National Semiconductor Corporation

2900 Semiconductor Drive
Post Office Box 58090
Santa Clara, California 95052-8090
U.S.A.
(408) 721-5000

Public Company
Incorporated: 1959
Employees: 34,764
Sales: $2.6 billion
Stock Index: New York Pacific

National Semiconductor is an old company in a young industry. The firm was founded by Dr. Bernard Rothlein in 1959, when major advances in semiconductors and other transistor-oriented chips were just being made. Rothlein worked for the Sperry Rand Corporation as a high-level engineer in its semiconductor research unit before leaving to start up his own company.

Rothlein was able to exploit his knowledge of transistorized circuits with great success at first. By 1961 National had reached $3 million a year in sales, and its growth continued to climb rapidly. In 1965, National sold $5.3 million worth of chips, a company record. However, record sales did not correspond to record profits; National’s profits slumped to $238,000 in 1965 from $362,000 the year before.

Part of the reason for the drop in profits was the settlement of a suit brought by Rothlein’s old employer, Sperry Rand, in 1959 regarding the misuse of Sperry trade secrets. The suit was decided in 1965: National had to pay Sperry $300,000 over five years and agreed not to make certain chips, an outcome that depressed the price of its stock and prevented National from paying dividends to shareholders. Once-soaring National seemed almost lost.

One of National’s original investors was Peter Sprague, a highly successful 27-year-old operator of an international food-processing business. When he saw his long-term investment in National becoming extremely short-term, Sprague decided to buy National and see if he couldn’t turn it around himself.

Soon after he purchased the company and cleared its legal slate, Sprague went on a talent hunt. It was a search that has shaped National through the rest of its existence. In 1967, Sprague raided the semiconductor division of Fairchild Photographic, one of the world’s top three chip makers in what was then a $1 billion industry. He came away with four men, including the number-two man at Fairchild Semiconductor, Charles L. Sporck.

Sprague installed Sporck as president and CEO of National, and Sporck went right to work. In 1968 he moved National’s headquarters from Danbury, Connecticut to Santa Clara, California. Sporck, with Sprague’s blessing, instituted sharp cost-cutting measures to send the company back towards solvency. “I guess I’m one of the few CEO’s who has spent time in the shipping department,” reflected Sporck once. “But in that first year, everybody did whatever it took to get products out the door.”

The all-hands-on-deck approach succeeded in righting National, thanks in part to another decision made by Sporck and Sprague. The two men decided that National should produce a wide variety of chips instead of just one or two, as many chipmakers its size were doing. Accordingly, National added 30 chips to its product line in 1968. It acted, in other words, like a much larger company—indeed, like the company it has become.

National’s wider product line led to a near-100% increase in sales between 1968 and 1969, from $22.9 million to $41.8 million. Sprague’s next move was to begin expanding out of National’s traditional military and commercial markets into consumer products as well.

In 1970 National moved from its Santa Clara headquarters into a 29-acre research and world headquarters park in Sunnyvale, California. The chip industry in general struggled that year; Fairchild lost $15 million on its chip operations in the first half alone, and Sylvania shut down operations entirely after several consecutive years of losses. National saw sales volume slip slightly, but did not lose money. Sporck told Business Week that year, “The only way you can operate securely is to operate very conservatively from the financial standpoint.”

The three years between 1970 and 1973, when the oil embargo began, were a period of phenomenal growth for the semiconductor industry. National quintupled in size between 1972 and 1976, when it reached $325 million in sales and added consumer products such as calculators and digital watches to its product line under the name Novus. Stock prices reached a then-all-time high of $55 a share. The company also began to focus its research on three major types of chips: MOS (metal oxide) memory chips, T/L (transistor/logic) logic chips, and linear structured chips.

Behind National’s incredible growth in this period was a reputation for high quality and excellent management coupled with the lowest costs in the industry. This combination allowed National to post profit gains in 1975, when the industry as a whole saw sales slacken 30%, one of the worst downturns in computer industry history.

In 1976 National’s vaunted management capabilities and manufacturing discipline took a blow. Its venture into consumer products, begun in 1973 to help the company weather typical semiconductor business cycles, had worked well in 1975, when overall sales increased 10% while semiconductor sales fell 25%. But low pricing and the use of Novus consumer products as promotional giveaways worked against National’s quality reputation. Consumer products slumped badly in 1976, due to both labor problems and mismanagement.

National was also accused of being slow to enter new markets for memory components and microprocessors. An October, 1976 announcement that it was building its own mainframes to sell in the commercial marketplace did not impress many.

But National weathered this period. By 1978, National’s reputation for quality was no longer in question and the company’s sales had reached $720 million, a 46% increase over 1977. A new product, an unprecedented 64K chip, led the increase, and National’s position as the number-one supplier to cathode-ray terminal-makers also helped.

Still, takeover rumors began to dog the company as Schlumberger acquired Fairchild and United Technologies took over Mostek. National was weak enough in both semiconductors (magnetic bubble memories, high-speed logic chips, and microprocessors) and consumer products to create concern, and its mainframe business had only one customer—ITEL. In addition, it was behind in overseas markets, and the stock price remained low. Analysts eyed its Datachecker subsidiary, which pioneered the supermarket point-of-sale scanner, as an easy spinoff.

In late 1979 National scrapped its mainframe project and purchased troubled ITEL’s successful computer-leasing business, bringing the company directly into computer sales and service for the first time in its history. During 1980 National merged repurchase into National Advanced Systems, formerly part of the consumer products group, and continued ITEL’s leasing of IBM-compatible mainframes (the machines were made by Hitachi).

After doubling in size between 1978 and 1980 and recording four years of record earnings, National was labeled “the streetfighter of Silicon Valley” for its bottom-of-the-barrel production costs and its management style. Under Sporck’s leadership, National cut costs wherever possible. It used sales representatives and distributors for its chips rather than employing a sales force, with its higher overhead. It moved most of its labor-intensive operations to the Pacific Rim, and maintained a spartan office center that lacked such basic amenities as carpeting.

In 1981 sales surpassed $1 billion a year for the first time, and National introduced a rash of new products, including advanced versions of its 32-bit chip, which became commercially available in 1983. Still, the same year saw National abandon bubble memory chips when costs did not decline as expected, making the market for this vital technology small. This move left Intel as the only U.S. chipmaker in bubble memories, an area that subsequently became dominated by lower-cost Japanese producers.

National took a big hit in 1981, despite its $1 billion in sales. The company lost money in the face of an industry recession that was just as severe as the national one. National also suffered a major blow when five top managers left, including Pierre Lamond, National’s long-time chief technologist, and Fred Bialek, the trusted trouble-shooter who had keyed National’s low-cost manufacturing, both of whom had come to National from Fairchild with Sporck.

Sporck came under fire for his highly autocratic, centralized management style, which had created fiercely entrepreneurial product managers and frequent clashes of will. Takeover rumors again surrounded the nation’s third-largest chipmaker. At the time, 72% of National’s sales came from semiconductors, while its biggest competitors, Motorola and Texas Instruments, each derived less than 40% of their sales from chips. National also carried low long-term debt, making a leveraged buy-out feasible. Despite its troubles, National had several strong product lines, and shared market dominance with Texas Instruments in bipolar logic chips and linear integrated circuits. But no deal materialized, and as what became an 18-month industry slump started to break, National’s low-cost production made it the likeliest candidate for a quick recovery.

Besides the difficulties of operating during the recession, international competition, especially from Japanese chipmakers, and the rising U.S. dollar hurt the U.S. semiconductor industry during the early 1980s. Like many U.S. chipmakers, National could best be described as “embattled” during this period. It lost money in both 1982 and 1983.

Research-and-development spending had remained important at National through both the good times and the bad times. Major breakthroughs had come in 1975, with the first commercially available 16-bit chip; in 1979, with the Series 32000 32-bit microprocessor; and in 1982, with Digitalker, a speech-synthesis chip. In response to the challenge from overseas, National nearly doubled its research-and-development budget between 1983 and 1986, to $200 million. Through extensive lay-offs and a new public offering, National was able to eke out nearrecord earnings in 1984 and 1985. To celebrate, it bought carpeting for its world headquarters.

Successful new products also helped turn the company around. National, not renowned as a leader in new technology, introduced its 32-bit chip in 1984, six months before any competitor had one that was commercially available, and the product sold extremely well. National’s line of semicustom chips, which allowed customers to adapt chips to better fit their needs, also sold well.

National restructured in 1986. Sporck, 59 years old in 1986, appointed two executive vice presidents, who are expected to vie for the top position when Sporck steps down. Sporck also directed the company away from Datachecker and National Advanced Systems’s sales of Hitachi-made IBM-compatible mainframes, although at one time he felt that these divisions would be National’s profit makers for the future. National also established two “core” businesses, the Semiconductor Group and the Information Systems Group. The company’s long-term efforts at diversification have met some success; by 1986 only 53% of revenues came from semiconductors and National was manufacturing more than 5,000 types of chips in a wide range of product lines. It also was continuing to produce disk-management systems and computer boards, in addition to its Datachecker operations.

Nonetheless, despite the restructuring, National lost money in both 1986 and 1987. The company made a turn-around in fiscal 1988, posting a $62 million profit. It also acquired troubled Fairchild Semiconductors for $122 million in 1988. Revenues increased to $2.5 billion in 1988 with the acquisition of Fairchild, and National jumped from llth-largest chipmaker in the world to sixth.

In fiscal 1989 National posted a loss in three of four quarters, and expected a loss for the year. It also sold its National Advanced Systems division to a joint venture of Hitachi and EDS, and sold Datachecker to ICL, a British concern, for a combined total of about $500 million.

Such moves will allow National to concentrate on its core semiconductor business, but the company faces an uphill road in a tough industry.

Principal Subsidiaries:

National Advanced Systems; N.S. Electronics Pte., Ltd. (Singapore); National Semiconductor (Hong Kong) Ltd.; National Semiconductor (U.K.) Ltd. (United Kingdom); National Semiconductor S.A.R.L., (France); National Semiconductor GmbH (Germany); Dyna Craft, Inc.; N.S. Distributors (Pty.) Ltd. (Australia) (90%); P.T.N.S. Electronics Bandung (Indonesia); N.S. Electronics do Brasil (Brazil); N.S. International Inc.; N.S. Disco Inc.; N.S. Electronics, Ltd. (Canada); Exsysco, Inc.; National Semiconductor AB (Sweden); N.S. Electronics Phillipines, Inc. (Phil.); N.S. Electronics Ltd. (Thailand).