Lucent's Stealth Chip Business

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SAN FRANCISCO -- In the highly competitive semiconductor industry,

Lucent

(LU)

is a stealth player.

Sure, the company's known for its young scientists who "make the things that make communications work." But the chip industry? That's a bunch of cranky old men who still yak about their

Fairchild

days.

But Lucent, known mainly as a maker of telecommunications equipment, has become one of the top semiconductor manufacturers in the country by focusing a hot sector: communications chips. In the past fiscal year, the company recorded $3 billion in chip sales, or 10% of $30 billion in total revenue. That makes the chip-making division, Lucent Microelectronics, about a third of the size of

Texas Instruments

(TXN) - Get Report

and twice the size of communications chip maker

Analog Devices

(ADI) - Get Report

. While the overall semiconductor market was in a slump this year, Lucent's chip sales grew by 10%.

"When you think of Lucent, you think of the big Lucent. You have to dig deep to find a jewel," said Sohail Khan, vice president for strategy and business development at Lucent Microelectronics.

Based in Allentown, Pa., Lucent Microelectronics is the No. 2 player, behind Texas Instruments, in one of the fastest-growing slices of this chip sector: digital signal processors, or DSPs. These chips enable telecom equipment and electronic devices to process real-world signals such as sound and video. About $3.3 billion worth of DSPs will be sold globally this year, and that number is growing at an annual clip of 20% to 30%, according to market research firm

Forward Concepts

.

Other players could soon enter this field as DSP chips are used in more places -- everything from automotive suspension to household appliances. Will Strauss, an analyst at Forward Concepts, said that PC makers like

Intel

(INTC) - Get Report

,

Advanced Micro Devices

(AMD) - Get Report

and

National Semiconductor

(NSM)

are all trying to put DSP cores -- sound- and video-processing capabilities -- into PC and server chips. So, in the next few years, Strauss said, TI,

Motorola

(MOT)

and ADI -- which are now angling for deals with companies such as

Nokia

(NOKA)

. In 1990, it made a big push to sell chips to other companies. But Lucent became successful after it narrowed its operations by paring down products to mainly meet the needs of the communications industry. That strategy helped Lucent leapfrog both ADI and Motorola to control 28% of the DSP chips market, only behind Texas Instrument's 45% dominant share.

Texas Instruments seems to have adopted a similar strategy by finally throwing off its sluggish memory lines. The attention to DSP sales seems to have paid off: Texas Instruments' DSP sales grew 17% in the third quarter, far outpacing Lucent's 7% rate in the same quarter. On the horizon is the threat that TI's new high-performance DSP chip, the C6x, could erode Lucent's market share. Lucent is the leading maker of DSP chips used in wireless base stations, and the C6x will compete with Lucent's base-station chips.

There are signs that growing competition and slowing growth is causing concern for the Lucent bosses in Murray Hill, N.J. This summer, Lucent announced a partnership with rival Motorola to design a new DSP architecture, leading some analysts such as

NationsBanc Montgomery Securities'

Jonathan Joseph to suggest that both companies have realized they can't fight Texas Instruments alone. Then, in September, Lucent restructured its Microelectronics management.

"Lucent has got to be worried," Joseph said. "Otherwise they wouldn't have gone into the joint venture with Motorola." NationsBanc hasn't handled offerings for Lucent, but it has for Texas Instruments.

The restructuring could allow Lucent Microelectronics to stay on a more focused strategy. "We are always asking ourselves," said Khan, "Are we in the right markets?"

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