#632 – Steve Sanghi - Microchip CEO for 31 Years!

Dave Jones: This is the Amp Hour podcast, released May 15th, 2023, episode number 632, with Steve Senge discussing being CEO of Microchip Corporation for 31 years. Welcome to the Amp Hour. I'm Dave Jones from the EEV blog.

Steve Senge: And I'm Steve Senge. For 31 years, I was the CEO of Microchip, now the executive chair of the board. Steve, great to talk to you again.

Dave Jones: How long has it been? 13 years since we last had a chat?

Steve Senge: Yes, Dave. That was a long time ago. I think our picket three had just come out. That's right. There were some things you didn't like about it, and I got that feedback.

Dave Jones: Yes. And then you guys made a hilarious response video, and yeah, that was great. That was good times. So 31 years as CEO of Microchip, and you've only recently stood down, and now you're executive chairman. Is that right?

Steve Senge: Yes. So I stood down in March of 2021, two years ago.

Dave Jones: Right. And why was that? You've had long enough there? You wanted to retire? Hand the reins over?

Steve Senge: I was almost 66 years old, and I needed to pass it on to my successor, Ganesh Murthy. And, you know, so I'm still working for Microchip three days a week. Right. But I have ample time, so I wanted to really, you know, my family made a lot of sacrifice over those 40 years. Yeah. And I wanted to really spend more time with them and reduce my hours at Microchip a little bit. I was working seven days a week and traveling 100 nights every year. And it was just...

Dave Jones: Oh, yeah. That's tough.

Steve Senge: Yeah.

Dave Jones: No, I can understand. So you've now written a book. We might talk about it a bit more at the end, but is that... What's that about?

Steve Senge: The title of the book is Up and to the Right. That's the main title. And then the subtitle is My Personal and Business Journey to Building the Microchip Technology Juggernaut. Excellent. So the book is really my, you know, 31-year history of building microchip and also has a little bit of personal stuff. My growing up as a small boy in India, how I came to the United States and, you know, early years, I went through a lot of hardship like most immigrants and how I got into business and then microchip and just a tremendous success building a $43 billion market value. Just absolutely a juggernaut. So that's really what the book is about.

Dave Jones: That is amazing. Hey, can you tell us very briefly, I don't want to go through the book, but tell us very briefly, how do you become the CEO of a large company like, well, it was, was it Arizona Microchip back in the day? I do have a recollection that it was called Arizona Microchip. Is that right?

Steve Senge: The name of the company was never Arizona Microchip. It was Microchip Technology Inc. Right. It's a European name and some of the Asian countries, they branded Arizona Microchip. Ah. But Microchip was too generic and those countries apparently added Arizona to it. But here in the US, the main company's name was always Microchip Technology Inc. Got it.

Dave Jones: So how do you become CEO of a company like that? What's the path? What's the...

Steve Senge: Well, there are two ways to become CEO of a large company. One is to become the CEO of a small company and then make it large.

Speaker ?: Right.

Steve Senge: You know, which is what I did. I joined the company when I was a $60 million company losing money. You know, we turned it around, took it public and just built it absolutely juggernaut. We just completed a fiscal year with sales of $8.4 billion. Nice.

Dave Jones: So you didn't start out as CEO though. You were working there as something else at the time, were you?

Steve Senge: I was... I came to Microchip as a senior vice president of operations. And after one month of me being here, the board took out the CEO because the company wasn't doing well.

Dave Jones: Right.

Steve Senge: And then there was a three months of search out. You know, they talked to internal and external candidates. And then I got the job about four months after I came to Microchip.

Dave Jones: Oh, fantastic. Because Microchip almost went bankrupt in 1990, didn't they? Is that before or after you took the reins?

Steve Senge: So Microchip really never went bankrupt. I almost did. So after I took the job, we basically were losing money and didn't have enough money. Venture capital was very hard to come by. I wrote a business plan and started raising money. Took me about nine months to raise money. During those nine months, every other Tuesday, I wouldn't know whether the paychecks will clear on a Friday. Oh, ouch.

Dave Jones: That is rough.

Steve Senge: So if any of those Fridays, the paychecks had not cleared, then we essentially will file bankruptcy. But we never did. We turned the company profitable. I raised new money. Two years later, took it public and up ever since.

Dave Jones: Fantastic. So did you change product strategy or something? Did you? Is that how you helped turn it around? Or was it just the capital raising that allowed you to buy time to drive in different directions?

Steve Senge: Massive overhaul. And, you know, actually, the second chapter of the book talks about the transformation of Microchip from what we were to what we have become. And Microchip originally was an EEPROM company. We used to make EEPROM memory products. And, you know, the prices in EEPROM memory products are very low. It's a commodity market and very, very competitive prices from Japanese and Koreans and others. So the company was really losing money selling EEPROMs. And the strategy we changed was to turn the company into a microcontroller company. We took the PIC architecture, which was, you know, had some two or three ROM-based products, about a million dollars a quarter business. So it was a very small business. And we applied our EEPROM technology to the microcontroller architecture to make the field programmable microcontrollers, which could be programmed by the customer rather than programming in the factory by sending your code to Motorola and waiting for 16 weeks, you know, for the parts to arrive. And during that time, your code changes and you start over again.

Dave Jones: That was game changing, wasn't it? I mean, that was the PIC-16C54. That was the first one?

Steve Senge: Exactly. It was a game changer. It was absolutely a game changer. And I write eloquently in the book about, you know, how the field programmability changed the game. There is a story about it, which is also in the book. I was visiting a customer in Europe, in Germany, that was building remote controls. So they were making remote controls for every single TV, audio, video, karaoke, garage door openers. They were making about 500 different remote control models in a given year. Wow. And they used to make them for, you know, Sony and Seiko and all the, you know, all the video, audio, TV players. So, but they were only making remote controls for other people. So, and they were using Motorola product and obviously ROM-based product. So I went to visit the customer and the president showed up in the meeting. So I asked the president my favorite question, which is, you know, dear sir, you know, what is it that you cannot do today, but would love to do if you only knew that it could be done? It's a powerful and profound question if you think about it. Yeah, totally. He did it a couple of times and I said, what is it that you cannot do today, but would love to do if you only knew that it could be done? He said, follow me to the production floor. We went to the production floor, put our smocks back. And he said, you know, look at all those pile of parts. There are obsoleted codes where the customer had changed the codes and the parts are scrapped. Look at those 14 people behind the glass. They're all on the phone with Motorola trying to expedite the parts on which the demand was stronger. And, you know, it's like we're going crazy. We have to forecast 16 weeks ahead of time an exact model mix of those 500 different codes. Can you help me? I said, yes, sir. Music to my ears. I said, change all those parts to a microchip microcontroller. Then all you have to do is buy the number of remote controls you build in a month. No model mix issue. Your night shift programs it and your day shift puts them into the socket. And guess who got the business? Yeah, exactly.

Dave Jones: Oh, well, yeah. So you guys were the only ones who had a reprogrammable microcontroller field programable.

Steve Senge: So I think, to be honest, Motorola, Intel, and I believe even Hitachi had an EEPROM-based field programmable part. But they were about 10x the price. Ooh. So they were not used for production. Right. They were used for prototyping, where you can program and reprogram. You use it for production. You use it for, you know, prototyping.

Dave Jones: Or for very high value added products, very expensive products. That's right.

Steve Senge: So what we brought to the market was a field programmable product, which was only, I think, about 20%, 25% higher price than ROM, but tremendous value in time to market.

Dave Jones: Wow. And then, so when did you make the switch from E2Prom to Flash?

Steve Senge: So the, so first we went from E2Prom to E2Prom. I think there was a PIC16C84, which was an E2Prom product. That's right.

Dave Jones: Yeah.

Steve Senge: And you can really byte program and change a single byte. And then around the 1995 timeframe, we introduced the Flash-based products, where you can Flash-erase the whole part and Flash-program the whole part.

Dave Jones: Right. And what was, like, how do you change your fab, like, process node or whatever it is to change from EEPROM to then E2Prom and then to Flash? Is it like a major upgrade to your fab? Or how does that, how does that work?

Steve Senge: Those were all distinct technologies. So today, we still make the original PIC16C54. Yeah. And the EEPROM technology still runs in our fab. We still make the 16C84, which is an E2Prom technology, and we still make it. And we make a whole bunch of Flash parts that you can buy from 16F505 to, you know, even 16-bit parts and high-end 8-bit parts. You know, there are 2,000, 3,000 different variety of PIC microcontrollers today. So all those parts run into the fab. So each one was a different technology that we developed and then implemented and put the designs on those technologies.

Dave Jones: Right. So how easy is it to change your fab, like, to, like, suddenly spin up a Flash part as opposed to a E2Prom part? Is it, like, really easy to do that?

Steve Senge: You mean the designs are already there?

Dave Jones: The designs are already there. How do you change the process on the manufacturing floor, so to speak?

Steve Senge: So all those processes are in production volume. And I can today, you know, start 100,000 parts of 16C54. Tomorrow I can start a mask set, which runs on the E2Prom process. And the day after I can start the mask set, which runs on the Flash process. Or on a given day, you can make all three. There is enough equipment with the fab to really make all those parts in parallel.

Dave Jones: Oh, wow. Okay. Fantastic. So how many fabs do you guys have and where are they?

Steve Senge: So Microchip owns three large fabs. The oldest one that we have it in Arizona, it's in Tempe. And then the second one is in Oregon. It's right outside of Portland in a city called Gresham. So the Tempe fab and Oregon fab are eight-inch fabs. And then we have a third fab, which is a six-inch fab, which is in Colorado. And we got it when we purchased Atmel. It was Atmel's fab.

Dave Jones: Oh, right. Yep.

Steve Senge: And then we use a, you know, we probably use 20 other fabs around the world in Taiwan and Japan and China. Basically, products that we buy from subcontractors like TSMC, Global Foundry, UMC and others.

Dave Jones: Got it. So what percentage of your products would be made in your own fabs, do you think, roughly?

Steve Senge: So about 42% of the products are roughly made in our fab. Oh, wow. Just are making foundries. So, you know, that number was almost 98% made inside prior to us starting, you know, the acquisitions.

Dave Jones: Yeah.

Steve Senge: And starting to build the products in TSMC. So I would say, you know, almost till about 2008, 2009, we made most of the products ourselves. Right. Then two things happened. Number one, we started to do acquisitions. So when we, for example, bought SMSC in 2012, they were 100% fabulous. When we bought SSD in 2010, they were 100% fabulous. When we bought MicroSemi in 2018, you know, they were largely fabulous. So when we bought all those companies, then a fair amount of our business started to be from the foundries. Got it. And the second reason is as the technology migrated up, especially to 300 wafers and past the 90 nanometer, 90 nanometer, 65, 40 nanometer, 28 nanometer, all those are very advanced lithographies. And MicroSemi. And MicroSemi doesn't have 300 millimeter capability inside. Right. So we're buying from foundries. So as that business grew, that also increased the portion of the business we get from outside.

Dave Jones: Got it. So we're looking at building your own, a new 300 millimeter fab in Gresham, aren't you? Is that still happening or?

Steve Senge: So we did a large study whether we could do a 300 millimeter fab owned by us with a CHIPS Act grant from the U.S. government that was approved a few months ago that you could apply for the CHIPS grant money. But we were doing that because our foundries had told us that they're not going to add any trailing 300 millimeter capacity. So foundries told us that they would not add any 300 millimeter capacity at the 19 nanometer, 65 nanometer and 40 nanometer nodes. So we had decided to do ourselves. But as we were still working on and getting the money and laying the plans, the foundries changed their decision and they said they will add trailing 300 millimeter fabs because apparently their original analysis was that the trailing edge demand wouldn't be there. But, you know, a lot of the, you know, a lot of the equipment are, you know, industrial equipment, automobiles, you know, all sorts of, you know, products built. They're all built on trailing edge technology. All the analog is built on trailing edge technology. It's only the advanced processors by Intel and NVIDIA and AMD and Qualcomm, you know, they're built on what we call bleeding edge technology.

Dave Jones: Yeah.

Steve Senge: All of microchips, microcontrollers are built on trailing edge technology. So as the foundries started to get that feedback from us and ADI and TI and NXP and ST Micro and Renaissance and others, they changed their mind and they said they would add more trailing edge capacity. So we scrapped our plans. Oh, it's scrapped. Okay.

Dave Jones: So even if the government gives you money through the Chips Act, you won't build a new fab? You don't think you will?

Steve Senge: Currently, we are planning to expand our 8-inch and 6-inch fabs because the demand on them is tremendous and we'll get some Chips Act help for that. Oh, great. So what's the 300-millimeter fab from Chips Act? Well, you know, the government did a little bit of bait and switch also. Right. So basically, they came up with rules that if you take more than $150 million help from the government for a given project and a 300-millimeter fab will be a $5 billion project. So we'll get a lot of help from the government. Then you have to put a, you know, unionized workforce. You have to build a daycare center. You have to share your profits with the government. You cannot buy back your own stock. You cannot increase your dividend. Oh, wow. Yeah. So it's like, you know, hey, you know, that's... So you're asking us to swim in a highly competitive world.

Dave Jones: Yeah. I think the name for that is golden handcuffs.

Steve Senge: Exactly. So a number of companies have decided to not take the government money and we're going to take the government money but stay below the $150 million per project. So we don't have to do all those things and use that money to expand our existing fabs.

Dave Jones: Got it. That makes sense. Okay. So you wouldn't be able... Would you actually be able to get capital somewhere to build your own fab that wasn't government money? Would that even be possible?

Steve Senge: Well, I mean, we are, you know, number one, we're very profitable. We can fund a fab ourselves. If we absolutely needed the fab and if, you know, the foundries had told us that they won't build a trailing edge technology and they had not changed that decision, then we will build a 300 millimeter fab. And we probably will only take $150 million from the government and rest we can cash flow ourselves. We're very profitable. We can borrow money. We can sell our stock to raise money. We can sell bonds. We can do a lot of things. So the problem wasn't really being able to fund the fab. The problem is, you know, building the fab in U.S. with all the regulations and all that is more expensive, you know, than building a fab in some other countries. So we wanted a government subsidy so the fab can be cost effective. But if they give you a subsidy on one hand and raise the cost even higher on the other end, then it's a mute point.

Dave Jones: Got it. Are you making any chips in China at the moment through any fabs in China?

Steve Senge: We are making very few chips over the last several years as the rhetoric between U.S. and China ratcheted up. We have largely withdrawn from manufacturing in China. We own no assembly or test plant in China. Some of the packaging we do, we have moved it outside. We probably do less than 5% of our packaging in China. And for wafer fabs, we probably, you know, do only maybe 2% or 3% of our manufacturing in China on wafer fabs.

Dave Jones: Interesting. So what about raw materials and things like that? Are you reliant upon China for those? Like if, say, if trade with China stopped tomorrow, would your fabs not be able to get material?

Steve Senge: So we are reliant on China on those. But even on those things, we have built second sources for most of the materials. Right. So if the supply line were to get totally cut off from China, which nobody is expecting it, then, you know, the other sources, which we have qualified, you know, will have a lot of constraints on them. And we won't be able to get everything we want. So we're still relying on China for a lot of the, you know, a lot of those rare earth materials and other things. But the sources are being developed outside of China to become self-independent there too.

Dave Jones: What sort of rare earth materials are used in chip fabs?

Steve Senge: I wouldn't be able to name them, but palladium is one of them, for example, and there are other.

Dave Jones: Okay. Interesting. Can we talk about the supply chain and COVID? Here's a big topic. Can you tell us what happened during COVID? Because my, let's see if my story ties up with, well, from what I've heard, ties up with what you know. The supply chain crisis happened because when COVID came around, all the major automotive manufacturers and all the big manufacturers, you know, all your big makers like Apple and everything, they stopped. They panicked and stopped ordering parts, which then meant you guys, that changed all your pipeline and everything. And then six months into it, they realized that, oh no, we better start making chips again. And then you guys couldn't ramp up fast enough.

Steve Senge: Is that what happened or? Somewhat that happened, but, you know, it's more complex than that. Right. Tell us. So, you know, COVID started in about March of 2020. And in June of 2020, the automotive demand had gone to about 20% of normal. So, automotive manufacturers cut back that much, not for the whole quarter, but it was sliding down. And in the month of June, it was about 20% of normal. Wow. And we, you know, we begged automotive manufacturers that that can't be a reality. You're just responding to the short-term thing. Give us a longer-term forecast. What happens in six months? What happens in a year? So, we maintain capacity and, you know, and not leave you high and dry. And nobody was giving any forecast. Nobody was talking. Nobody knew what's going to happen. So, while the automotive demand was down, the demand in two areas skyrocketed. Right. One was in a work from home.

Dave Jones: Yes.

Steve Senge: So, I would say a large number of our employees have a desktop in their office. And when they started working from home, we had to buy them a laptop. Right.

Dave Jones: Instant demand for laptops and monitors, external monitors and things.

Steve Senge: Yeah. So, we had to buy them a laptop, a monitor, a dock, docking station, upgrade their broadband at house, in the house, a printer to be able to print things. So, the demand for things needed for work from home, you know, even headphones and others, it skyrocketed. And then the second thing that happened was medical. So, I'll give you an example on medical. You know, in March of 2020, if somebody had asked me, you know, what is a ventilator? Yeah. A ventilator must be some sort of fan, maybe an attic fan in Phoenix to get the heat up. But then I learned that ventilator, you know, was this pump that pumped oxygen into the lungs of the patients that couldn't breathe. And every design around the world, I would say 90% plus of the designs around the world had a pick in it. Oh, really? And that demand went up a thousand X. Oh, a thousand times. Wow. Yeah, a thousand times. And it was not only ventilators, also, you know, digital thermometers, temporal scanners, glucose pumps, and, you know, and diagnostic equipment. And when the COVID test kits started to come out, they all had our products in it too. So, the demand for medical just skyrocketed and took us more than a year, year and a half to supply that demand. So, the automotive capacity got shifted to medical and work from home. And then four or five months later, when the automotive came back and saying, hey, we want our parts, we had no other capacity. Wow. And then everybody got constrained and still are. I mean, our lead times are still, you know, 26 to 40 weeks on most of the products.

Dave Jones: Yeah, that was common back in like the late 90s, wasn't it? I can remember like 40-week lead times being very common. And then it seemed to be plentiful in the last 15 years or something. And now it's like 40 weeks again.

Steve Senge: Yeah. So, you know, we are on record to say that we bring the, we'll bring the lead times on all of our products, you know, down below 26 weeks by end of September. Right. So, it's a pretty far away. And I think, and then continue to bring down beyond that. Other companies are doing the same thing. So, things are normalizing from COVID. You know, the medical demand has been met. The PC demand has been met. Actually, PCs are soft. Automotive demand is rising. But now the switch is happening. You know, the capacity we had given it to PCs and work from home and medical, now we can give that capacity back to automotive. So, we're catching up.

Dave Jones: Us engineers, we think, we foolishly think that the chips are the bottom of the supply chain. Like, oh, I can't get my chips. Therefore, I can't build my products. But to you, it must be different. It's like, well, if there's a supply chain crisis, I can't get my wafers. I can't get my chemicals. I can't get, you know, all the things I need to build those chips. It's like turtles all the way down. Did you guys have any supply chain problems for stuff to make the chips?

Steve Senge: Yeah, we had huge problems to make the chips. So, you know, we were expanding our fab and we're adding equipment in our fab. And when we will order the equipment, you know, the companies like Applied Material and KLA and others we were buying the equipment from will give us a delivery date when the equipment will be shipped. And let's say they told us it will arrive in September 2020. And it didn't arrive in September 2020. It arrived six months later. What happened? Because many of them couldn't get semiconductors to build the equipment. So in many cases, we found out if it was our chip, then we preferentially gave the chip to those people who will help us, you know, give the equipment.

Speaker ?: Right.

Steve Senge: But we were not the only chip in those equipment. Even if you gave ours, maybe they couldn't get it from TI. They couldn't get it from somebody else. So eventually everybody figured out to help the gear manufacturers so they can build enough gear to really, so that we can improve production. But that was not the only thing. Then our stuff, let's say, was coming from Japan and it sat outside of Los Angeles Harbor on the ships for eight weeks. Oh, right.

Dave Jones: Because they couldn't get the port workers or whatever, the dock workers. Is that right?

Steve Senge: And, you know, they couldn't get, you know, enough. They couldn't get the port to be working efficiently enough. There were union workers. They were working, you know, one shift and, you know, it was overloaded. So ships sat out in the ocean for six to eight weeks. So by the time they were able to offload our stuff and they put it on the ground, our truckers had bailed out saying, we got other jobs to do. You know, we've been waiting for a week to wait for your equipment and we're leaving. So then it took us four weeks to get the truckers back. They took the equipment to Oregon where we needed to install it. By that time, the installers had bailed out and saying, well, you know, we got other work. We got to make money. We've been waiting for a week for the equipment to arrive. So there were delays after delays after delays after delays. So therefore, the commitments that we had made to the customer a year out based on our capacity growth plans, we had to break those commitments because that capacity growth didn't happen because we didn't get the equipment.

Dave Jones: Wow.

Steve Senge: We didn't get the equipment to work. We didn't get the equipment to work.

Steve Senge: We never shut down because of chemicals because there was a fair amount of chemical supply available onshore from lots of people that make chemicals. So we did come hand to mouth a few times where ordinarily we'll have six weeks of supply of chemical in-house and we never want to shut the fab for a stupid chemical. Yeah. Yeah. And then we came within a week of shutting down. We never shut down because of that. Right. Another point I wanted to make is, you know, where historically over the last 40, 50 years, customers have dealt with their chips as jelly beans. Yes. Whenever you want them, they will be there. You know, automotive suppliers never paid enough respect to the semiconductor suppliers because, you know, I got lots of suppliers and chips are available. And, you know, whenever I need them, I will have them. And they, for a decade plus, they were driving these JIT program just in time. I don't want any inventory.

Dave Jones: Yeah.

Steve Senge: All the inventory. Give me what I need. And automotive manufacturers got a big lesson in the last two, three years. Three years. Basically, what happened is for the shortage of a $2 chip, they couldn't ship $80,000 car. Yes. And they lost so much money, billions of dollars, that most auto manufacturers have now changed that strategy from JIT to JIC. JIT was just in time. JIC is just in case. Yes. And now they're all planning to stock an inventory of product. So if this kind of thing happens again, they will not have billions of dollars of cars that they cannot ship.

Dave Jones: Yes. I heard that even Toyota did that. And Toyota basically invented just in time, didn't they, with the Toyota production system?

Steve Senge: Absolutely. I mean, if you go, you know, look at it in Japan, wherever the Toyota's factories are, the, you know, the big trucks and big rigs are lined up in the alleys behind Toyota's plans. And they are supposed to deliver the product to Toyota every four hours. Toyota keeps no inventory. So every four hours, a truck pulls up and supplies it and gets on the back of the line. You know, it gets working. So, I mean, that's how it worked. And, you know, now all those trucks were empty. There were no parts in it. So Toyota had to shut down factories too.

Dave Jones: Oh, wow. Yeah. That's a lesson hard learned. Really. It worked for, what, 30 years though, didn't it?

Steve Senge: It worked for a long time. And so I think now, you know, semiconductor industry is getting healthy respect, getting respect from automotive guys, getting respect from the rest of the market, getting respect from the governments. And they're basically, you know, semiconductors are the, you know, the new oil of the economy. Right? Yeah. For so many years, you know, the crude oil was, you know, whoever has the oil has the power because energy was needed. And now nothing happens without semiconductors. So they're becoming the new oil.

Dave Jones: Right. Can you, I don't really want to get into this, but it's what I probably have to ask. What do you think would happen if China invade Taiwan? I mean, how big a disruption would that be with Taiwan being what, 70% of the chip market globally? Is that right?

Steve Senge: Does Taiwan make 70% of its chips? So I think that number is high.

Dave Jones: Okay.

Steve Senge: Yeah. So, but it's like, you know, it's probably 70% of the advanced manufacturers.

Dave Jones: Of the advanced ones. Yeah. That's probably what it is. Yeah.

Steve Senge: So, you know, if China invades Taiwan, that's a huge problem. And, you know, everybody, number one, is hoping that it wouldn't, you know, wisdom will prevail. Secondly, if China doesn't invade Taiwan, shutting down world's chip supply, I'm not sure how it helps China. Yeah. Because the world then, you know, shuts off everything. Oh, totally. You know, the US, you know, shut down Huawei a few years ago. And if all the chip supply and all the raw materials and everything else stop going to China, then China becomes a third world country. So I think it's kind of a, you know, mutual destruction. And everybody's hoping that that will happen.

Dave Jones: Yeah. I suspect so. So let's talk about the sheer number of parts. This was a question that some people asked. You make over, I think, over 1,200 variants of just the 8-bit microcontrollers. How does it make sense to make so many minor variants of, you know, one family or one part? How does it make sense from a production point of view, from a supply chain point of view? How does that work?

Steve Senge: So I think, you know, over the years, you know, for 30 years, and let's say, let's go back to, you know, when 8-bit microcontrollers were, you know, six, seven years old. So we started them in 1990 and let's say 1998 timeframe. You know, we would analyze our design wins and design losses. And we will find design losses because, you know, we didn't have a PWM on the chip and somebody else did. Right. Or we had, you know, one 8-bit A to D and, you know, somebody wanted A to D and two PWM channels. Or we had, you know, what would happen is customer would say, I love your architecture. I love your product. It's great. But I wanted, you know, but I wanted a USB on board. So we'll say, well, here's the part with USB on board. But that only has 40 pins. I want 68 pins. Okay, here's the part with 68 and USB, but that doesn't have enough PWM channels. So that really happened because, you know, customers wanted it and we wanted to win every design. So we kept proliferating it. And we have to invent a system in our manufacturing where you can order any one of those 1,200 variants and we will make them and make them cost effectively and keep our inventories in control and keep our business very profitable. You know, which is, by the way, is a, you know, is a skill in itself. Now, you know, Costco knows how to do it. Walmart knows how to do it. But I don't think Intel knows how to do it. And I don't think AMD, NVIDIA don't know how to do it. Right. And many of the other semiconductor companies, Qualcomm and others may not know how to do it. Microchip does. And obviously, analog guys knew how to do it. Max and I knew how to do it. ADI knows how to do it. And we know how to do it. So we did it because, you know, we would lose design because, you know, customer didn't have the exact part. And many times we would then make a super chip that had a bunch of PWMs and A to D, USB and have Ethernet and have all that stuff. And then we would lose the design because our part wasn't cost effective because we put too much into it. Got it.

Dave Jones: Are you going to share with us what the secret is there or is that a trade secret? Are there any tricks to being able to produce so many parts on a whim, like just bang?

Steve Senge: It's probably a trade secret. I think others have it, too. And we don't know if the others do it exactly how we do it, you know, but we're not the only one who does it, you know, who's good at it. I would say ADI is good at it. I would say TI is good at it. So there are other people who are good at it. But I do not know whether how we do it and how they do it is exactly the same. I think TI does it through inventory. Right. And, you know, their inventory is a lot higher than us. So they kind of do it through inventory. We don't really do it through inventory. And therefore, I think, yeah, it's probably, you know, some others would like to know what microchip does.

Dave Jones: The MIPS versus ARM thing, can you tell us the history behind that? Why did you go into MIPS when everyone was doing ARM?

Steve Senge: So that was a long time ago. We had essentially a bake-off between MIPS and ARM. And we found that ARM's proposition in terms of upfront license fee and royalties were much more draconian because of their market share than MIPS were. And a lot of our low-cost competitors like Atmel, I mean, Atmel would sell a chip for half the price we would. And they wouldn't make any money at it, but it didn't matter. You know, when I bought Atmel in 2016, they were making zero profit. Wow. And today they're making over 40% operating profit under microchip. So they didn't have the pricing discipline. They absolutely did not. So, you know, if we had gone to ARM, then competing with a lot of low-cost competition and having no differentiation, we thought we wouldn't be able to do what microchip wants to do, which means be differentiated, sell with profits, and, you know, grow our business responsibly. We couldn't do it with ARM. So we went to the MIPS architecture. And our MIPS was quite successful. And even after we bought Atmel, which was ARM, we looked at it three years after. Our MIPS business had grown as much as ARM had from the point of, you know, acquisition and forward. So now, you know, we kind of eliminated some of the very low-cost competition. So then after we bought Atmel, we kept doing both, but eventually we decided that if it's a, you know, general purpose part, then we will build them on ARM. If it's a part where the core is not visible to the customer, means we're building a CSIC for a single customer or single application, and we put the program in it and the customer doesn't see the architecture, then those ones we will still build with MIPS because, you know, financially, it's a better solution.

Dave Jones: Got it. So how did the Atmel buyout happen? Did they approach you? Did you guys, like, post them? And how did it go? How was the transition to buy them?

Steve Senge: So Atmel's board had decided to sell the company. So they got investment bankers, which were, you know, I think Catalyst is the name of the company that's the bankers who were trying to sell Atmel. So we were approached by the bankers saying Atmel's board has hired them to seek for bidders for Atmel. And, you know, and then, you know, lots of companies looked at Atmel, including us. There's an entire story about Atmel acquisition in the book. But originally what happened is, you know, Atmel gave us a non-disclosure agreement to sign, which I wouldn't sign. Oh. Because it had some draconian terms in it, and I don't know whether they gave the same draconian terms to other companies, but they did give it to us. You may recall that we tried to buy Atmel Hostile back in 2008. Oh, that's right. So that acquisition failed because it ran into the global financial crisis. But some of the bad blood at the management level stayed between Atmel and Microchip. So this was now 2015, about seven years later, when the board was trying to, you know, sell it. So this was a non-disclosure agreement that I wouldn't sign. So then everybody else was looking at it, and we were not because we were outside. We wouldn't get any information. So eventually I reached out to the chairman, and I asked him to give me a meeting. And that meeting happened in San Jose, where I impressed on the chairman that Microchip is probably the most likely viable and qualified buyer for these products. You know, looking at our record of acquisitions and how successfully we made them. And if he didn't include Microchip in the process, I think there'd be a lot of questions asked by investors and lawyers and others. And so he agreed to, you know, essentially, you know, help us take a look at the company. And he would soften the NDA a little bit, which he did. So subsequently we signed the NDA, and then we made our offer to buy Atmel. So our original offer to buy was at $9 a share. Then chairman called me and said that we were not the highest offer. There is a higher offer than us. But if I were to raise my offer to $10, then he'll be willing to swing the board to really go with us. I said, you know, our offer was not pulled out of the air. It was done based on a lot of analysis and all that. And what we came up with was a $9 value, and I wouldn't raise it to $10. So then we didn't hear anything from them. And a few weeks later, the news came that they signed the agreement to be bought by Dialog. Dialog semiconductor. That's right. But the offer from Dialog was in the form of large amount of Dialog stock. And some cash. So mostly stock, but some cash. When that offer was announced, Dialog stock went down reciprocally. So when the Dialog stock goes down, the value of Atmel's offer goes down.

Dave Jones: Yeah.

Steve Senge: And every day, every week, Dialog stock would go down and the value of Atmel offer would go down. The original offer started with $10.40. When the deal was announced, the value of the offer was $10.40. And it kept going down, down, down, and it went below $9. It went below $9. And I wrote to the chairman again, and I said, mine now is a better offer. And then that resulted into us engaging again. But now Atmel's business was also starting to fall. So we said we need some new numbers, new information, where the business is. And we got those. Based on that, we eventually were able to buy Atmel at $8.15. Wow.

Dave Jones: And how has the transition been in terms of merging their products in? Have you discontinued Atmel parts at all? I don't know.

Steve Senge: Yeah. So we did not discontinue any Atmel parts. We usually don't. Our strategy is that we build all the parts essentially forever. We merged Atmel businesses. Their microcontroller business merged in our microcontroller business. Their 8-bit merge into our 8-bit. Their 32-bit merge together. Their eSquare business, serial eSquare business merged with our serial eSquare business. So we did a fair amount of combination. Their RF and wireless business merged into our wireless business. And together, we started to make rapid improvement in products and yields and pricing and cost. And Atmel had a very bloated overhead structure. They were spending huge amounts of money in finance and legal and HR and other disciplines. They don't really add value to the product as much. So we did a significant restructuring. Atmel in their headquarters where all the overhead was in San Jose had 400 people and we kept only 80.

Dave Jones: Oh, wow. That's amazing. So these days, do you sell more microchip microcontrollers or Atmel microcontrollers?

Steve Senge: So they're all microchips microcontrollers. We don't care what the customer wants to buy. We promote them equally. And we are still building AVR products and we're still building PIC products. We're still building, you know, ARM-based microcontrollers. Some of the new parts we build on ARM, they have a PIC nomenclature on it. Some of the old parts that came from Atmel had a SAM, you know, nomenclature on it. Got it.

Dave Jones: But which one sells more? Because people want to know, are there more AVRs sold or PICs?

Steve Senge: When we bought Atmel, PICs were selling 2x the AVR sales. And in that distance, it's probably even larger now. Oh, okay. Right. Well, because, you know, for years, Atmel had not done any more AVR products. They had switched their entire energy to build a 32-bit ARM. So, therefore, AVRs were atrophying. So, after Microchip came in, we said, you know, we want to re-graduate, you know, AVR. So, a year later, we introduced four new hard-hitting products with a lot of Microchip features on AVR. And we also made the AVR products work on Microchip's development tool set. So, we re-energized AVR and they started growing again. But PICs are a much, much larger business in AVR.

Dave Jones: I know that you have the RISC-5 in the Polar Fire FPGAs. Do you have any plans on having RISC-5, like, just chips on their own?

Steve Senge: We currently don't. On a standalone microcontroller, we don't. Because I think, you know, our customer base, which is, you know, largely automotive, industrial, you know, those kind of customer base, they're really very risk-averse.

Dave Jones: Right.

Steve Senge: And, you know, they wouldn't. Unintended. Unintended.

Steve Senge: And we talk to them all the time. They wouldn't take the, you know, risk-based part today because they don't believe there is enough ecosystem. So, we are really using RISC-5 where the architecture is not necessarily visible to the customer. You know, or an FPGA, maybe, you know, in future, some of our data center products and others slowly walk the line. And eventually, we may do that someday, but not in the next two, three years.

Dave Jones: So, have you guys ever discontinued a part? You said that is not your thing. And I don't recall a pick micro ever being discontinued.

Steve Senge: So, the name we have for that is customer-driven obsolescence. So, as long as customer wants to buy the part, we will continue to make them. Now, that one was, you know, customer-based obsolescence was perfect when we made all those parts internally because we could keep all those processes running. With, you know, so much of our business now really gone to foundries, you know, we are not perfect in customer-driven obsolescence. So, foundry would, once in a while, give us a notice that they're going to obsolete a process. Then we work with the foundries to go build five, ten years of inventory and still continue to supply the parts for a long time and create them in the minds of the customer. It's a customer-driven obsolescence, but we're not as perfect anymore.

Dave Jones: I've got some questions from the audience. So, we'll rapid-fire these ones. Do you have any plans for open-source FPGA toolchains?

Steve Senge: I do not believe so.

Dave Jones: Okay. Right. Because they're getting very popular now and a lot of people won't touch them if they don't have open-source platform support.

Steve Senge: I will ask that question, but to my knowledge, I think the answer probably right now is no.

Dave Jones: Okay. That leads into the next question. Any plans to support the platform IO IDE? Or any other third party? Because Microchip's kind of famous for having their own ecosystem.

Steve Senge: Yeah. So, you know, we support IAR. We support Kyle. We support some others. But largely, yes. We, you know, we prefer our own because I think we have gotten inconsistent support from time to time. See, what we could do with our products is we can have a development tool group line up their priorities with a microcontroller group. When the part comes out, the tool chain is there. Right. If you rely on the outside guy and you go to them and say, you know, I have this product coming in and I need the tool chain ready by June of 2024, he says, I don't have resources. I have other priorities. I'll work on it a year from now. Got it. So that's a problem.

Dave Jones: Well, in terms of platform IO, that's just an integrated development environment. It's not actually like a compiler tool chain. So any plans to support third party development environments like that? That are just like editor environments that are becoming very popular?

Steve Senge: I would probably have to find out and then let you know. Okay. And I can really, you know, give that answer in a future session.

Dave Jones: Now, this one comes up a lot. Why do microchip charge for compilers or at least optimize compilers when most other manufacturers are now offering free compilers?

Steve Senge: So there is a story behind it. Okay. You recall probably over the last 35 years, you know, Motorola or Freescaler, whoever has spinned out their tools group two or three times. They spin it out and they, you know, rebuild it. I don't know if you know that or not. So what happens is if you run the tools business as a cost center only and don't sell them and don't make money at it, then when the down cycle comes, like the 2008 financial crisis, 9-11, when these black swan events happen, some general manager says, hey, you know, I can't handle all this cost. You know, plenty of third-party guys build our tools and, you know, they shut it down or they spin it out. They spin it out and it's fine. It looks like a great decision because you lower your cost. And then two years later, you're introducing your product and the other party doesn't get the tool chain ready because they tell you my priorities are different. You know, same answer I had given you prior to that, why we, you know, why we do our own. So we have seen other companies suffer from not having their own tool chain and sometimes their priorities and the priorities of the tool chain supplier don't line up. So then Motorola at one time bought it back and, you know, you know, they bought it back and then a few years later, they sold it again, you know, with a different management, different general manager, a different business cycle. So I've learned this over time and in the last 33 years I've been at Microchip, I said we will never shut down or sell our tools group. We will keep the priority of our tools for our microcontroller business. Anybody else who provides support to our tool chain is in addition, but not instead of us. And we're going to charge for it so we can afford to continue to build it. If we don't charge for it, then it becomes a cost center and then next general manager or next CEO shuts it down.

Dave Jones: Got it. Yeah, I think the problem here is that a lot of our audience are either hobbyists or they're like small business or something like that. And to them, like free tool chains is a big business, but that's probably a very small percentage of your market, is it?

Steve Senge: Yeah, well, but, you know, if they're hobbyists, then they don't really need an optimized compiler. You know, you're a small volume customer, then you can really use the version that is available for free. And you don't really have to have an optimized compiler. And I think some of our compilers now, you know, you can rent them by month, right? Oh, okay.

Dave Jones: Fair enough. One last technical question on the chips and fabs. You guys do radiation hardened chips. What sort of process is it for making those for like aerospace industry?

Steve Senge: Yeah, so we are the largest aerospace and defense supplier, semiconductor supplier in the world. Really? Probably 2x larger than the nearest person. So we have a very large number of chips for aerospace and defense, and many of them are RADHARD. And RADHARD also is, you know, various different levels. They can be radiation tolerant, and they're radiation hardened. And there's a category where they are good only in the lower orbit. And there's another one which has to be good in the upper orbit. You know, there are various ways to make them hardened. One way is where you design them with larger tolerance. You know, when the radiation hits, it, you know, creates a lot of free electrons that move around and really short the part. So if you build a part with, you know, larger variants, then the part is more tolerant. And the second way, which is almost always the case, is that you shield the device with, you know, these shields which are in processing on the wafer as well as packaging, which essentially doesn't let the radiation go through those shields onto the die.

Dave Jones: Got it. Interesting. So they're like very expensive parts to produce?

Steve Senge: They are expensive parts to produce, yeah. So they, you know, if a non-hardened part ships sells for $2, the radiation hardened part will sell for $200.

Dave Jones: Wow.

Steve Senge: That's amazing. But, you know, it's going in the shuttle. It's going in a satellite. Yeah, yeah, exactly. It's going to be up there for a long time. I mean, look at this, you know, SpaceX, they send a $5 billion shuttelite and it blows up, right? Right. So, you know, there's a lot of money that's going into it and, you know, we get our pound of flesh.

Speaker ?: Thank God.

Steve Senge: But I would say this, that there is nobody who leaves Earth's orbit without microchip on board. Wow. No shuttle, no satellite, no vehicle, no, you know, any...

Dave Jones: Space probe, no Mars lander.

Steve Senge: No Mars lander. There is no one who leaves Earth's atmosphere without microchip on board.

Dave Jones: Wow. That's incredible.

Steve Senge: Yeah.

Dave Jones: So where do you guys sit in the, like, a list of largest chip makers, both worldwide and in the U.S.?

Steve Senge: So I think in U.S. probably we're within top 10. You know, it could be, you know, somewhere in the 8, 9. I haven't really exactly seen the ranking lately. And if you add global, then you add some more like Samsung and others. And, you know, it could be in the low teens area. So that's where we sit. You know, that would be based on just the revenue. You know, but another thing that's important is the market value because of profitability. You know, you know, if you look at it that way, we're well within, you know, top 10.

Dave Jones: Yeah. You guys had a hundred quarters of profitability?

Steve Senge: 120, 124 now, I think. 124?

Speaker ?: Yeah.

Dave Jones: Oh, wow. Is there any risk of microchip being acquired by anyone? Like, because in theory, somebody could just come in, hostile takeover and buy all your shares.

Steve Senge: So I think, you know, for example, this question was asked to a CEO of TI at one of the investor conferences, you know, about three years ago, where investors said, you know, hey, you know, everybody's buying companies. Look at ADI, look at microchip, look at Renaissance TI. Why don't you go buy microchip? And the CEO's answer was, I buy microchip and then I improve what? So, you know, we are a very well-oiled machine, extremely profitable, high gross margin, you know, high operating margin, and a lot of different industries running very well. So that's one issue that we are running very well. So people don't see how they're going to improve. And to buy a company, you have to pay a significant premium, and you have to improve them to earn the premium. And like, right, to actually make a profit out of it. Yeah. So like we did with Atmel, so they don't find what they can improve. And second thing I think is right now, trying to get antitrust approval, especially from China, would be largely impossible. Because of the, you know, strained trade relations between US and China, China is not approving any of those large deals.

Dave Jones: All right. So microchip's not going to get bought out anytime soon. Good to hear. No.

Steve Senge: So I think, you know, if I could spend a minute on the book. Oh, yes.

Dave Jones: Well, I was going to finish up on that right now, because our hour's up. So yes, please tell us about the book.

Steve Senge: Yeah. So the title of the book is Up and to the Right. And the subtitle is My Personal and Business Journey, Building the Microchip Technology Juggernaut. And I think I, you know, recommend the book to your audience. It's available on Amazon. You know, the book starts with, you know, my upbringing, growing up in India, and then how I came to America. I went through very difficult times. I came to US with $150 in my pocket with nothing to fall back on, no place to stay, just admission to a master's college, and went through a lot of early struggles. But, you know, then graduated with a 4.0 GPA from University of Massachusetts and went to work for Intel, worked there for 10 years, then at another small startup, and then finally came to microchip in 1990. And then on after first chapter, it's largely building the microchip technology juggernaut. You know, how we transformed the company, how we took it public, you know, went through the significant growth phase. You know, in 19, you know, in 1993, when we public, we were $85 million revenue. And, you know, by 2000, six, seven years later, we were about $750, $800 million company. You know, had grown really just tremendous. And, you know, then we started buying companies, and there are three chapters on negotiating the deals, buying the companies, financing them, how we improve them, how we ported our culture to microchip. There's a chapter on crisis management. And, you know, every company, sooner or later, will have a crisis. And, you know, I talked about crisis of Y2K, then 9-11, then 2008-2009 global financial crisis, then COVID, what we did, how we came out of crisis stronger than we went in, and, you know, how we gained market share. I talked about strategic planning process. I talked about how we sustained continuous improvement for 31 years. I talked about microchip as a top training organization, how we acquired low-cost manufacturing capacity, how we delight our customers. We talked about succession planning and promoting internally, you know, our compensation system. And the final chapter before summary is a chapter which is titled 31 Years at a Glance. So when I was writing that chapter, I had pages and pages of charts, you know, revenue, you know, growing, gross margin growing, operating margin growing, market share growing, stock price growing, dividend growing, and all these charts. And all these charts had one thing in common. They were all up and to the right. And that's where the title of the book came from. Till I wrote that chapter, I didn't have a title for the book. Right. So I think anybody, your audience, who use microchips products and have used them for many years, if they have used them for, you know, five years or 30 years, it doesn't matter, will relate to things in the book regarding, you know, how we did to build this juggernaut and how we financed it, how we took it public, how we transformed it, how we grew it. So I think people will enjoy it. And if they buy the book and they enjoy the book, then also please ask them to, you know, give me a review on Amazon.

Dave Jones: A review, yes. Most important. I will definitely get the Kindle version of that and I will give it a read and a review.

Steve Senge: Sure.

Dave Jones: That sounds absolutely fantastic. So let's recommend that one, even though I only found out about it yesterday, so I haven't read it yet, unfortunately.

Steve Senge: Yeah. So Kindle version you can download in seconds.

Dave Jones: Well, thank you very much, Steve, for joining us. This has been fantastic.

Steve Senge: Thank you, David. It was very enjoyable. It's nice to catch up with you after probably about 25 years or so. Yeah. Maybe it's not that much. Exactly. Let's not take another 20 years. Let's make more of it. No, no.

Dave Jones: Well, we could do a part two because I've got more questions, but we'll call it quits for today.

Steve Senge: Yeah. Okay. Thank you very much.

Dave Jones: Thanks, mate.

Speaker ?: Bye. Bye. Bye. !