Charles Winston, GSI Lumonics President/CEO

Charles Winston became president, CEO and a director of GSI Lumonics Inc. (Wilmington, Mass.) following the March 1999 merger of Lumonics Inc. and General Scanning, where he had been CEO and a member of the board of directors. With expertise in telecommunications and electronics, Winston was a senior vice president with Federal Express Corp., where he established and directed the electronic product division and created the world's first document transmission service. He has a B.S., cum laude, in physics and mathematics from the City University of New York; an M.S. in physics from Rutgers University; and an M.B.A. in marketing from the University of Southern California. GSI Lumonics produces laser-based manufacturing systems for wafer and die marking, and memory repair production systems.

SI: Earlier this year, GSI was restructured. How was the business affected?

Winston: We've done several things since to reposition ourselves by getting our cost structure in line with the projected business environment. Like so many others, we'd originally thought that the semiconductor and electronics industries, which had been in a sharp downturn since the beginning of 2001, would show signs of recovery early this year, or certainly toward the middle of the year. It became obvious that things would continue to nose-dive during the first part of this year, and looking at the back half of the year we weren't seeing any recovery either.

SI: Just about everyone expected some recovery. What happened?

Winston:

Charles Winston (Source: GSI Lumonics)

SI: Those must have been difficult decisions.

Winston: Very much so, particularly since as a company we've prided ourselves on providing employment for people. We hire with the intention of giving people a good career opportunity. When the business turned down as dramatically as it did, we were willing to carry some excess capacity and keep the good people onboard for the upturn. However, when the upturn did not come within two or three quarters, we couldn't afford it. So we resized ourselves from being a $90M-per-quarter business, which is where we were in 2000, to about half that or roughly a $40M revenue run rate per quarter. We're striving to get close to break even at that level. Letting go of any further capacity or engineering people would put us in a position where we'd be in danger of being unable to take advantage of a recovery.

SI: What other difficulties did you encounter during the restructuring?

Winston: The major issue in restructuring is reassigning priorities within the business. With fewer resources available the assignments to be worked must be fewer, with higher assurances of success. The employees must see a success path to be reassured and remain dedicated and focused. There's always a lingering feeling that, if they don't see orders pouring in soon, they're going to become concerned, and some of the better people are going to begin looking around. So you try to hold on to those good people, mainly by bringing them into being part of the success path. Another problem is excess real estate. That requires getting out of leases or selling off real estate — difficult because the real estate market's timing appears to always be 180° out of phase.

SI: What does GSI look like today?

Winston: We're certainly a leaner company. We're getting closer to the break-even point. We took most of all the one-time restructuring charges in Q1 and Q2 to clean up for severance pay, reduction of value in buildings, and diminishment of deferred tax assets — items that are no longer useful in the balance sheet. We have a better prospect of getting to profitability at a lower revenue level than ever before. We've taken our revenue break-even point from about $65M per quarter to below $50M at this time, and are working to get to break even at the current revenue level. We've also worked hard to maintain a strong balance sheet. In our Q1 results, we raised our cash deletions from $130M to about $150M from the beginning to the present, by reducing inventories, collecting receivables and being careful about capital expenditures. Over these last five quarters, although we've lost money, we've been cash-positive. Recently, we got a refund on our prepaid income taxes, which were estimated on the basis of returning to profitability.

SI: So, now that the dust has settled, what are your short- and long-term plans and strategies?

Winston: Short term, obviously to continue working diligently on building customer relationships. Although at the moment they're not buying, we want to be there to support them by providing service and spare parts, and applications support for their existing products; and to continue working on their future needs and ensuring they understand we're committed to the long term. Second, to continue development work on new products that will be extended beyond a year. Customers want to see a long-term technology roadmap.

SI: You mentioned providing support during lean times. By doing that, aren't you giving more than you're getting?

Winston: That's always a danger, because the customers themselves are trying to husband their cash and cut excess expenses. We've been trying to encourage them to think about things that they're doing, which could be outsourced to us.

SI: Such as?

Winston: Equipment maintenance work. It isn't cost-effective for them to do that. We're trying to encourage customers to think in terms of being in a long-term relationship with us, and outsourcing to us what they don't really need to do themselves — saving themselves the fixed cost of doing it.

SI: What are some of the changes that your customer base is requesting?

Winston: Increasingly, customers want to restructure their businesses to enable them to avoid high fixed costs. They're looking for a faster turnaround when they place an order, they want the product delivered quicker and to be on-line sooner than before. Thus, when an upturn takes place, they can jump quicker by adding production capacity and pumping out profitable product, because they are all anticipating that when the business returns — and it looks like a shallow, rather than a V-shaped recovery — it won't stay up for a long time, but will downturn. We may have to live with severe fluctuations with shorter periodicity. If that's true, we must respond quickly and get our cycle times down. We, too, are working on outsourcing. We're taking product that we used to build in-house and have the larger subassemblies done for us by other vendors, with an understanding that they'll be able to respond quickly by giving us a subassembly we can put together with others and build the system, load in the software and deliver it to the customer quicker.

SI: So your customers' demand for faster turnarounds is forcing you to outsource some of your capabilities for the same reason?

Winston: Right. During 1999 to 2000 we had anywhere from six- to 16-week lead times with some products — from the time we got the order to when we delivered. Now, lead times for some of those same products would be in the four- to six-week range. That's how much we've had to compress, and we are looking for even other opportunities to make these cycle times even tighter.

SI: And not have to carry large amounts of inventory?

Winston: Correct! In the last cycle we had inventories of upwards of $95M. Now they're down in the $50M to $56M range. We need to take this down further while still being able to deliver the product in a much shorter time.

SI: Obviously, you must have dependable providers. However, doesn't it concern you that so much of your core competency is being outsourced? What happens if one of these links breaks?

Winston: We're carefully focused on what we consider, strategically, our core competency and the strategic value that we bring to things such as a laser system for use in a semiconductor production facility for either manufacturing DRAMs or marking wafers, manufacturing mixed-signal devices, etc. We don't bring value to building the frame that houses the system. The frame, the wiring harness along the chassis, the backplane — we don't bring any value there, so we have these things outsourced. We're willing to pay the vendor for the raw material — sheet metal for the covers, tubular steel for the frames. We buy it and have it sit on the shelf for us, all precut, so that when the time comes they can put it together. The same thing goes for our PCB manufacturers.

SI: It seems like you're poised to go. What do you see as your next growth areas, and how are you planning for them?

Winston: We view the transition from 200 to 300 mm as being full of opportunities — the equipment for DRAM manufacture that we're selling, being purchased for 200 mm lines running now, with the understanding that it can be used on a 300 mm facility when 300 mm begins to turn on. Some 300 mm wafers are going through today — this is also true for the wafer-marking products, which are shifting to 300 mm. The latest change we see is that, as more chip-scale packaging is taking place, we have a product we have been selling for some years, which we have upgraded for high-level production to mark the backside of each chip while it is still on the wafer before being diced.

SI: Is growth getting more difficult?

Winston: Definitely. It's more difficult to find growth opportunities, and we're seeing the semiconductor industry's overall growth rate slowing down. We aren't going to be looking at 22, 24% a year growth year over year with some downcycles, but still averaging some 16 to 17% over a five-year period. I believe we're going to have single-digit growth in the industry, making it difficult for companies like ours to maintain growth over prolonged periods of time if we remain where we are. We must figure out additional services and values to add.

SI: What are the origins of this industrywide slowdown you referred to?

Winston: We've become a far more mature industry. When you look at things like PCs, laptops, PDAs, pagers and cellphones, and go back 10, 15 years ago, there was small penetration — 15 to 30%. Today these penetration rates are probably up in the 60 to 80% range. Every high school kid has a cellphone and a laptop. Most homes and individuals already have the devices, and there isn't as great a growth opportunity as there once was. Before, with automobiles, it was only the expensive, top-of-the line cars that had the sophisticated electronics controlling airbags and ABS — that penetration has gone down to low-end, first-purchase cars. All of this in the beginning drove the need for mixed-signal devices, memory, microprocessors, etc. Now, the latest wave is navigation systems, but we're getting an increasingly higher level of penetration, so the growth rate must slow down. Most high-end products have become commoditized — this is happening across the entire electronics sector.

SI: How do you view the mergers taking place in the industry?

Winston: It's a necessity. The market just will not support the number of producers and production costs. When you talk of a cost of $2B for a greenfield fab, there's only a handful of companies capable of doing it. Consolidation is necessary to provide the capital formation. We'll end up with an oligopoly of five, eight companies. We're seeing it in the semiconductor industry and in the electronics manufacturing sector. Most companies needing manufacturing, whether it is Hewlett-Packard, Motorola or IBM, used to make their own PCBs. Now they outsource, and we're looking at a small number of very large multibillion-dollar service organizations that manufacture PCBs for everybody. The capital equipment purchasing is being concentrated into a handful of semiconductor and electronics manufacturing sector companies.

SI: Since most innovation appears to come from small companies, will this trend put the brakes on new developments?

Winston: It will get more difficult for start-ups. Many companies now won't do business with smaller companies. They want someone that's $50M or $100M in sales minimum, and provides worldwide support to service their equipment because it gets installed in plants in Asia, Europe and North America. So unless the small start-up has a killer product with lots of patent protection, it'll find it difficult to get anywhere. Besides, venture capital is increasingly scarce, particularly for that second round of financing.

SI: The buzzword today is "China." Are you planning anything there?

Winston: We established an office in Hong Kong 10 years ago, knowing that the region would return to mainland jurisdiction, making it a point of entry for us. We've installed over 400 laser systems in China for semiconductor and electronic product manufacturing applications. We have people traveling and working. Later this year, our Shanghai office will become a fully owned foreign entity. Over the next four years, we'll develop a much stronger presence in China. Many of our customer companies will move complete plants to China from Europe, North America and even other regions in Asia because of the cost structure. So we'll be ready with spares and service there.