The Creation of STMicroelectronics
Two semiconductor companies. Both alike in dignity.
In fair Europe, where we set our scene.
From ancient roots break to new silicon.
In 1987, Italy's SGS Microelettronica and France's Thomson Semiconducteurs decided to join forces. It was a historic alliance that created a European semiconductor giant - a globally competitive one at that.
The stories of these two star-cross'd silicon lovers are fascinating. In today's video, we talk about the merger that created SGS-Thomson, now STMicroelectronics.
Oh, and I do want to sincerely apologize for totally mangling these European pronunciations. Feel free to make fun of me in the comments.
An Urgent Need
Let us start in Italy. Because the history of SGS is far simpler. And also because I like pasta.
SGS begins with the iconic Italian industrialist Adriano Olivetti. Adriano was the son of the founder of an iconic Italian typewriter company. A visionary leader with immense drive and energy, he pushed his company into the computer space in the mid-1950s.
Their first prototype - the Elea 9001 - had been built with vacuum tubes. It worked fine, but Adriano and the brilliant Chinese-Italian leading his computer team Dr. Mario Tchou decided to redesign and rebuild the computer using solid-state transistors.
The resulting success convinced Olivetti and Tchou that transistors were the future. But Adriano did not want to import these critical items from the United States - where they were first invented - or West Germany or the Netherlands. They wanted to make them here in Italy.
However, the Olivetti Company had its hands full with the work of producing computers. Fundamentally, they saw themselves as a mechanical company ill-equipped to handle the challenges of solid-state device mass-manufacture.
While debating the merits of starting a full research laboratory themselves, the two hear about another Italian company working on transistors.
Starting SGS
Born in 1906, Virgilio Floriani grew up believing in the value of technology and innovation.
During the war, he worked as a designer and engineer for a military radio factory. After the war ended, he founded the Italian telecommunications company Telettra in 1946. The name is an amalgamation of "Telephony, Electronics, Radio".
Telettra introduced a series of new technologies to post-war Italy. So when Floriani realized that nobody else in the European telephone industry thought these transistor things were important, he saw a chance to seize the high ground.
So Telettra bought a license from Bell, and then in 1956 traveled to the Murray Hill laboratories to join a hundred-person symposium to learn transistors.
He did not learn much, since his English and theoretical solid-state physics knowledge were limited. But upon his return, he set up a very small laboratory in Milan to build solid-state diodes and transistors.
More than a year later, Telettra publicly present their work in early April 1957. Olivetti and Mario Tchou hear about this and paid him a visit. After some discussion, Olivetti and Floriani decided to join forces - combining research from Tchou's lab in Barbaricina and Telettra's processes.
Thus in October 1957 we have the "Società Generale Semiconduttori", or SGS.
The name literally means the “General Semiconductor Society" and they presented themselves as the first Italian company expressly founded for the "research, study, and manufacture of diodes and transistors". Their products would be available to any company.
SGS would set up a research lab and factory in the small town of Agrate Brianza along the Milan-Bergamo motorway to take advantage of Milan's big industrial base.
Starting with a license from General Electric, they start producing their first germanium diodes for their parent companies in 1959. Their transistors accelerated Olivetti's work, helping them ship the Elea 9003 computer.
SGS-Fairchild
SGS was founded the same time as Fairchild Semiconductor.
Fairchild quickly distinguished itself with several innovative moves. For instance, making silicon transistors when everyone else - except Texas Instruments - was doing Germanium.
General Electric was a famous name, but their transistor technology quickly grew outdated in the fast-moving industry.
Between 1957 and 1961, the company lost nearly 700 million lire. Which I think is over a million USD in 1960 dollars, assuming an exchange rate of 600 lire to 1 USD.
SGS soon realized they needed a new technological partner. So Olivetti and Floriani reached out to Bob Noyce of Fairchild through Adriano's brother Dino and asked about a partnership.
The resulting deal made Fairchild an equal partner to Olivetti and Telettra - a third each. Fairchild transferred their silicon technology and sent over their staff to start converting those Germanium lines over to silicon. SGS began building factories across Europe - England in 1963, West Germany in 1964, France and Switzerland in 1966, and so on.
SGS-Fairchild was a fairly successful endeavor. They turned a profit in 1963. And in 1967, they generated about 17.5 billion lire - or about $30 million USD. 75% of that revenue came from outside Italy. They had about 3,200 workers and owned 30% market share of the Italian market.
However, the arrangement did not last. Fairchild wanted SGS to just stick to sales and manufacturing. But SGS and the Italians wanted to do R&D right in Agrate, Italy where they were founded. They argued that the European semiconductor market was different from America's.
For instance, the American semiconductor market in the 1960s leaned heavily towards the military - space and missiles. Europeans on the other hand were focused on telecommunications and consumer items.
This disagreement led to a split in 1968. Fairchild allowed SGS to keep the licensed technology, but sold their shares. A year after that, Telettra was sold to the massive Fiat Group, dumping their SGS shares as well. Thus by 1970, Olivetti was left the sole shareholder.
Despite these troubles, SGS emerged from the 1960s and the transition to integrated circuits as one of the few European semiconductor successes. Their partnership with Fairchild gave them a valuable planar IC technology targeting consumer and specialty devices.
Going to France
Let us step away from the guys in Italy and pick up a new - very messy - thread over in France.
The company that we will eventually call Thomson is the result of a series of mergers that occurred throughout the 1960s and 1980s.
It gets messier than the Habsburg family tree so we will do our best.
Keep in mind this is not a general history of French semiconductors. I highly recommend these two resources on whom I leaned greatly for this section - Andrew Wylie's French Vintage Semiconductors Page, and Mark Burgess's French transistor history page.
There are two dominant semiconductor groups that will eventually merge to create Thomson Semiconductors - COSEM of CSF and SESCO of Thomson-Houston.
We shall start with COSEM. Yes, I know we are going two levels deep here. Bear with me.
COSEM & CSF
COSEM was the semiconductor manufacturing arm of "Compagnie Générale de Télégraphie Sans Fil" or CSF.
CSF was a radio and telephone company with roots dating back to the 1880s. By the 1950s, they produced military and telecommunications electronics hardware. Being vertically integrated, they also produced their own vacuum tubes, ferrite cores for memory, and so on.
CSF was one of the very few transistor companies that did not start their journey with a Bell Labs license. Rather, they relied upon technology transferred over from the state's telecommunications laboratory - "Centre national d'études des télécommunications" or CNET.
In addition, they leaned on the connections of critical members in the French semiconductor community to the US. Notably, Claude Dugas, a French-born physicist who studied at Carnegie Mellon and had been good friends with scientists in Bell Labs and others.
In the mid-1950s, CSF founded "Compagnie Générale de Semi-conducteurs" or COSEM in Saint-Egrève, a western suburb of the town of Grenoble. The area was chosen for its nearby university as well as its dextrous female workforce - deemed suitable for delicate transistor manufacture work.
In 1961-1962, COSEM had become France's largest semiconductor-maker with 17 to 45% share of the French market. While they largely serviced the local market - selling to French computer makers like IBM France and Bull - up to 30% of its output was sold abroad.
SESCO & Thomson
SESCO hails from France's other major semiconductor maker - Compagnie Française Thomson-Houston or just Thomson-Houston.
Thomson-Houston was founded all the way back in 1893 as the French subsidiary of the American Thomson-Houston company - one of the predecessors of General Electric. They sold electric trains, railway signaling, telephones and the such.
A wild series of restructurings, mergers, transfers, and one 1936 nationalization later, we have the French Thomson-Houston company. French is in the name because of the nationalization.
During this period, they spin off their heavy engineering divisions. That eventually becomes Alstom, the French Rail company. What a coincidence, right?
In the 1940s, Thomson-Houston is making radars and radio transceivers for the professional market, as well as consumer radio sets and telephones. Transistors make a lot of sense for radios. However resistance from the vacuum tube people prevented them from going as hard into transistors as they should.
They fell behind. So in 1956, Thomson-Houston teams up with its former American owner General Electric to work on semiconductors. Later in 1961, the two found a semiconductor subsidiary, "Société Européenne des Semi-Conducteurs" or SESCO.
In 1966, Thomson-Houston merged with the electronics arm of the French arms company Hotchkiss-Brandt. Hotchkiss is somewhat famous for their Hotchkiss Revolving Cannon, capable of firing 43 shells per minute. The new company is called Thomson-Brandt.
Okay, just to recap. We have CSF, the telecommunications company, and Thomson-Brandt ... which itself was a merger of the electronics divisions of a French-nationalized American company and French cannon company.
Merger to SESCOSEM
French theoretical solid state physics knowledge was very strong.
However, French companies struggled to translate that knowledge to the market. Notably, their telecommunications and electronics companies stuck with vacuum tubes and then Germanium for longer than they should have.
France is known for having numerous foreign companies operating there, which offered substantial competition to domestic firms. So with Thomson-Brandt struggling to compete and CSF over-leveraged thanks to its expansions throughout the 1960s, the two decided to merge in 1968 to create Thomson-CSF.
Soon afterwards, their semiconductor divisions - COSEM and SESCO - joined together to create SESCOSEM, "Société européenne de semi-conducteurs", or literally "European Semiconductor Company". Whew. SESCOSEM began as a second-source producer for companies like Motorola, helping the latter more easily enter French markets.
The Pull of Computers
The end of the 1960s saw a spate of European countries trying to domestically produce their own computers.
The most famous of these efforts was France's Plan Calcul, which Charles de Gaulle initiated in 1966 after General Electric acquired the last French computer-maker, Bull.
One of the companies involved was Compagnie Internationale d'Informatique, or CII. This was a non-vertically integrated company partly owned by Thomson-CSF and subsidized by the French government.
That same year, the United Kingdom government also midwifed their own domestic integrated computer giant - ICL. I covered it in a previous video.
Calcul should have presented a great opportunity for SESCOSEM. After all, they were CII's sister company. And Plan Calcul did allocate 20 million francs for SESCOSEM to build semiconductor TTL plants for CII.
But CII - not to mention ICL and the other European computer companies - opted to build around Texas Instruments. SESCOSEM did manage to receive the second source contract, but nevertheless suffered damage from CII arguing that if they were forced to buy local then their products would be inferior to IBM's.
Throughout the 1970s, SESCOSEM struggled to turn a profit. Their volumes were too small, which management naturally blamed the domestic market for. But one could also point at SESCOSEM's own business practices, which forced it to offer too large a range of niche products.
For instance, its "controlled delay" ("retard contrôlé") strategy, which targeted a 2-year lag behind American leaders. Ostensibly to avoid taking excessive risks on potential flops. In 1972, Thomson-CSF absorbed SESCOSEM into its own corporate structure for tax reasons. Meaning, SESCOSEM were losing a lot of money.
Italy Intervenes
Let us step away from France and go back to SGS.
It is 1970, and after Telettra and Fairchild left the business, SGS suddenly found itself in a rough spot. Fairchild provided a good portion of its technology and there were too many unprofitable factories across Europe that needed to be closed.
Its sole controlling shareholder was Olivetti, which was suffering its own turmoil. Adriano Olivetti and Mario Tchou had died in the early 1960s, leaving them in a bit of a lurch, leadership-wise.
They were also in financial straits due to intense Japanese competition and an ill-advised acquisition. So Olivetti could not cover for a struggling semiconductor company, and they started looking for a financial partner to take the business off their hands.
Motorola sniffed at a possible acquisition, but the Italian government - recognizing SGS's strategic importance - stepped in. In 1972, they bought out Olivetti via a state-owned telecom/electronics holding company called STET.
Then STET merged SGS with a small Italian semiconductor company ATES to make SGS-ATES.
ATES ("Aquila Tubi e Semiconduttori") was founded back in 1959 as a vacuum tube manufacturer. Two years later, they got a license from RCA and Marconi and built a factory in the city of Catania in Sicily. Their management team took over running the combined organization.
SGS-ATES
The Italian government saved the company from falling into American hands, but did not improve their loss-making financial status.
The company did have some interesting products. They held a license from Zilog to produce the Z-80 and Z-8000 microprocessors. Zilog cofounder Federico Faggin once worked at SGS-Fairchild before he joined Intel.
That was basically the only digital integrated circuit they sold. But they also had some good RF germanium, analog integrated circuits, and power stuff.
Yet despite these good products, the company lost money throughout the entirety of the 1970s - $20 million in a good year, $50 million in a bad one. Each year, the government compensated them for exactly the amount of that loss.
The government did this because they - like many other people in Europe - thought that semiconductors would always lose money. You must do them because they support critical things like nuclear weapons and other strategic industries. But don't expect to make money from it.
In an atomic bomb, who cares if a transistor costs one dollar or a thousand dollars? So just make the best darn transistor you can make, and forget about the cost. So volumes cratered, product lines expanded, and costs rose.
This arrangement made sure that everyone stayed employed - not unimportant in Italy those days with its leftist bent - and some high quality products got made.
But it also left the company in limbo. They were perfectly satisfied to sell small numbers of chips solely into Europe - itself a declining semiconductor market. So the 1970s saw SGS-ATES gradually lose share and money in the overall market.
Turnaround
In 1979, the company hired a new CEO - Pasquale Pistorio.
Pistorio was born in 1936 in one of Sicily’s poorest villages. He studied electrical engineering at Turin and then became a salesman for Motorola - turning down a job offer from Olivetti.
Over many years, he worked his way up to be vice president of Motorola's international semiconductor division and the most senior non-American in the world's second largest semiconductor company.
The SGS job offered a 40% pay cut and required him to take an armored car thanks to terrorists. But Pistorio embraced the professional challenge of turning around what he called a "basically broken" company that still held national importance to his home country. It would also allow him to move home to be with his aging parents.
Upon arriving, Pistorio set out three goals for SGS-ATES: To make a profit, to enter the US market, and to become a billion dollar company. And to show that things really had changed, he started firing people. He recalls in an oral history later:
> A guy ... says, "Look, yeah, our company's a disaster. The quality's terrible. The cost is high. The service is a disaster. It's still a miracle that we get some orders."
> I said, "You are the marketing manager?" He says, "Yeah." What can you do? So you simply ask him to leave, because it cannot be.
Pistorio started from the top and worked his way down. His first month, he fired 20 out of the 80 top managers. Once that was done ...
> The second month, I attacked the lower level. Absenteeism was 22 percent. Can you imagine 22 percent absenteeism? And then I fired some 17 ... absenteeists, and their track record was more than 50 percent of the time for three years in a row
Over a thousand employees were fired and money-losing factories like the one in Scotland were closed. Naturally this led to a huge huff. SGS-ATES was a government-owned company, and firing people seemed unimaginable.
Many of the lost jobs were in Catania, and involved the poorest, least educated workers. But the company had lost money for a decade. Italy in 1980 was itself going through political upheaval over these questions. Pistorio stood his ground, and the government backed his plans. They knew that things had to change.
Return to a Profit
Their new culture would be centered around hard work and globally-minded expansion.
Pistorio is known for having what Businessweek calls a "passion for his work". He gets to the office at 630 AM, when everyone previously came in at 930 AM. And then he would work until 10PM.
SGS quickly adopted American-style management techniques, and dramatically upped their work hours. They were only working 1,500 hours a year rather than 2,000 in the US and 2,200 in Japan or Singapore.
To convince the unions to accept this, he assigned all top management including himself to work a few graveyard shifts. The tactic succeeded and in doing so, SGS became the first company in Italy to employ women at night.
Another thing crucial to the SGS turnaround were its strategic alliances with big companies like IBM or Hewlett-Packard for computers. These close relationships allowed them to co-develop special custom chips that go into products. These were high-margin chips in popular, high-volume electronics.
Going into the 1980s, all the big four European semiconductor companies - Siemens, Philips, SGS, and Thomson - were losing money. They had lost money all through the prior decade.
In 1983 SGS became the first of the four to turn a small profit. Pistorio had promised to do it in four years, but managed it in three. The other three European companies now saw that it can be done, and pushed for the same thing as well.
All this time, Pistorio wanted SGS to become big. He knew that volume and scale were key in the global semiconductor game. The higher the volume, the better the yields, the better the profitability.
They were one of the first European semiconductor companies to build a wafer fab in Asia - in Singapore in 1984. Its Southeast Asian facilities would eventually contribute 30% of total volume in less than half a decade.
SGS revenues had grown over three times what they were when he took over - hitting $375 million in 1986. But looking ahead to the 1990s, Pistorio became convinced that the future belonged only to the biggest companies making at least a billion dollars in revenue. The fastest way to achieve that was a merger. But with whom?
Thomson and SGS
Thomson was looking to scale up throughout the 1980s as well.
In 1982, the Mitterrand Socialist government nationalized five of France's biggest companies, including Thomson.
Alain Gomez was appointed by the government to be chairman of the Thomson parent company. Harvard-educated, Gomez brought sweeping change and focus to the electronics company just like what Pistorio brought to SGS.
Pistorio knew the management of Thomson Semiconductors - including its CEO Jacques Noels - quite well. The two companies seemed like a natural fit. Both were largely government-owned, were similarly large at about $400 million in revenue, and were following the same strategy.
Over time, the idea of a combination began to percolate. They started to cooperate in a formal manner in 1986, when they jointly applied for funds for a big memory chip project via EUREKA - Europe’s big R&D initiative.
Gomez approved, though they did keep some bits. Thomson Semiconductors was one of the world's largest military chip suppliers. But for national security, this stayed with the larger Thomson company. Anyway. So in 1987, it was announced that SGS would merge with Thomson Semiconductors.
Digestion
The new company - named SGS-Thomson - made about $800 million in revenue.
This made them the second largest European semiconductor company after Philips, and the 12th largest in the world. It tripled the product offering and added many customers in segments like industrial and telecommunications.
But the new company needed extensive reform. In 1987, SGS-Thomson turned about $200 million in losses - all from Thomson - and had $350 million in debt - all from SGS. Critics in the media called it a case of the "blind leading the blind".
Pistorio was appointed the new CEO. He held a meeting with people from both companies. There, he told them that they were one company now and needed to integrate as fast as possible. The longer it took, the worse it would get.
Within a year of the merger, Pistorio closed five plants - three in France and two in Asia - and started moving more production over to the remaining Asian facilities. All the sales offices were merged together and top management was cut by a third - with an eye to balance French and Italian.
These changes were tricky with SGS-Thomson now having two national governments as its shareholders. It caused issues with things like choosing a headquarters. In exchange for accepting an Italian CEO, the French government mandated that the headquarters be in Paris for ten years.
From 1987 to 1991, SGS Thomson lost a cumulative half billion dollars. They would have gone under had it not been for a strategic $800 million loan from their governments. That money was eventually paid back with interest after their later IPO.
But in 1992, the company finally turned around, making a tiny profit of about $4 million. The year after that, 1993, the company made $100 million in profit. The worst was over. Pistorio was quoted in a news article at the time: "I am glad to say that we made it, that this has been a successful merger."
Conclusion
A year later, SGS-Thomson went public on the Paris and New York Stock Exchanges.
In 1998, they changed their name to STMicroelectronics - an abbreviation of their respective halves.
The company's corporate alliances with Nokia in wireless, Western Digital and Seagate in disk drives, and Bosch in automotive had given it a highly diversified portfolio of products powering MP3 players, smart cards, and phones.
They hit a particularly big home run with their bet on analog and mixed-signal chips. Such chips have important roles in cars, industrial machinery, and power applications.
In 2005, Pistorio retired from STMicroelectronics and became its honorary chairman. He has since spent his life focusing on environmental and social issues like water conservation and inequality.
As of this writing, he is 88 years old and still kicking. His semiconductor legacy is secured. The company he once led back from the brink is now one of the largest chip companies in Europe. What a life!