Acquisition of FCI bearing fruit: An interview with Silicon Motion president Wallace Kou

Silicon Motion, which has made its name designing flash controller ICs, lays strong emphasis on its technological strength and service that constantly has landed it opportunities to work with international companies. Through its own R&D, as well as acquisitions, Silicon Motion is ready to employ the strategy of platform solutions to accelerate its growth. Digitimes had the opportunity to speak with Silicon Motion's president, Wallace Kou, about these issues.

A market leader in controller ICs for SD/MMC and flash drives, Silicon Motion is headquartered in Hsinchu, Taiwan. It currently runs R&D teams in Taiwan, the US and China, with marketing operations worldwide. Following its acquisition of Korea-based Future Communications IC (FCI) in April 2007, Silicon Motion now offers solutions in three major areas: mobile storage, multimedia SoC, and mobile communications.

Silicon Motion’s clients include major players from different sectors – handsets, PCs, digital cameras, networking equipment and others. Silicon Motion is not a household name widely recognizable in the consumer market, but it is the unsung hero behind many of the memory cards that consumers use.

NAND flash controllers, the stronghold of Silicon Motion’s product range, are the most important part of memory cards technology-wise, although in terms of cost structure, they are the least desirable. Mobile storage is the biggest group in the IC designer’s product portfolio, accounting for 87% of the company’s revenues in 2006, while the second largest is multimedia chips, which generated 12% of sales last year. Mobile storage sales are expected to grow further. In the second quarter of 2007, Silicon Motion shipped 73.1 million memory controller ICs, up 152% on year and 14% sequentially.

Silicon Motion president and CEO Wallace Kou revealed that the company’s decision to acquire FCI was based on the belief that the fast growing mobile storage market will increasingly emphasize low-power consumption, and demand for portable devices with flash-based storage applications will be remarkable. After acquiring FCI, Silicon Motion has established a place in mobile communications – now the third most important product line of the company.

Kou stressed that from the point of view of multimedia, the trend towards wireless will be inevitable in both audio and visual applications. Whether it is digital broadcasting or mobile TV, the signals are received by handsets through the same tuners based on the same RF technologies. That was the reason why Silicon Motion acquired FCI.

Apart from time to market and cost competitiveness, major IT players, such as Broadcom, ATI, Qualcomm and Texas Instruments (TI), are gearing up development of platform solutions in order to raise their competitiveness. Silicon Motion sees itself as a supplier of turnkey solutions in mobile storage and mobile digital media. To become a real market leader, Silicon Motion must also be able to offer clients platform solutions. While this involves a wide-range of technologies, Silicon Motion is determined to pick up its pace towards platform solutions, either through its own R&D or through acquisition.

Traditional companies in Taiwan, according to Kou, can seldom work with Korean firms because of cultural or managerial differences. But Silicon Motion’s acquisition of FCI in April 2007 already started to bear fruit in the third quarter.

In 2006, FCI’s revenues amounted to US$15-16 million. In 2007, FCI’s mobile TV tuners, CDMA front-end components, and electronic toll collection RF modules all have good prospects, with sales from the three segments standing a chance of doubling for the year.

Silicon Motion’s partnerships with major clients are growing strong. The company revealed it received orders from Asustek Computer and Samsung Electronics for solid state drive (SSD) controller ICs, to be adopted for embedded applications in Asustek’s Eee PC notebooks and Samsung’s latest digital cameras.

It also supplies Samsung with flash drive controllers; Lexar and Kingston Technology with memory card reader controllers; Mattel, Thomson and Coby with MPS controllers. Following the acquisition of FCI, Silicon Motion has also become a supplier of S-DMB mobile TV tuners for Samsung's three latest handsets.

Explaining why Silicon Motion runs separate R&D teams in Taiwan, the US and China, Kou said the company didn’t want to break them up in the first place, but it was difficult to find a large team of quality R&D personnel in Taiwan alone.

There are three operation units in China: the one in Beijing supports the development, marketing and services of FCI applications; the one in Shanghai is a small team for software development; and the Shenzhen team operates more like an independent company, with R&D, PM, FAE, and accounting departments. Kou said the Shenzhen team has to be run as an independent company to offer quick services to clients, without the need to have the problems solved back in Taiwan.

Currently, Silicon Motion has over 500 employees worldwide. In Taiwan there are two offices, one in Hsinchu and the other in Taipei, with a total of more than 300 employees. In Silicon Valley, there is a team of 30 R&D and marketing staff. In China, the three operation bases there have a total of almost 140 employees, while the addition of FCI has increased its Korea-based staff to almost 80. There are four marketing personnel in Japan.

Silicon Motion’s core competitiveness comes from its technologies, including NAND flash know-how, design capability and innovation. But the industry that Silicon Motion works in is a highly dynamic one, and for clients, the service and technological support is most important. Offering technological and service support is far more challenging than selling controller ICs. Kou remarked that currently there are over 5,000 kinds of products that use SD cards, and the memory cards that adopt Silicon Motion’s controller ICs are all compatible with them. It is a huge investment to guarantee compatibility. Kou disclosed that Silicon Motion’s labs have a collection of 1,500 different handsets and digital cameras. The company also works with other labs, such as National Software Testing Labs (NSTL), in order to ensure compatibility.

Kou set up Silicon Motion in 1996 in Silicon Valley with a few former colleagues from Western Digital. The company originally focused on mobile graphics, and it once managed to become the world’s third biggest mobile graphics IC design house. But later when Intel announced that it would integrate graphics into northbridge chips, Silicon Motion, with no chipsets to offer, found its market opportunities gone.

In 2002, Silicon Motion took over Taiwan-based Feiya Technology, with an aim to be listed on the stock market in Taiwan. But many of Feiya’s staff chose to leave, with only 50 people remaining. Further hit by serious inventory issues, the acquisition did not achieve what Silicon Motion had expected. But Silicon Motion on June 30, 2005 finally began trading on Nasdaq.

In 2002, the SD Card Association (SDA) was not yet a very open group. Kou said Silicon Motion, the first Taiwan-based company to enter the association, tried to convince Toshiba, Panasonic and SanDisk of the benefits from opening the doors wide. Gradually, SDA decided to open its doors.

Despite good prospects of the flash market, the design house insists that it will only sell controller ICs, but not flash itself, because it does not want to compete with its clients, according to Kou. But the fast dropping prices for flash controllers is an issue that Silicon Motion has to tackle.

In 2003, one controller IC sold for almost US$3, but now the prices have fallen to US$0.4-0.5. But Silicon Motion can still maintain a 50% gross margin. Kou remarked that the company tackles the price issue by providing the best solutions, accelerating product development, and expanding its client base. Only big players can achieve economies of scale, and to achieve economies of scale, Kou said Silicon Motion has three guidelines: grow with the market and expand the company’s share; participate in the development of new industry standards, and accelerate product development; expand its base of clients and strategic alliances.

The downward price trend may not be totally bad for the market. Apart from boosting sales, the declining prices will spur the birth of new applications. In the past, PC storage all adopted embedded hard drives. But now the market is migrating towards NAND flash storage, using solid state drives (SSDs) as PC storage systems. Kou predicted that when prices go further down, the SSD, which currently is for the niche market, will be adopted by mainstream notebooks.

Kou foresees that the chief momentum of growth for the controller IC market from the second half of 2008 through 2010 will be the embedded market. The two biggest embedded markets are handsets and consumer electronics, with Silicon Motion having participated in many of the designs of the new products for the two segments. Apart from Asustek’s new notebooks and Samsung’s digital image recorder, Kou revealed that Silicon Motion will also team up with a major handset vendor in November.

Apart from the embedded market, Kou says another chief growth driver will be SSD. He disclosed that Silicon Motion’s CF controller shipments worldwide amount to one million units. Although Samsung and Toshiba and other Taiwan makers all want to have a share of the SSD market, Kou believes that Silicon Motion’s success in the CF controller IC market will give it an edge. While expecting Asustek’s Eee PCs to have good market acceptability, Kou says Silicon Motion will work with the PC vendor towards promoting the trend of replacing hard disks with SSDs.

Silicon Motion president and CEO Wallace Kou
Photo: Janet Wang, Digitimes

Source: Company, compiled by Digitimes, October 2007

Source: Company, compiled by Digitimes, October 2007

Article translated by Rodney Chan and edited by Eric Mah