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September 2010 Executive Interview

September 14, 2010
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MWJ: At IMS 2010 you focused on five post-crash trends and you were open about the impact on Agilent. So, when did Agilent first witness the crash in the electronics industry and how did it manifest itself?

GP: We watched the semiconductor industry closely and it became clear to us in early 2008 that we were in for a downturn. The severity of the downturn was not apparent until September of that year when the financial crisis became evident to everybody.

Agilent took early action to reduce our spending and focus on core product lines. Throughout the downturn we continued to invest in new products such as our new spectrum analyzers and oscilloscopes.

MWJ: Which sectors were particularly affected and were there others that came out of it fairly unscathed?

GP: In this case every sector was impacted significantly. Of course anything associated with manufacturing went to nearly full-stop for a while and there were a number of semiconductor and component vendors around the world that went out of business. Academic/research and Aerospace Defense were, of course, less impacted – those markets have less cyclicality to them.

MWJ: You have previously mentioned that you see opportunities to apply electronic measurements to environmental monitoring, green initiatives and the next generation of mobile connectivity. Did the economic downturn just delay funding for these applications and is that optimism returning?

GP: We see continued investments in alternative energy and green initiatives. In fact venture capital has been flowing to these areas throughout the downturn. Solar will continue to grow with some help from government programs as well as the natural improvements in performance that are a hallmark of the semiconductor industry.

MWJ: How do you see these sectors developing in the next three to five years?

GP: Clearly wireless technologies are being embedded in the fabric of life. In addition to communications and the explosion of smart phones, wireless enables security, remote monitoring and security, remote medical communications, etc. Much of this is an economic play; for example, the ability for a doctor to monitor a patient’s vital signs remotely saves time and can detect problems earlier than otherwise possible. Both of these offer large economic benefits to society. The challenge to this will be a country’s ability to enable these technologies to succeed and transition capital from existing processes and practices. It’s likely that the enduring global economic slowdown will accelerate these transitions because at some point it will become obvious that they save time and money.

We expect alternative energy investments to continue over the next 5 years as I think everybody would predict that the cost of oil will increase again at some point.

MWJ: Agilent appears to be shifting its focus towards life sciences. Can you shed some light on the situation and explain Agilent’s plans for its Electronics Measurement Group?

GP: Throughout HP/Agilent’s 70-year history there have been external events which have created opportunities for us to add value to new markets. The recent downturn created an opportunity for Agilent to proactively leverage our strength in electronics into our chemical analysis and life sciences business. A look inside any of our chemical analysis products for example will reveal a great deal of electronics. And a visit to any life sciences lab will reveal electronics equipment being used along side bio/analytical solutions.

Electronics is at the core of measurement – once we capture the data using a specialized sensor much of the process of analyzing it is common. The downturn enabled us to see that more clearly and take advantage of our leading electronics heritage.

Existing electronics opportunities are not going away either. There is still a tremendous investment in semiconductor technologies and there are plenty of opportunities for Agilent to make a contribution. Surveillance is all about electronics for example. This is a large and growing area and Agilent can utilize our spectrum monitoring capabilities to deliver world-class solutions.

Our electronics test business is as healthy as it has ever been. We are aware that we serve a highly cyclical market and have created a business model which enables us to be successful across the cycle. We are better poised now to capture new business opportunities with a smaller and more focused team.

MWJ: At IMS 2010, you mentioned “movement from the core to the edge”. Please explain what ‘edge devices’ are?

GP: Edge devices reside at the end or edge of the network. I use this term liberally to identify any device – such as a sensor, radio, medical or process monitor – that is connected to the network. The number of edge sensors will grow geometrically – think of all of the opportunities to connect devices to the network.

The core on the other hand will grow at a slower rate – but is vital in sustaining the growth of edge devices. As edge devices – mainly smart phones – demand more bandwidth for video streaming, service providers are finding that they must “light up” more “dark fibre.” If you recall the telecom crash of 2001 – many predicted there was enough fibre in the ground to last 20 or 30 years. Agilent Labs thought that demand would begin to press against available supply, based on 2002 technologies for utilizing optical bandwidth, by about 2014. We aren’t too far off from that prediction.

MWJ: Would you include over-the-air testing as part of this emerging focus on engineering to the edge and what is Agilent’s current activity in the OTA sector?

GP: As you know Agilent divested the Assurance business to JDSU earlier this year, so we’re not focused on operational assurance at this point. At the same time, we continue to have solutions for over the air testing in the research and development phases, and we’ve recently entered the Field service arena with some of our handheld products. In fact we just introduced a handheld spectrum analyzer with several applications in early August.

MWJ: As more smart phones enter service, there is likely to be a strain on infrastructure from core-to-edge. What are the main technical challenges for networks, handset OEMs and even chip manufacturers with the proliferation of new internet-enabled mobile devices? How do you see Agilent having an impact?

GP: The strain will be felt everywhere and will migrate from point to point. Some of the more difficult challenges across the entire internet can be found between high mobility devices (e.g., cell phones) and base stations as well as on the backhaul between remote base stations and the central office. There will be more demand on the optical core as mentioned above. Each area presents unique challenges and Agilent offers solutions for them.

MWJ: Agilent is seeing a bifurcation of the electronic food chain, with the industry’s needs falling into the ultra-high performance camp or the maximum price/performance camp. Is the former being driven by the most advanced R&D requirements while the latter is driven more by the evolving needs of high volume testing?

GP: The main driver of this bifurcation is that edge devices – from which most of the volume in electronics now comes from – don’t always require the highest performance electronics. Simple sensors for example often feature embedded, low-cost processors and lower bandwidth communication protocols such as ZigBee. This drives a great deal of volume of price-competitive components and sub-systems.

Of course, smart phones do require very high performance silicon and associated design and test products as well as very skilled RF and high speed digital expertise. These are also high volume but with fewer players and fewer, but specialized design teams.

On the other end of the spectrum, high performance computing and switches will continue to require bleeding edge electronics. As an interesting example these customers are worrying about the surface roughness of the copper traces that comprise the high speed digital interconnect in a switch or server. This means that nano-scale measurements will be needed to capture the topography of the copper trace; which is then turned into a model that can be used in simulation of high speed digital communication channels.

MWJ: What are some of the markets most in need of optimum price/performance test-equipment?

GP: Every market has specialized needs. Clearly for those customers embedding a Bluetooth radio in a static (fixed location) sensor, simple Bluetooth design, characterization and test tools are all that is needed and less headroom is required. One-box solutions that feature ease of use and have just the right features are what the market needs. Agilent develops common platforms that have broad applicability and then customizes them for specific markets.

MWJ: What do you think is a good strategy for a company to maintain its investment in test equipment?

GP: In my experience successful engineers and managers purchase design and test equipment based on a set of criteria that includes but is not limited to:

- Fit for their measurement need. Don’t over-buy – but don’t neglect future trends.
- Total cost of ownership – that is more than just the purchase price but such factors as quality, cost of repair and calibration and after-market price.
- Trust and integrity of the supplier. Measurement is all about integrity and customers expect that their vendor will stand behind both their product as well as the measurement science behind it.

There are signs that while many companies are not adding headcount or other fixed costs they are making capital equipment purchases to improve the productivity of their employees. This trend could last for a while as many companies continue to build strong cash positions and are looking for opportunities to get a higher return versus putting it in the bank.

MWJ: At IMS 2010 you mentioned that it will be crucial to lower the cost of test, which dominate capital expenditures when it comes to test-equipment investments. How can this be achieved?

GP: The total cost of test for many products is declining when you look at the cost per unit. Higher volume and integration of test suites into T&M products help reduce the total cost of test. An important point here is that it’s not just the cost of the equipment; it’s also the total cost of test development and maintenance. The cost of capital equipment in some test stations is just a fraction of the total cost of test.

This trend will continue. Companies seek competitive advantages in different ways, so some will seek to outsource production including test, others will outsource production while retaining control over test and still others will maintain everything in-house but seek ways to become more efficient. Of course A/D system integrators will require in-house test for security purposes. Test has always been a critical element in electronics and each time there is a reduction in test cost of a common item there will be a new, demanding opportunity for test in another area.

MWJ: The IMS 2010 in June is a while ago now. Have there been new developments and what is your assessment of the current state of the market?

GP: The biggest change is that it’s clear to everybody that global economic uncertainty is here to stay and that we will see further weakness in economies around the world in the next 12 months. We see customers acting defensively to ensure that they remain viable in the next downturn.

The magnitude of the downturn and the speed of the recovery caught the market by surprise. Because you can’t predict what will happen next you must remain nimble. Agilent’s business model enables us to be more flexible while maintaining strong customer satisfaction and investments in our product lines.

MWJ: The next big show in the RF and microwave calendar is European Microwave Week at the end of this month. What do you think will be the key issues that the industry will be addressing in Paris and what will Agilent’s main message to visitors be?

GP: EuMC has been a showcase for new products and breakthrough research. Agilent is proud to continue our tradition as a sponsor of this event. I always look forward to talking with leading researchers from around Europe and the world. I expect that there will be focus on sub-Terahertz silicon and the increasing trend of nano-scale structures as the basis for next-generation electronics.

Agilent will continue to showcase our solutions for tough technical problems. This has been a core of HP/Agilent for 70 years and this will continue. We believe it’s what sets us apart in the industry.

We will showing solutions that address the merging of electronics and nanotechnology. Our high performance customers are finding that the structure of their devices is increasingly impacting the performance of their systems. I mentioned copper surface roughness as an example. Instruments that can measure surface roughness and simulation tools that can model it with the right balance of accuracy and speed will become increasingly important to the industry.

We also have a wide range of new product introductions from across our RF/uW portfolio that are a direct result of our continuing investments during the recession.

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