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St Gallen PC memory module maker bucks trend

Independence from Siemens has enableds spinoff Swissbit to expand the memory module product line to include a portable hard drive swissbit

While other computer industry manufacturers are laying off, six month old Swissbit, based in St Gallen, is hiring and on the brink of new growth.

This content was published on July 1, 2002 - 10:03

Once the memory module division of Siemens Switzerland, Swissbit spun off into an independent company last Fall. The complete transition of ownership and management will be complete in September.

The group's core business is making and selling memory modules for the personal computing platform. Its business model has Swissbit controlling the entire supply chain, except for assembly, which is done at a highly automated facility owned by Siemens, located across the street from the startup company.

The divestiture by Siemens was a "non-asset transaction", which means that it was not a traditional management buyout where management leverages the purchase price. The new company did not incur any debt to gain its independence, according to its founders.

A winning operation

Siemens has been spinning off non-core businesses since the late nineties. Other divisions that recently became independent are Infineon and Epcos. The difference between Swissbit and these other two is that Swissbit is profitable.

"Last year, the worst to hit the industry in a long while, we actually broke even. We are hiring while others are laying off," says Vincenzo Esposito, co-founder and managing director of sales and purchasing at Swissbit.

He told Swiss Venture that the number of memory module units manufactured each year remains fairly stable at about 3.5 million units, a claim confirmed Steve Cullen, a principle analyst at In-Stat/MDR, a market research firm that covers the semiconductor industry, among others. "The module market is relatively stable when measured in units 10-20% change per year tops," says Cullen.

It is expected to stay the same this year. What changes is the cost of the individual components used and in turn the price the manufacturer can charge for a memory module. The prices fluctuate dramatically.

If the module firms manage inventory properly, "they can have a more stable profit than the DRAM companies because their value added is just in the module assembly", Cullen told Swiss Venture. "Although their total turnover will vary considerably as DRAM prices move up and down."

Margins can be good like they were in 2000 when the group earned SFr 300 mn, according to Esposito. Or they can be tight like last year when the division generated less than half of the previous years income, at SFr 112 mn in sales, just managing to break even.

Esposito says that sales totals this year will be much better, with revenues expected to be somewhat greater than SFr 180 mn, not including income from new products to be introduced this year.

Swissbit employs some 20 people today with plans to half a dozen or so more by the end of the year, mostly in the sales area.

Assembly of the printed circuit boards, capacitators, and memory chips into modules traditionally takes place here. Then the finished product is sold to PC assemblers and distributors across Europe. A small percentage of sales, about 5 percent, are targeted the makers of telecommunications equipment who also require memory modules in routers and switches.

Swissbit has tough competition from global competitors. The sales figure of 3.5 million units a year marks Swissbit as a small player. It claims to be one of the top three supplying the European market. According to InStat/MDR's Cullen, the total market is about 200 million units a year.

"The module industry has a few large firms, such as Kingston Technology and Smart Modular, which now a part of Selectron for example and a lot of smaller firms, many of them in Taiwan," says Cullen.

Keys to success

It is not easy for a Swiss company to compete in a market with such tight margins. "We take a make-or-buy approach," says Esposito. He says the firm knows how to negotiate to get a good deal on the price of memory chips, thanks to nine years of buying and negotiating experience.

But if the cost of manufacturing is better elsewhere then the company will do it. The company is currently mulling whether or not to undertake to manufacture a number of a new portabale memory device in the coming months.

It handles its own logistics "We don't work with any of the big names. We find it better to work with smaller, hand picked logistics companies," explains Esposito.

Tightly run operations are also critical to success. "If they do not manage their inventory properly they get into big trouble, which happened to MCT in Denmark a few years ago," points out Cullen. The Danish firm went into bankruptcy protection and was eventually acquired by DataRAM, a Princeton-based firm.

Other factors contributing to Swissbit's success in a tough market include skilled staff, low staff turnover, and purchasing savvy, plus the support of the economic development agency in the Canton St Gallen.

Expansion written in the memory cards

Independence from Siemens is enabling expansion of the product line. Swissbit recently announced an innovative new portable hard drive that you can plug into any computer equipped with a Universal Serial Bus. It is currently reselling the product from an original equipment manufacturer.

Now that music, pictures, and presentations can all be stored in a software format, there is a need to be able to transfer them and copy from one computer to another with greater ease.

The memory device works like the mechanical hard drive in PC but it runs on a solid-state silicon chip. It looks like a fat magic marker with a little flat metal plug on the end but it packs a lot of power and convenience. The device is commonly referred to as "key memory", as the inventors of the technology imagined users carrying it on their key chains.

Swissbit says you don't need to carry a Notebook anymore because you can carry the hard drive in your pocket. With a capacity of 256 Megabytes of data, about 180 times what old floppy disks stores, that statement is not exactly "like having your whole hard drive in your pocket", which is somewhat less than a standard personal computer.

These days they usually have about 2 or 3 Gigabytes of memory. So it would be enough to store around 30 PowerPoint presentations or if you wanted to move individual data directories between computers.

Swissbit says a new supplier, a firm that would been excluded as a partner while the company was a Siemens division, will make its marketing tag even more accurate. The new partner, a German startup, has technology that could enable the company to sell cards with as much as 1 Gigabyte per unit.
An improvement on the basic product such as this would enable the young Swiss firm to pull out ahead of some of the pioneers in the key memory market and gain market share.

Portable memory is a fast growing market. There at least five formats for portable memory chips, including CompactFlash, SmartMedia, MemoryStick and so on that provide the same kind of functionality used in digital cameras and MP3 players.

Swissbit's Esposito he expects that his company will begin to sell some of these other formats too, extending its reach beyond the PC market.

By Valerie Thompson

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