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Cyrix production snags hit National

Although Cyrix helped create the sub-$1,000 PC, manufacturing problems and competition have hurt the firm and parent company National Semi.

Although Cyrix helped create the sub-$1,000 PC, manufacturing and marketing problems as well as increased competition have thwarted its efforts to increase microprocessor sales--a situation that may have a lasting impact on parent company National Semiconductor.

Cyrix's difficulties were brought into sharp relief yesterday during a conference call with National. Difficulties in producing adequate volumes of Cyrix processors, combined with the Asian financial crisis, produced lower-than-expected earnings for the parent corporation's third fiscal quarter.

The setback results from poor execution. Simply put, toward the end of 1997 Cyrix could not make enough high-speed 200- and 233-MHz MediaGX chips to satisfy the demands of PC giant Compaq Computer.

While Compaq chose to use the MediaGX in a notebook PC, it dropped the chip in favor of the K6 processor from rival AMD in its consumer desktops.

"That caused the unit volume to go down pretty dramatically," said Dean McCarron, principal analyst at Mercury Research. About 500,000 MediaGX chips came out in the fourth quarter of 1997, McCarron said, and fewer will be produced this quarter.

While Cyrix asserts it has rectified its manufacturing problems, the company faces a more difficult position in the long term, according to McCarron and others. Both Intel and AMD have begun to push into the low-cost computer segment. Further, Intel has adopted Cyrix's strategy of integrating functions on its chips as a way to reduce costs and increase profits in low-end products.

"Intel is responding to a market that Cyrix created with a technique they [Cyrix] created," McCarron said.

On top of this, the company faces another arduous manufacturing transition. National is scheduled to move volume production of Cyrix chips from IBM plants to its own fabs in Maine during the second half of the year. A manufacturing process shift like this is tricky at best and can easily become a nightmare.

The transition will accompany a shift from the older 0.35-micron manufacturing process to the new 0.25-micron operation. To top it off, Cyrix also says it will come out with a new processor core for the MediaGX with 15 new 3D instructions.

The best thing the company has going for it is that it's still the low-cost leader. The MediaGX integrates a core microprocessor, audio functions, graphics, and most of a computer's other core features into one chip. A complete Cyrix solution costs computer vendors roughly $75 per computer. Intel's equivalent costs $150, while AMD's answer will cost $110.

"I think they will make a comeback," said David Goldstein, president of Channel Marketing.

Last November, Cyrix was on a roll. Not only was the company's MediaGX integrated processor a key component in Compaq's sub-$1,000 computer sales, but also Cyrix had racked up a design win with IBM to supply its 6X86 processors for the Aptiva E40 being sold in Radio Shack. Digital Equipment was also planning to come out with a sub-$799 commercial PCs with monitors, powered by an integrated X86 processor that only Cyrix made.

Four months later, Cyrix chips have been ousted from Compaq's consumer desktops and can be found in only one Compaq notebook. IBM lost the Radio Shack contract, and is only using AMD and Intel chips for the Aptiva.

Digital hasn't been talking about its inexpensive corporate desktops, while Compaq and IBM plan to come out with sub-$800 business machines that use chips from Intel, sources said.

For the most part, Cyrix executives attribute these reversals to the failure to make the higher-powered chips. The Compaq contract wasn't so much won by AMD as it was lost by Cyrix, Steve Tobak, vice president of corporate marketing, told CNET earlier this year.

Tobak added that sales and design wins could easily come back once the production problems are solved. A Cyrix spokesman said today that most of the yield issues have been fixed. Yield refers to the percentage of usable chips that come from the silicon wafers on which chips are made.

Production issues aside, the MediaGX will soon find itself up against new low-cost processors from Intel, which will go by the brand name of Celeron. While the first version of the Celeron chip, code-named Covington, is not being well-received by computer vendors, the second generation, code-named Mendocino, is expected to perform adequately for this market. Mendocino chips are due toward the end of the year.