Nat Semi announces PC-on-a-chip

The technical feat of combining 43 different chips onto one sliver of silicon is designed to appeal to consumers who are tired of overcrowded desktops and to accelerate the development of fully functional handheld computers. But the development of the Geode SC1400, as it is called, may be a pyrrhic victory for National Semiconductor's chief executive officer, Brian Halla, and his chief lieutenant on the project, Israeli engineer Sidi Yomtov.

The chip comes too late to rescue National Semiconductor, based in Santa Clara, California, from the price-cutting war it waged and lost to Intel Corp. with its Cyrix PC microprocessor unit. In May, Halla admitted defeat and announced that his company would sell its Cyrix. But it may come just in time for National Semi to save itself, much like Intel did in the 1980s, by making a strategic exit from a losing market in favour of a hot one.

"We're taking a page from [Intel's] book with this chip," says Halla, referring to Intel's departure from the memory-chip market. And for once, Halla may indeed have an edge over Intel.

National's chip will serve as the brain of "information appliances," devices that provide easy access to the Internet -- and a market that is expected to grow from 13 million units this year to 65 million in 2003. Because National's chip consumes very little power and can fit in much smaller packages than Intel chips, it can eliminate the need for bulky fans and fit inside a palm-size chassis. With the exception of a few separate chips to store memory, National's chip also will wipe out the costs of dozens of previously required PC chips, says Kevin Hause, an analyst at International Data Corp. in Mountain View, Calif. While it runs at a slow 266MHz, National plans speedier future generations but won't have to start from scratch.

"It's a great technical achievement that sets National apart from everybody else in this space," Hause says. "Now they have to get the big customers and then find out if consumers really want this stuff."

Halla is betting his career and National's fate on the success of the chip, scheduled to appear in a wide range of products early next year -- from network computers to car navigation devices. America Online Inc. and Royal Philips Electronics NV are expected to use it in a set-top box that tap into the Internet, according to people familiar with the matter. Other likely customers include Wyse Technology Inc., a San Jose, California, Web terminal maker, Chinese PC maker Legend Computer Systems Ltd. and Taiwanese electronics giant Acer Inc.

"I believe in the next decade that information appliances will be one of the dominant devices within the so-called Internet world," says Acer Vice President Rick Lei. Expectations like that put considerable pressure on National to deliver. And that puts pressure on the chip's designer, 47-year-old Yomtov. Coordinating a team of 90 engineers in four different time zones, he is at work or on the road so much that his three daughters in Tel Aviv erected a life-size cardboard cut-out of him in the family's living room. "I put my entire prestige of two decades at National behind this project," says the bleary-eyed Yomtov. "I was afraid that if it didn't work, I might not be able to show my face."

Yomtov accepted the assignment from Halla when the CEO visited Tel Aviv in February 1998, where Yomtov works at a National facility. A veteran PC component designer, Yomtov had never directed the design of a PC microprocessor. He began by visiting potential customers and stitching together teams of engineers in India, Israel, Silicon Valley and Longmont, Colorado. Each team specialised in a different piece of the chip, such as the microprocessor, video, graphics, and input-output components.

In 1996, when he joined National Semiconductor as CEO, Halla soon began acquiring all the pieces he needed to create a "system on a chip," a computer that could rely upon a single chip for everything but temporary memory. Halla had also ordered engineers to design the pieces so one day they could be combined in one chip.

Halla's biggest gamble was buying the Intel-compatible microprocessor designer Cyrix for $389m (£237m) in stock in 1997. Halla insisted upon Cyrix rather than another type of microprocessor, because it ran Microsoft software. Other chip makers bet that faster and smaller RISC (reduced instruction set computing) chips would work better in appliances. But Halla contends that Intel compatibility is crucial when accessing most Web sites. If someone wants to listen to audio on a Web site, for instance, it is more likely that the software to do so will be specially written to run on an Intel-compatible chip. By August 1998, Yomtov saw that he couldn't play the "megahertz game" and match Intel's chip speeds. He asked for and received approval to shift direction from a "PC on a chip" to an "information appliance on a chip." He added better video processing to the chip so that it could shine when displaying an image on a TV screen, and added basic communications capability as well. But rather than lose time designing those new functions, Yomtov only had to turn to other National divisions for help integrating chips that already had been created independently.

By this spring, the price war was taking a toll. National reported a loss of $783.5m, including a $688.4m restructuring charge related to its exit from the PC market, for the fiscal fourth quarter ended May 30. Halla pulled the plug on Cyrix in May and then sold it to Taiwanese chip maker Via Technologies Ltd.

With the Geode, however, investors may give Halla one more chance. The company's stock price has more than doubled since his decision to exit the PC microprocessor business was announced, although the stock run-up may have more to do with a recovery in National's mainstay analogue-chip business. Halla says the analogue recovery has been so strong that the company can return to profits by the fiscal second quarter ending Nov. 30. Any added revenue from information appliances will be gravy, he says.

Yomtov, meanwhile, expects the next version of his chip to be ready in six months. "I know that Intel will come after us," he says. "I think better under pressure."