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National Semi leaving PC chip market

National Semiconductor says it will exit the PC processor business and lay off more than 500 people.

Burdened with financial losses and declining prices, National Semiconductor will exit the PC chip business and lay off more than 500 people in the process.

The announcement does not mean that National is getting out of the chip market altogether, as it will still make processors for so-called embedded devices such as TV set-top boxes. National said it will "focus on the emerging information-appliance market and on its traditional analog [chip] business."

The relentless price war in the PC processor arena largely led to National Semiconductor's retreat in its Cyrix line of chips. The company bought Cyrix in July of 1997 with the hopes of becoming a force in the microprocessor market for personal computers. Processor pricing, however, was just beginning its steep decline, and Cyrix became a drag on National's balance sheet.

"We will immediately cease slugging it out in the PC processor market, which has been dragging down our financial performance for several quarters," National chief executive Brian L. Halla said in a statement.

While Cyrix's MII processors will remain on the market for some time, the exit will likely cause a ripple effect throughout the low-price segment of the industry. Several of the low-cost PC manufacturers, including Packard Bell and Emachines, use Cyrix processors in their lowest-cost computers. These companies will thus likely be forced to migrate to processors from AMD, Intel, or small upstarts like Rise or IDT.

In addition, the exit could lead to a new competitor for this market. National is selling both a majority stake in its South Portland, Maine, fabrication facility as well as the design team, brand name, and intellectual property for its Cyrix MII microprocessor, said Steve Tobak, vice president of corporate marketing at National. A company thus could almost "immediately" get into this market, he said.

He also acknowledged that the sale could conceivably include a valuable cross-license National has with Intel. In the past, analysts have conjectured that IBM, which used to manufacture chips for Cyrix, wants to get back into this market.

The "Cyrix" name will also likely disappear, he added.

"Since its acquisition of Cyrix Corporation, National has marketed two lines of [Intel-compatible] processors. National will exit its [Intel] PC-compatible microprocessor line. National will retain and reinforce its integrated-processor line, including the Cyrix MediaGX...for information appliances such as interactive set-top boxes, thin clients, thin servers, and portable Web devices," the company said.

The company also said that it will eliminate 550 positions "through early retirement, attrition, and layoffs, including 165 job cuts in Singapore announced in April. This represents less than 5 percent of worldwide employment."

In addition, National said it expects losses in its PC processor business will widen to about $45 million to $50 million in its fiscal fourth quarter, up from $35 million in the third quarter, in part because of increased pricing competition from Intel, according to Reuters. Intel's low-cost Celeron processor, intended to compete with Cyrix, has been well received by PC makers after the chipmaker made improvements.

National laid off about 10 percent of its workforce in August of 1998. At that time, it cited problems stemming from manufacturing difficulties experienced by its Cyrix subsidiary in producing faster versions of its MediaGX chips.

Today's action will be reflected in the company's financial books. "As a result of exiting the PC-processor business and related support activities plus the workforce reduction, but not including disposition of the fab, National expects to take a one-time charge of from $250 to $300 million in its current fiscal 1999 fourth quarter, which ends May 30, 1999," the company said.

The company is talking to "potential" partners for the South Portland manufacturing facility and the "final impact of that action on fourth-quarter results depends on the outcome of those discussions."

Ironically, Cyrix seemed to be gaining ground in 1997 because of its low prices. The company, in fact, made the processors that went into the first successful sub-$1,000 PC in February 1997. When National bought Cyrix back in July of 1997, the market was not populated with the sub-$500 PCs of today, and it was still a relatively profitable business to make Intel-compatible chips which were selling at levels higher than they are today.

Squeezed in the low-price market
Cyrix now finds itself at the bottom of the processor heap in its competition with Intel and AMD. Typically, PC companies that specialize in low-end boxes such as Emachines and Microworkz relegate Cyrix processors to their lowest of low-end boxes where profits are squeezed the most. These machines are typically priced below $400.

At retail, Cyrix chips sell for between $30 and $60, sometimes less.

Cyrix's MediaGX chip was the processor that helped kick off the sub-$1,000 computer revolution in 1997. In early 1998, however, Cyrix had difficulties in producing adequate volumes of speed upgrades to the chip. Compaq Computer cut back on its use of Cyrix processors in favor of processors from AMD. The loss of some of its Compaq business contributed to financial losses for the company at that time.

Subsequently, Compaq has gone with AMD almost across the board in its low-cost consumer PCs and even in some its small-business models.

National announced in August of last year that it had begun to produce Cyrix MII and MediaGX processors on an advanced "0.25-micron" manufacturing process in its plant in Maine.

The advance came as National shifted its production of chips from IBM to its own facilities. IBM acted as the main production facility for Cyrix when the company was independent. When National acquired Cyrix, the combined companies announced that they would gradually transition manufacturing to National's plants.

In its most recent financials, National reported a net loss of $27.2 million, or 16 cents a share, compared with a profit of $26.2 million, or 16 cents a share of the year-earlier period. Revenues fell to $500 million from $650 million.

National said its sales in the third quarter declined slightly from the second quarter, due to a drop in sales of its Cyrix microprocessors, which compete with microprocessors from Intel and AMD. Cyrix will now aim at the appliance market. "This market is characterized by...low-power systems...optimized for Web access, which is exactly what our highly integrated processors are designed for," Cyrix said.

Reuters contributed to this report.