ST Hangs Future Growth on ‘Mass Market’ & Distribution

by

STMicroelectronics NV is deepening its engagement with distribution partners worldwide and moving to diversify its revenue base by expanding sales into what executives at the company describe as the “mass market.” This strategy is one of a series of actions being taken by ST to improve sales and profit growth and stabilize revenue generation, according to a senior executive with the Geneva-based chipmaker.

In the last one year ST has redefined its growth strategy to focus on improving sales generation at small to medium-size companies in response to challenges at many of the company’s historically biggest accounts – especially in Europe – many of which are struggling with structural market changes and competitive stress from rivals on the continent and from Asia. The “mass market” business, featuring opportunities spread across all segments of the economy, represents one of the brightest performing sectors within ST and is critical to its future goals of reversing year-over-year sales declines.

“Over the years, we’ve had historic engagements with many big customers in the electronics industry. The necessary part of a growth strategy for any company is to engage with large customers where the largest available sales are available but that strategy works well when those customers are all doing great,” Paul Grimme, executive VP, Mass market and Online Marketing Programs, at ST, said in an interview. “We know that the big customers have their up and down cycles and so, as a matter of diversifying the revenues of the company, it makes more sense for us to be more formal about driving growth at what we call the mass market, which for us is everything outside of our top 125 customers.”

ST’s mass market strategy has very simple components to it but it also involves a much wider range of customers and third-party support partners than the direct sales system used to sell products to big customers such as Apple Inc., one of the company’s biggest accounts. For the mass market, ST is relying heavily on its 54 distribution partners to drive engagement with existing medium-size customers numbering about 35,000 and accounting for approximately 31 percent of companywide sales. The distributors cover 150 countries for ST and operate both as components fulfilment partners as well as collaborators with OEMs to design the company’s products into finished equipment. Some in Asia even design and sell their own equipment, according to Grimme.

In addition to current programs, however, ST is engaging with distribution partners to help drive demand-creation and customer design-in sales that it believes would dramatically raise its share of the total available market by 2016. Since the program was launched one year ago ST said it has added more than 1,000 new customers and expects this number to grow as it raises awareness of the engagements globally and helps distribution partners sharpen their messaging about the range of products available at the semiconductor vendor.

“There are three main elements to the strategy. The first is centered on the customer base itself and focuses on growing the customers that we currently have,” Grimme said. “We’ve segregated the customer types into three categories in the mass market. The first are the top 1,600 customers who are at the top of the pyramid and for whom we’ve assigned specific sales coverage. The second is the group of 35,000 customers that we rely on our distribution partners to touch and grow. And, the last is the very long tail of customers that we engage with online – numbering around 65,000. Our goal is to grow them and eventually take the customers that we engage online and make them larger distribution customers.”

While ST sells a wide range of products used in automotive, communication, computer, consumer and industrial applications, the company had in the past relied on the biggest OEMs for a big chunk of its annual sales. That strategy drove the company into major problems at the beginning of the decade, however, as OEM partners foundered with some of these losing market share heavily and ending up being acquired by competitors.

ST’s sales tumbled in the five last years to $7.4 billion in 2014 from as high as $10.3 billion in 2010 when it reported net income of $830 million compared with $128 million in 2014. In 2011, ST’s top 20 customers include companies that are still thriving today – such as Apple, Bosch, Cisco and Delta – and others that have since ran into major cyclical or structural turmoil, including Ericsson, HP, Motorola, Nokia and Research in Motion. For 2011, Nokia accounted for 10.4 percent of ST’s sales, dropping from 13.9 percent and 16.1 percent, in 2010 and 2009, respectively. Nokia’s problems since and the eventual sale of its wireless handset business to Microsoft Corp. contributed to a sharp decline in revenue at ST.

The company’s dependence on key customers for a majority of sales has changed dramatically since 2012. In its last annual filing with the U.S. Securities and Exchange Commission it noted that “no customer exceeded 10 percent of our total net revenues for the years 2014, 2013 and 2012.” Company executives say they intend to keep limiting their exposure to a handful of customers. In a presentation to analysts in May, Carlo Bozotti, president and CEO of ST, said the company had made “important progress” in its reorganization, adding there is “still work to do.”

Bozotti said ST “is going back to a sustainable sales growth strategy” adding that the “transition to replace lost revenue is now on. We expect to see an improvement in China especially via distribution.”

The Mass Market group headed by Grimme is at the center of that expansion. The division has annual revenue of $2.4 billion and targets more than 100,000 customers using in-house sales teams, distribution and online avenues. The range of products the group is also pushing to customers is wide in addition to efforts to encourage engagement with the customers at all levels.

Grimme noted that this strategy is preferable for the company not only because it brings higher sales stability but also due to the higher margin potentials. Distribution margins are approximately 5 percent better than ST overall average, according to Grimme in a presentation at the May investors’ conference. Margins are higher at distribution, he said.

“In the world of distribution, the gross profit margin is higher when they are finding the customers through design-in and supporting the production and engineering,” Grimme said in the interview with EPS. “Some distributors are happy to do fulfilment only and it works for their models. Some distributors are quite happy to do what we call demand creation, which is the creation of new business based on their own efforts and so we provide the tools, training and documentation for these distributors. Frankly, we like it too. This is business that is more stable since it is spread across many customers and it’s really healthier for the distribution environment.”

EPS will publish excerpts from the interview with Grimme separately.