Innovative lighting was the shining star of Cree for decades. Now, making parts used in hot new cars and cutting-edge mobile phones provides the Durham company’s glitter.
At Durham-based Cree, a light went on with the arrival of new CEO Gregg Lowe in September 2017.
More accurately, a light went off when the veteran semiconductor-industry executive succeeded Chuck Swoboda, who helped Cree grow from $6 million in sales to about $1.5 billion during a 24-year run, including the last 16 as CEO. Lowe immediately began a strategic review that would prompt a sale of its LED lightbulb business 18 months later. Lowe put his chips elsewhere, on nascent but promising markets for electric vehicles and the 5G technology standard for mobile phones.
Lowe landed at a Triangle company known as a technology pioneer whose achievements included commercializing the world’s first blue light-emitting diode (LED) in 1989. That advance led to creation of LED-based electronic displays that could employ the full color spectrum and light up hotels, convention centers, gas stations and many other venues.
Perhaps Cree’s most promising application for LEDs also carried the potential to turn its relatively obscure name into a major international brand: Replacing the centuries-old incandescent lightbulb. Blue LEDs made it possible to deliver a brighter, whiter light while significantly reducing power demand. They were expensive but long-lasting, and a steadily declining price prompted more uses, both industrial and residential.
In May 2015, after years of growth, research and development, and a bumpy financial performance, Cree and Swoboda were ready to redouble the emphasis on lighting and LEDs. To fund the plan, Swoboda announced a spinoff of Cree’s semiconductor-manufacturing unit called Wolfspeed. The business then had annual revenue of $124 million primarily from making semiconductors for managing power systems and radio-frequency devices. The more mature lighting and LED units were much larger, with yearly turnover of $770 million and $550 million, respectively.
Shortly after making its spinoff plans, Cree received several offers to buy Wolfspeed outright, a hint of the unit’s value. Swoboda canceled the spinoff plan and put the unit up for sale. In July 2016, the company inked an $850 million sale to German semiconductor maker Infineon Technologies, a spinoff of Siemens that specializes in the automotive industry. But regulators at the Committee on Foreign Investment in the U.S., a federal agency empowered to veto the sale of U.S. technology companies to foreign entities, had different ideas. CIFUS nixed the transaction, and it was terminated in February 2017 for reasons that haven’t been disclosed.
Three months later, Swoboda said he was leaving Cree by the end of the year. “My decision to change my work-life balance follows a recent medical issue, which was resolved, and which caused me to reevaluate my priorities,” according to a press release.
Cree’s board was ready for a change. In a statement, lead director Robert Ingram said Swoboda and directors “agree that now is the right time to accelerate the process to identify a new CEO to lead Cree and further grow our businesses.” Ingram, 77, is a former CEO of pharmaceutical giant Glaxo Wellcome who has served as a director, investor and adviser to many Triangle companies. He is no longer on Cree’s board.
Swoboda’s departure thrilled investors, who had grown disenchanted with Cree’s sluggish stock performance and were skeptical of plans to go head-to-head against bigger competitors including Asian-based companies with government backing selling relatively low-margin lightbulbs. In the two days after Swoboda’s move was announced in May 2017, Cree’s stock jumped 12% to about $24.50.
It’s not that the veteran Cree CEO hadn’t created a successful business. “Cree monetized the core technology around the LED the best that they could,” says Jed Dorsheimer, an analyst with Vancouver, British Columbia-based Canaccord Genuity. But, he adds, “The decision to vertically integrate was a risky one in a market dominated by state-owned enterprises and companies like GE.”
To give Cree a fresh start, the board recruited Lowe, who had worked at Dallas-based Texas Instruments for 28 years through 2012. He had been considered a potential CEO of the electronics giant until he got the top job at Freescale Semiconductor that year. The Austin, Texas-based company was spun off by Motorola a decade earlier, then was acquired by Blackstone Group in 2006. It went public a year before Lowe’s arrival.
A Cleveland native and electrical engineering graduate of Rose-Hulman Institute of Technology in Terre Haute, Ind., Lowe was the top exec for three years at Freescale. The company had about $5 billion in annual revenue when it was acquired by Netherlands-based NXP Semiconductors for about $12 billion in December 2015.
A year and a half later, Lowe moved to North Carolina to run Cree. His first task was taking a close look at the competitive position of Cree’s three primary business lines: lighting, LEDs and silicon carbide. “We spent the first six months doing analysis,” he says. “Where can we be a clear winner? We thought we had tremendous differentiation with silicon carbide and our Wolfspeed business.”
OUT OF THE LAB
Indeed, silicon carbide is for Cree what ground beef is for McDonald’s: the essential ingredient. Founded in 1987 by engineers out of N.C. State University, the company grew to be a global leader in the obscure field of substrates, the materials used to fabricate microchips, radio-frequency processors, and other electronic components that are used in products such as cellphone base stations, the power grid and, perhaps most important, electric cars. While most substrates have been silicon based, Cree’s expertise lies in a different corner of the market, silicon carbide, where its market share tops 60%.
Silicon carbide-based products offer some technical advantages but are generally more expensive to produce. This was a problem in the lightbulb business where the superior properties were often trumped by the lower costs of other materials. But cost is less of an issue with more expensive, value-added products, including electric vehicles.
Lowe’s arrival in Durham coincided with increasing headlines about electric vehicles, aided by Tesla founder Elon Musk’s nonstop hype for his revolutionary cars. Cree’s new CEO, who gained lots of auto-sector knowledge from his time at TI and Freescale, shares the view that the industry is on the verge of a long run of dynamic growth as consumers opt for electric vehicles over traditional combustion engines.
In May 2019, Lowe made a historic shift in Cree’s strategy, selling the LED lighting fixtures business to Sycamore, Ill.-based Ideal Industries for $225 million, with a potential for $85 million more if sales are strong. The move, which did not include the LED chips and components unit, left Cree “well positioned as a more focused semiconductor leader,” Lowe said at the time. “Cree’s technologies are at the forefront of the automotive industry’s transition to zero-emission electric vehicles, the telecommunications industry’s move to faster 5G networks and the continued ramp up of LEDs for specialty applications.” The transaction, Lowe said, would provide significant resources to help accelerate Wolfspeed’s growth.
The bet seems to be paying off as the world shifts to electric vehicles, just as Musk predicted. About 2.1 million electric vehicles were sold in 2019, accounting for 2.8% of the global market and a 40% increase from the previous year, according to the International Energy Agency. By 2024, they are expected to make up about 5% of the global car market, then 20% by 2030, by Lowe’s estimate. “EV is the biggest opportunity we have,” he says.
Analysts at Canaccord are more bullish, projecting that as many as 180 million battery electric vehicles will ship cumulatively worldwide by 2030. Globally, car companies and their suppliers have announced more than $300 billion in electric vehicle investments, Cree says. Its products also show up in fast chargers, a critical piece of the infrastructure needed to make the vehicles practical.
Had Cree sold Wolfspeed three years ago, it would be in a much different place; Wolfspeed’s strength in silicon carbide has positioned the company to take advantage of these changes, Dorsheimer and other analysts say.
The key concerns for electric vehicle customers are how far they can travel between charging sessions and their price, in that order. While silicon carbide is more expensive, it allows manufacturers to extend the range of their vehicles, which keeps customers happy. Dorsheimer cites an example from a few years ago when Tesla added $3,000 worth of components to its cars, resulting in a 20% gain in the overall mileage of the Model S, which starts at about $75,000. While silicon carbide was just one part of the advances included in Tesla’s new battery-management system, it was critical to improving performance. Tesla was able to charge as much as $15,000 more for the added range, according to Dorsheimer. “It’s a very clear value proposition.”
Lowe trumpets the cost-value proposition, too, pointing to a Goldman Sachs Group study that concluded that “every incremental dollar invested in silicon carbide in an EV returns from $3.50 to $7.00.” Cree’s products typically turn up in subsystems — products like powertrains that are built by suppliers including STMicroelectronics, ZF Products and Infineon Technologies — that are in turn sold to Tesla, Volkswagen and other manufacturers that do the final vehicle assembly. While Cree won’t name which automotive companies use its products, Dorsheimer says that ST is Cree’s biggest customer for silicon carbide wafers, and that Tesla is ST’s biggest customer. The bottom line: Cree is plugged into the automotive industry’s most innovative, fastest-growing player, which enjoyed a market value of more than $750 billion in mid-July. That was about 10 times the combined valuation of Ford and General Motors.
Cree’s products are likely to continue to take market share. A Canaccord report notes, “As technology accelerates, certain electric systems require faster, smaller and more efficient design, and [silicon-carbide]-based power electronics seem to be at the prime of development to occupy the niche, where traditionally established materials can no longer keep up.”
This is true not only for cars, but for buses and trucks as well. In June, Cree announced a deal with Zhengzhou Yutong Group, a Chinese manufacturer of electric buses, to use Cree’s products. It’s the first use of silicon carbide in a bus in China.
THE TROUBLE WITH 5G
As if hanging around Tesla isn’t enough, Cree also has big potential in the exploding market for 5G, the fifth-generation technology standard for cellular networks. The big mobile telecoms started deploying 5G last year, and some experts predict as many as 1 billion users will be on the network by 2023.
Here again, Cree is well positioned. Its offering — gallium nitride radio-frequency devices — has a number of technical advantages seemingly tailor-made for 5G, including wider bandwidths, greater efficiency at higher frequencies, and a smaller footprint for base stations. Unfortunately, politics have slowed Cree’s prospects to book revenue from sales in the giant, growing Chinese market. China’s Huawei, which has driven much of the growth in 5G, is a key target of President Donald Trump, who views the government-supported telecom as a threat to national security. He’s blocked U.S. companies from doing business with Huawei and pressed other nations to take similar action.
With its centralized economy, China has successfully promoted the rollout of 5G and the availability of 5G phones. In the U.S., the effort has been more fragmented and slower. Analysts at Swedish telecom manufacturer Ericsson expect North America to catch up in a year or two and are projecting that 75% of North American cellphone users will convert to 5G by 2025. For now, however, China is the biggest market, and the inability to sell there is hurting U.S. suppliers like Cree.
As a result, Cree has scaled back its expectations for the technology. Cree still has plenty of growth opportunities in electric vehicles and, to a lesser extent, power management for the power grid through customers such as Switzerland’s ABB, which has a big joint-venture operation in Raleigh with Japan’s Hitachi.
Such growth potential sparked Cree’s plans to build the world’s largest silicon carbide manufacturing facility near Utica, N.Y. It had originally been slated for Cree’s Durham campus, but the Empire State provided an astounding $500 million in incentives for the $1 billion plant, which was announced last September.
Fortunately for North Carolina, the company is also adding 400 jobs at a “mega materials factory” in Durham, expanding its silicon carbide production capacity by a factor of 30. The goal is to triple Wolfspeed revenue from about $500 million to $1.5 billion over the next three years. The expansion should result in lots of job opportunities for engineers, skilled technicians and other support staff in the Durham area.
Wall Street is on board with the strategy, based on Cree’s stock performance. Shares traded at about $64 in mid-July, having increased by more than 150% since Lowe arrived. The S&P 500 Index gained about 30% in the same period.
There’s more to come, Lowe says. “If you believe in electric cars, if you believe range [for those cars] is important, if you believe in silicon carbide, you have to believe in us.” ■