Derek Boyd Interviews Doug Dunn, Chairman of ARM, March 2007

Derek Boyd interviews Doug Dunn, Chairman of ARM, March 2007

Doug, can you first of all give an update on business with ARM right now?

We've just released results for a great 2006. We've had record bookings of $100m in Q4; good licensing & royalties and good growth across a range of products. We're very pleased with the way our business is performing. We also recognised 2006 was a good time for us to invest in growth and we hired around 350 new engineers over the year at our various locations round the world.

What are the key business challenges facing you in taking the business to the next level and how are you planning to tackle these?

Driving forward on the leading-edge of the industry in new technology is getting exponentially expensive for our customers. They have to make huge investments to stay on the leading-edge. We like to think of our IP as lightening the load on our customers. Our products are proven to work and are easily imported enabling customers to get to market quickly. There are lots of other challenges in getting leading edge, differentiated product to market and it's therefore a compelling need for our customers to get easy-to-use, high quality IP. Our key challenge is basically continuing to produce excellent IP, staying at the leading-edge while delivering a good ROI for our customers and investors.

There are very few companies that have made an IP business model work successfully yet ARM has managed to achieve this; what has made this work?

There is always competition but ARM has 5 'Greats' that differentiate us. Firstly, the excellence of our people; we have some 1,500 highly motivated and creative employees, around 50% in the UK but we are tapping into expertise wherever it exists around the world. Secondly our product; it is quite simply the best. Third; our business model that has been proven to benefit both the customer and ourselves as the supplier; it is key for both that this is a win-win arrangement and we have great experience in making it work. Fourth, timing; getting the right product to market at the right time. We have examples of this from the Artisan acquisition and now the recently announced partnership with SOITEC. Fifth and last but not least, is our execution and delivery. ARM has a proven reputation that is second to none in this area and we work incredibly hard to maintain it.

With the acquisition of Artisan and the recently announced partnership with Soitec, it is clear that ARM considers the physical aspects of IP integration as vitally important; can you comment further on this?

Some time ago we recognised the importance of physical implementation in IP. We performed due diligence of a range of alternatives and realised we had to bring this capability in-house. This is now paying dividends to customers. Our libraries are highly efficient libraries in both area & performance. They are highly portable; independent of any individual process and can be used on the manufacturing process of the customer's choice.

We are clear that this further differentiates ARM from other IP providers, the partnership with Soitec and our acquisition of Soisic are all signs of our determination to stay ahead. We've recognised that SOI and strained silicon wafers are being used in many high performance applications and use of the engineered substrates is growing. We also recognise, with Soitec, that it's not only about the material but the eco-system that surrounds it. To be a widely implemented technology, SOI need more than a good supply of wafers; it needs for example a suite of custom designed libraries and it is here that ARM has taken a lead. We see SOI as staying ahead of the curve and we're well positioned to exploit that.

We're seeing it become ever more critical that designs are right first time; do you feel the current range of verification tools are enough?

Verification Tools are not my area of expertise but they perform a critical function. Verification has always been difficult and it's getting more so as technology advances. Bringing companies together to address the issue is a good idea and NMI is doing a good job there, one I would encourage. If we can get the correct mental horse-power focussing on the problem then we have a good chance of moving this forward. However we need to look for some engagement outside the UK on this as it's certainly a wider challenge across the industry.

There seems to be a fundamental shift in the industry with private equity playing a bigger stake and much talk of mergers, acquisitions and joint ventures; what are your own views?

In my view we are seeing a radical change in recent times. The Semiconductor Industry has until recently always been seen by private equity as very volatile and capital intensive and therefore unattractive for their business model, so what's changed? First of all the Private Equity Companies (PECs) are awash with cash and looking for good places to put it. They're aware the semiconductor industry is changing; the growth rate is slowing down; the historical 15-20% CAGR is now down to the 8-12% range. This means the industry is more stable and less prone to the huge investment cycles often followed by strong decline through over-capacity. There is now an option to be a player in the industry without being heavily capital intensive through using foundries & partners. We also see the big IDM`s co-operating in process technology to reduce the costs of developing the next process node while seeking differentiation through their products. I can see large IDMs retaining manufacturing capability for process variants but standard processes will move towards foundries.

Taking these factors together, I believe the PEC's see an opportunity to reduce capital investment in manufacturing, possibly increase spend on product R&D, use partners effectively, concentrate on core competencies; all to generate future value and provide them with a good ultimate return. The implications are interesting as this breaks the existing rules and generates new opportunities for everyone. In my view, all companies need to review how this affects their business. At ARM we see opportunity for greater business through these trends.

Turning attention to how Europe and the UK compete in a global sense, what are your views on the European Funding Programs?

I was on the board of JESSI back in the 80's and more recently MEDEA. There's no doubt these programs helped many companies, e.g. NXP, Infineon, ST and others survive today through creating the environment for, and demonstrating the value of, pre-competitive research. So these programs should be credited for providing value. There's no reason why EU and national government funding should not continue to provide a strong basis for future competitiveness. Indeed they must be maintained in order to keep a level playing-field with other regions round the world. The programs have been criticised for being too close to the big companies but all projects require the involvement of small and medium enterprises. Take ASML as an example; 15 years ago there was no lithography equipment big player in Europe, now there are only 3 players worldwide and ASML are the biggest with 60% of the market. This is an example of a small company with great capabilities partnering with others and receiving funding to become a world leader. The issue will continue to wage but I am an advocate of big science and big programs. Now having said that, we do need to continue to find ways of getting more engagement from small innovative companies and that has always been a challenge. In summary thought, I am a big supporter of the EU funding programs and of course we should always evaluate and seek to improve but we need to recognise these are hugely valuable programs to the industry in Europe.

What are the key strengths in the UK we should be exploiting and does Government Policy have a role?

We would all like to think the UK has the skills to compete in the jobs market for any company looking to start or expand their business. We all want the UK to be recognised as a competitive location for Global Corporations and enjoy many high quality technology jobs in the future. To achieve this objective we have to elevate awareness of the benefits to the economy and to individuals of a career in technology. This means starting at an early age to positively promote the sciences, put careers in high technology on a pedestal as being rewarding and stimulating; something attractive to young people when considering a career choice. Current UK emphasis on engineering, maths and science is simply not deep enough to achieve these objectives. I sense a vicious circle; if we do not produce the skills we will not be a competitive location in future, industry will bypass us and we will require less skills in these areas, with the inevitable decline. We have 1001 different initiatives, maybe way too many, but I don't sense a real determined objective to succeed. Success often entails only doing a few things really well. We need to communicate the excitement, stimulation and enjoyment in technology. Ultimately Government policy should play a role in assisting industry by putting in place the infrastructure and articulating a clear set of supporting policies which recognise that high technology is critical to that future.

Education is perhaps the major area the government can influence and where it has the ability to direct policy so that sciences get more attention not less. It is important to set the general policy direction without doing the job for the educational institutions. There is a national crisis in science education and that must be addressed. All stakeholders must be engaged to make a difference. Until last year I had lived in the Netherlands for many years, a small country of 20m population, they've done a great job in supporting high-tech. by providing encouragement at all levels, together with clear policies and some funding for key areas. Witnessing the Dutch Govt play a hands-off role, while letting everyone know that high technology is important, proved very stimulating, and this has delivered for them a relatively great result. There are good examples of very successful companies in the UK, but successive Governments have not done enough. For over 20 years the UK has not demonstrated enough commitment to science education and high technology, the words often sound good but the follow up is weak and this needs to change.

If we take skills through to employment and use ARM as an example, then we are fortunate, as a highly successful company we command attention in the jobs market around the world. Our HQ is in the UK, and Cambridge is still the biggest site, however increasingly in the future ARM will recruit people into the company wherever in the world the best people can be found around the centres of competence. We all see the example of India as the leading location for embedded software; very high quality skills at the right cost. In the last year we've hired around 350 new engineers; around 100 in India and around the same in US to supplement the focus on physical IP design, with the remainder spread across our other locations. Most Global companies act in the same way and put teams wherever the right skills and business climate can be found. The UK must plan to stay competitive through investment in skills, in particular the disciplines of science and engineering technology.

It's clear that many other countries have established greater linkages between academia and industry and we amongst many others consider this a major weakness in the UK's innovation system and threat to our competitive future; do you agree with this view and how can we go about changing this?

There are close, to home in Europe, a couple of noteworthy success stories where academia, government and industry have identified an important need and resolutely resourced it to the point of acclaimed success. Since I recently lived in the Netherlands, very close to the Belgian border, and was involved in bringing ASML to a leadership position in lithography equipment and before that Philips Semiconductor, let me comment on the IMEC story. A combination of a determined and clear government policy combined with inspired academic leadership (from Leuven University) and proactive industry established IMEC as a world respected source of advanced research and development used by almost all large and small IDM`s from all regions of the world. Recently in co-operation with the Dutch government ministry of Economic Affairs, and Philips, they have opened a new centre, the IMEC-Holst Centre, in Holland. If Belgium and Holland (both relatively small countries) can achieve this world wide capability, then maybe we could learn from their experience.

It is clear that we no longer have major firms in the UK that act as a National Champion. Perhaps it becomes even more important that successful companies like ARM act as flag carriers for the industry in the UK. Is this something you feel ARM should support?

I hope that ARM is already seen in this role. We're proud of our success and our heritage and we're frequently used as an exemplar of what a UK-based company can achieve. We're also proud that we have several centres and many employees at other locations round the World. However, we do want to see the UK stay competitive for high technology industries and we will certainly do our bit to see that come about.

About Doug

Doug Dunn joined the board of ARM in December 1998 and became non-executive Chairman on 1 October 2006. He was previously President and Chief Executive Officer of ASM Lithography Holding N.V. until his retirement in December 2004. Before joining ASML, he was Chairman and Chief Executive Officer of the Consumer Electronics Division of Royal Philips Electronics N.V. and a member of the board. He was previously Managing Director of the Plessey and GEC Semiconductor divisions and held several engineering and management positions at Motorola. He was awarded an OBE in 1992. He is a non-executive director of ST Microelectronics N.V., Soitec S.A. and LG. Philips LCD Co. Ltd.