Jockeying for Position

Electronic News, June 18, 2001 by Jeff Chappell

Test companies prepare for upturn; LTX turns to Jabil

Test companies, like the rest of the industry, are coping with what may prove to be the steepest cyclical downturn in history, but also like the rest of the industry, they know that coping with the downturn means preparing for the upturn.

Wall Street looks with hopeful eyes to signs of a chip recovery even as fundamentals remain dismal, and chipmakers and equipment suppliers alike pro vide little positive guidance. It may not be over just yet, but market share is won and lost in the equipment business whenever chipmakers begin to ramp capacity once again.

Like their chipmaker customers, outsourcing is one way test companies are positioning themselves for a return to capacity-driven buys, whenever it may come.

"Usually this is a good time to slim down your own operations and develop the supply chain for outsourcing," said Ron Leckie, an automated test equipment (ATE) industry veteran and current chief executive officer of Infrastructure. This is just what LTX Corp. is doing. It said last week that it would be outsourcing the manufacturing of its Fusion system-on-a chip (SOC) tester to contract electronics manufacturer Jabil Circuit Inc. Westwood, Mass.-based LTX (nasdaq: LTXX) plans to transfer all of its assembly, final integration and test operations over the next 12 to 15 months to Jabil (nyse: JBL) of St. Petersburg, Fla. LTX's transition plan will result in a permanent reduction of about 15 percent of its employees.

LTX management discussed the decision during a conference call last week. LTX wants to be able to better address the cyclical nature of the industry, ramping more quickly during an upturn and being more flexible to quickly manage downturns, said Roger Blethen, LTX president and CEO. It will also allow the company to better concentrate on R&D, new products and customer support, Blethen said.

Since 1997 LTX has pursued an out sourced business model for component purchasing and assembly, and was able to reduce its internal product cycle time from several months to several weeks, said David Tacellisssss, LTX executive vice president. With Jabil now handling assembly as well as systems integration and testing, LTX expects to reduce its internal prod uctcycle time from several weeks to five to 14 days, Tacelli said.

The big ATE companies like LTX seem to have a good handle on the outsourcing business model. But some of the smaller companies involved in periphery and support areas of test and ATE, such as test-handling and prober companies, have yet to extensively embrace the outsourced model, Leckie suggested, noting that many of these smaller companies still have their own machine shops.

Another strategic activity that companies can use to prepare for an upturn is acquisitions. With the industry relatively quiet at the moment, this is the time for companies to get in shape. "This is the time to bulk up," Leckie said.

Among those companies bulking up in the test arena, the most notable merger is Credence Systems Corp.'s acquisition of Integrated Measurement Systems Inc.

Leckie also suggested that even as companies look for ways to trim payrolls, they should be focusing on keeping and developing key personnel with internal training, preparing them for the upturn.

"A lot of people don't think of that, but it's very important," he said. There is always the risk of losing the key people you don't want to lose to competitors or recruiters. You've got to keep developing your good staff and look after them," he said.

Oh Say Can You SOC?

But aside from the conventional industry wisdom of managing the downturn in terms of preparing for the upturn, there are strategic areas of the market that may determine who loses and who gains customers during the next chip-capacity ramp. One of those areas is software.

Software is a large, important component in ATE, Leckie noted. "Software has always been problematic ... there's always a long bug list," he said. Now, with the industry relatively quiet, it's a good time to address those problems, he added.

Another area key to test companies' preparations is the movement to design-for-test (DFT). It has generated a lot of interest in the test realm over the past few years and witnessed a lot of ATE companies working more closely with design and intellectual property, seeking ways to cut test costs. Among these alliances were Agilent Technologies Inc.'s recent plans to team up with Synopsys Inc. But this is also the time that test companies should be working more closely with their customers in areas such as DFT, Leckie suggested.

"This is a good time to get close to customers and to keep customer support going, not just maintenance but development. That's how you gain market share when you come out," he said.

Another area that may prove to be of strategic importance to test companies during the next chip ramp may be the capability to test SOCs. In addition to test costs, which have become a source of major complaints from chipmakers, the complexity of chips is bringing changes in the way test is accomplished, DFT being only one example.