cannot be done by TSMC and must be developed in-house.
The Agrate factory in Italy spent 10 years just tuning the MEMS production line. Currently, there are fewer than five factories in the world capable of producing 6-axis gyroscopes, and STMicroelectronics owns two of them.
This is their third leverage: process barriers.
An essential business logic
Ultimately, what did STMicroelectronics do right?
It is not about having the strongest technology, but the best combination.
The combination of analog and digital technologies allows them to provide complete solutions.
A wide product line allows them to smooth out cycles.
Having their own factories creates barriers.
There is a deeper insight here: In technology-intensive industries, system integration is more valuable than single-point breakthroughs.
Most people want to find that “killer app”, but the real experts are those who can combine ordinary capabilities into a system that others cannot replicate.
Lessons for the sensor industry park
From STMicroelectronics, we learn three things:
1. Attract complementary enterprises
Do not just recruit a bunch of companies making the same products, but rather those that can form an industrial chain. Companies that make sensors, algorithms, and packaging should be together to create a chemical reaction.
2. Services should help companies smooth out cycles
Companies in a single market are very vulnerable. You should help them connect with different markets such as automotive, industrial, and consumer electronics to enhance their risk resistance.
3. Investment should focus on process barriers
Competition in sensors ultimately hinges on processes. The park should be willing to invest in clean rooms, testing equipment, and other “heavy assets”; this is the true moat.
True competitiveness is not about being the best, but about being the hardest to replicate.
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