Early last year, Cree’s chip-making Wolfspeed subsidiary was akin to the company’s redheaded stepchild. Wall Street commentators saw it as a high-cost, low-profit business and applauded the electronics manufacturer’s plan to unload it to a German competitor.
Nowadays, Cree’s top executives see Wolfspeed not as a liability, but as the key to the company’s future. They’ve told investors they think it can grow from generating about $221 million a year in revenue to about $850 million a year, and do that by 2022.
Developments in the car industry in particular mean “the market flipped’ for one particular set of Wolfspeed’s offerings and gave Cree an opportunity “you rarely see, a business that has the potential for growth for over a decade with [market] penetration rates increasing” at the same time, Gregg Lowe, Cree’s CEO, said during a February presentation to investors.
The Durham company underscored its strategy switch this spring when, instead of selling Wolfspeed to Infineon Technologies for $850 million as it was planning at the start of 2017, it bought a key part of Infineon’s chip business for about $430 million.
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The reversal began after the Committee on Foreign Investment in the United States blocked the plan to sell Wolfspeed on national-security grounds.
A security issue
There was little explanation for the decision at the time, but Lowe acknowledges that the agency’s veto likely resulted from the fact that Wolfspeed, based on Cornwallis Road in Durham, is one of the 75 chip factories nationwide that the U.S. Department of Defense labels a “trusted foundry” for the military and its contractors to buy electronics from.
That makes it a key piece of what the Pentagon calls the “defense industrial base,” and it’s a sensitive issue for the military because electronics manufacturing is a global business.
Defense Department officials see a globally interlinked network of designers and fabricators as a security risk, one where potential adversaries like China can either steal or sabotage technology the Army, Navy, Air Force and Marine Corps rely on.
The trusted-foundry program exists to make sure there are factories in the U.S. that can “meet the confidentiality, integrity, availability, performance and delivery needs” of the Defense Department and other federal agencies, the Pentagon said this March in its Fiscal 2017 Annual Industrial Capabilities report to Congress.
In practice, a trusted foundry is one with a lot of auditing controls in place to assure that the buyer knows precisely what went in to the making of a chip, said Nick Justice, a retired U.S. Army major general who heads the PowerAmerica Institute at N.C. State University.
When it comes to military electronics, it’s critical to “know absolutely what’s on that chip and that it’s controlled and accounted for,” said Justice, who before retiring headed the Army Research, Development and Engineering Command. “You can go back and trace it to a lot [or] a wafer, you have the ability to ensure your supply chain out there.”
Wolfspeed’s main offerings are multiple lines of off-the-shelf power-supply components and radio-frequency chips, with uses in everything from vehicles to radar. But it also runs a custom-chip business that in theory can give customers needing a chip like no one else’s a place to get it in as little as five months from design to delivery.
Electric vehicles driving growth
But military applications aren’t really part of the growth prospects ahead of Wolfspeed, Lowe said.
The sector is “more the foundation of the business,” a reliable source of revenue over time, he said. “It’s not a high grower.”
The real opportunity, Lowe said, is the car industry’s deepening commitment to producing electric vehicles and the cell-phone industry’s impending development of 5G networks.
In both cases, the silicon carbide and gallium nitride chips and components Wolfspeed makes allows the circuits it’s used in to operate more efficiently. For an electric car, that can mean better range, faster charging or just a smaller battery. For a cell-phone network, it can mean better bandwidth and the resulting ability to push more data faster.
Cree’s confidence in the electric vehicle market comes from the fact that eight different automakers — Ford, General Motors, Nissan, Toyota, BMW, Mercedes, Volkswagen and Volvo — are boosting their investment in the technology.
Environmental regulations, including those in Europe, are helping drive things in that direction.
“The car industry has hit a tipping point and is definitely moving toward electric vehicles,” Lowe said. “Some cities — Paris and London are two — have said by certain date they will not allow gasoline engines inside the city limits.”
Even if it starts small, car-company purchasing would create a major opportunity not just for Cree but the entire “power electronics” industry because automakers typically do things at a much larger scale than almost anything else in the business world, Justice said.
“It’s high production and high volume,” he said, explaining that each electric vehicle likely will need several of the kinds of components Cree/Wolfspeed makes. “The automotive industry is going to be the first big adopters and frankly, we need them to be. It’s going to be a fascinating roller coaster ride over the next few years.”
Justice added that if things play out as he expects, Wolfspeed’s products and those of its competitors will also find wider uses in both the power grid and the aircraft industry as they modernize as well.
The 5G opening, meanwhile, involves companies make relay-station hardware. Gallium nitride chips have given “a nice boost to 4G base stations,” and 5G has even higher efficiency and bandwidth requirements, Lowe said.
“It’s almost to the point where you can‘t do 5G without gallium nitride,” he said.
Cree bought out Infineon’s radio-frequency chip business with an eye toward adding manufacturing capacity that can serve the cell-network industry, Lowe said. And it’s also been putting money into the power-electronics side of the business, again adding production capacity even as “customers are coming to us trying to figure out how we can do long-term supply agreements.”
On Tuesday, outgoing Cree Chief Financial Officer Mike McDevitt told investment analysts the company expects to plow $220 million into expansions of Wolfspeed’s production capacity in fiscal 2019.
Lowe added that Cree officials think that because of the auto industry’s needs, the demand for silicon-carbide-based power electronics from Cree and its competitors “is likely going to outstrip the supply for some time.”
Wolfspeed booked notable revenue increases in the second, third and fourth quarters quarters of fiscal 2018, but as of late June still only accounted for about 22 percent of Cree’s revenue. The company also makes lighting and LEDs.
“It’s early days for sure, but we’re definitely starting on a positive note,” Lowe said, in an interview, about the results of the strategy switch.