After the failed sale of Wolfspeed to Infineon, CEO Lowe senses new market opportunities
Still not smooth: But with increasing reach, EVs are becoming increasingly attractive in the market
June 10th, 2018
After the failed sale of Wolfspeed to Infineon, CEO Lowe senses new market opportunities the mood at Infineon at the time was gloomy. CEO Reinhard Ploss strove to hide his disappointment about the failed purchase of the semiconductor specialist Wolfspeed. After all, he was convinced of the qualities of the American manufacturer, which had a sophisticated production of high quality chips and, thanks to the EV market, promised huge growth rates. However, the US authorities thwarted his plans. The approval, which should have been a formality, was denied in February 2017 by the Committee on Foreign Investment (CFIUS), allegedly due to national security.
"The failure of the sale of Wolfspeed to Infineon was a blessing and good fortune at the same time," said Gregg Lowe, CEO of the American lighting technology specialist and semiconductor manufacturer Cree, which owns Wolfspeed, which was originally scheduled to be sold to Infineon for $850 million. "I am glad that the deal did not go through," says Lowe, who only started in September 2017, with a smile. He was previously Chairman of Freescale and a longtime senior manager of Texas Instruments. “This way we got a second chance for a new growth story for Cree."
At that time, Wolfspeed with its 550 employees only made a turnover of $173 million. The scope of the acquisition of a niche provider was difficult to recognize from the outside. For more than 30 years, the Cree subsidiary has relied on silicon carbide (SiC) and gallium nitride (GaN) semiconductors. They are very robust, particularly durable, reliable, heat-resistant, but also very expensive in view of the more complex production. Wolfspeed is dominant in this niche with a market share of 60 percent.
Even if SiC and GaN chips are ten times better than common silicon in terms of performance and efficiency, they have only triggered higher demand in special customer groups, such as aerospace, power supply and telecommunications, meaning that they are usable especially in electric vehicles and fast chargers. With the rapid growth of e-mobility, the market conditions improved swiftly because the installation of the high-
performance chips have made the batteries more effective and therefore lighter. And with a wider range, EVs are becoming increasingly attractive in the marketplace.
Moreover, Wolfspeed now presented a new technology, claiming to offer unprecedented charging speed for batteries. With this, the industry increasingly realizes that the advantages outweigh the disadvantage of higher acquisition costs compared to silicon. "With the advance of e-mobility, we are heading for two decades of growth," says Lowe. He is not alone. Infineon too, even without the acquisition of Wolfspeed, relies on the precious chips (Frankfurter Allgemeine Newspaper, May 28). The Munich-based manufacturer has therefore entered into a long-term supply agreement with Cree/Wolfspeed and also intends to increase the use of SiC semiconductors.
Furthermore, "there is some irony in that we recently acquired Infineon's high-frequency power components business," says Lowe. In March, Cree acquired that RF-business for Wolfspeed for $345 million.5 These components are not used for electric vehicles but also for the cellular infrastructure. This has opened up another growth area since the construction of the new cellular communication standard 5G promises a lucrative business to component suppliers.
Against this backdrop, Lowe's forecast appears conservative, in expecting Wolfspeed's revenue to quadruple from $220 million in fiscal 2017 (June 25) to more than $850 million by 2022. For the former pioneer of semiconductor-based light-emitting diode technology (LED), Wolfspeed opened up an important perspective for the future.
So far, the American corporation with a turnover of $1.5 billion last year has not been doing too well. Last year, net leverage nearly quintupled to $100 million. In the first nine months of 2018, the deficit has grown to $247 million. That's the cost required for cleaning up at Cree. Under Lowe’s predecessor Chuck Swoboda, the problems piled up.
The manufacturer lacked a growth strategy. Sales of LED lights lost momentum. The lighting business targeting commercial customers had become a problem child. It was overcharged by the growth of previous years, internal structures have not kept up. Qualitative issues became more frequent, warranty and recourse claims got out of hand. Difficulties with the inadequate IT infrastructure further complicated the situation. The shortcomings surely were the reason for the resignation of Swoboda, who was apparently overcharged with the reorganization.
If Wolfspeed had been sold, the extra revenue would have concealed the weaknesses of the parent company probably only for a short time. "I did not come to Cree with answers, but with a plethora of questions," admits Lowe, who was contacted only shortly after the announcement of Swoboda’s resignation. Nevertheless, he approached the overdue refurbishment in the lighting business with verve. Now a stable situation is in reach. According to him, planning the future will be possible once the losses are eliminated. Lowe, amongst several options, even considers a sale imaginable. That could also apply to the LED lamps; that is what German rival Osram demonstrated by selling Ledvance to Chinese investors. Anyway, the chances for Cree lie elsewhere: "With the focus on Wolfspeed, my strategy is very clear," says Lowe. "My vision is: Let’s take the opportunity and run as fast as we can."
Speed can help. The company is now valued at $5 billion on the stock exchange, twice as much as a year ago. A growth story and the associated stock rise could help Lowe make it harder for other semiconductor companies to take on potential takeovers. In particular the American industry champions could come to realize that besides silicon there is the attractive option of silicon carbide. What Infineon boss Ploss might be more worried about, in light of the missed opportunity, is what Lowe has a very pragmatic view upon: "Every day, every week, every year, an acquisition attempt can come," he says. "That's simply the risk of a stock listed company."
He knows what he's talking about. Lowe was at the heart of the industry’s “eating and being eaten”. As head of Freescale, which is as big as Cree in market value, he has implemented the NXP integration. The acquisition of NXP by Qualcomm is still not completed. Now Qualcomm itself has been targeted by Broadcom. "I'm not worried about that," says Lowe fatalistically. "I must take care of driving growth."