The last person you expect to meet in Migdal HaEmek is a believing Mormon and ex-wrestler who simultaneously quotes management gurus, William Faulkner, and Alice in Wonderland, and demonstrates the wonders of his chips using pictures painted by his granddaughter. Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM) (marketed as Tower-Jazz) CEO Russell Ellwanger, however, is all of those things and more. He has been sitting in his Migdal HaEmek office ever since he promised then-Tower Semiconductor controlling shareholder Idan Ofer in 2005 to take a company on the edge of the abyss and lead it to revenue of over $1 billion. For his part, Ofer promised to support the company for 10 years.
"Globes": Weren't you afraid? Couldn't you have failed?
Ellwanger: "I don't scare. I could have failed, but William Faulkner once wrote, ' Given the choice between the experience of pain and nothing, I would choose pain.' In the larger picture, if you are in the arena and fighting, you're doing something. The only failure is not to try."
Life on the edge?
"It has been said that if you aren't on the edge, you're taking up too much space. I'm not a man who takes wild risks, but in 2005, that had already been done, their money was already in jeopardy, and big things had to be done in order to refocus and save it."
After two major acquisitions, (US company Jazz and a fab in Nishiwaki, Japan from Panasonic), Tower Semiconductor is regarded as an almost surprising success in the semiconductor industry, which has been through ups and downs. The company had a $550 million debt in 2005 and its annual revenue was $100 million. Now a much larger company, it enjoys consistent double-digit growth, a negligible debt, and its 2016 revenue will probably reach $1.4 billion.
Meanwhile, the company has also changed hands. When Israel Corporation (TASE: ILCO) was split into two companies, its then-24% stake passed to Kenon Holdings Ltd (TASE:KEN: NYSE: KEN-WI). Two years ago, Kenon also said goodbye to Tower Semiconductor. When Ofer himself gradually parted with his shares in the company, it was left in the hands of the public, without a controlling shareholder. "He's completely out of the company, he sold everything," Ellwanger says. "I think that's good. He kept his ten-year promise to me, and we made the company profitable, so that he could make back his money."
Did he tell you he was selling his holdings?
"I didn't necessarily know that he was going to sell, but it makes no difference. Our mutual commitment was for 10 years. He was very fair, and did everything he said he would. Without Idan, the company wouldn't exist today.
"In 2005, the company had a big debt due for repayment in 2007, but its cash flow was negative - it burned $180 million every year - and it's very hard to repay debt with that. We refinanced the debt in 2007, and in 2008, when the two banks. Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI), were the creditors, they replaced part of the debt with convertible capital notes and rescheduled the rest (each of the banks converted $100 million to capital notes)."
"I believed with all my heart that in order to put the company back on its feet, we needed an acquisition (Jazz), and I couldn't do that without having the debt rescheduled."
Where did Ofer enter the story?
"The banks' condition for accepting paper instead of part of the debt was for Ofer to put the entire amount they were writing off into the company. They didn't have to write it off, because they eventually sold their stake and got more than they gave, but Idan had to put more money in, and it's not easy to put in another $200 million after already having invested in a company whose value is less than the money you're putting into it. It's true that he eventually did well and made a profit, but he couldn't have known at the time that this would happen, and the company would have died without it, because that was the banks' condition."
So both you and Ofer kept your commitment for 10 years. 12 years have passed. What are your plans?
"Now the enjoyable part has begun. We have cash, and a lot of things are happening. I can't foresee how long I'll stay, and part of it depends on how satisfied the board of directors is with me. But I'll be glad to see the fruits of everything that has happened, and to lead to company forward, including in new directions."
"She thought I was a crazy American"
Ellwanger began wrestling at age 11. There was a wrestling team in his school, and he was sent to competitions and became involved in the sport. When it came time to go to high school (his family moved to Las Vegas at exactly that time), they chose the best school for wresting in the US for him.
That was also when he encountered the "Church of Jesus Christ of Latter-day Saints," the Mormon church, when "One of my wrestling teammates, who became a close friend, was from a Mormon family." The young Ellwanger became curious, and several years later, when he was a 19 year-old university student, he joined the Mormon church.
What does being a Mormon mean to you?
"First of all, the Mormon church has an agreement with the Israeli government that forbids us to talk about the Mormon church and the Mormon religion (when a branch of Brigham Young University was founded in Jerusalem, there was a great haredi (ultra-Orthodox) protest about missionaries. As a result, the Mormon church promised that its members would not talk about their religion). What I can say is what means for me: it means no more and no less than Judeo-Christian values and goals, and a focus on self-development in the light of those principles - to remember every day that I have a conscience, and to focus on values based on belief in God, morals, and ethics - in other words, to get as close as I can to being in the image of God.
"There is a new president in the US who justified many of his actions by saying that they were legal, for example bankruptcy. I think that if a person limits himself to legal standards, he is below ethical values, and certainly below moral values. To declare bankruptcy and leave many people without their money is not an ethical thing to do, and it's certainly far from what we perceive as being in the image of God.
"I think that the biggest thing that a person can do in this context is to allow others to realize their potential in life. Unfortunately, there are people who don't have much many opportunities of doing that, whether because of family, geography, or their economic situation. My job, if you can call it that - my role in life is to see where I can help in this."
After joining the Mormon church, and studying for a year on a wrestling scholarship, he went to Germany for two years as a Mormon emissary and met Margaret, "another emissary of the church, a German, who was the most amazing and inspiring young woman I ever met."
"We didn't have too much contact, and as an emissary, you don't spend your time inviting girls to go out with you. You're completely dedicated to what you regard as God's work. After the end of my period as an emissary, however, when I had already returned to the US, and went to visit my brother-in-law's pig-raising farm, there was a day when I was loading hay on a truck. The work was very physically hard, and my brain was free. Right then, there was a beautiful sunset, and I thought about my future, and that young girl appeared in my thoughts again and again. So without having known her very much, I wrote her a letter asking what she thought about marrying me."
What did she answer?
"She thought I was some kind of crazy American. I went on writing her about it, and she eventually wrote me, 'No way'."
That did not deter Ellwanger. After several months, he flew to Germany to visit her, "and things worked out pretty well." She was doing an advanced degree in physics. He went to hear several of her lectures, and decided that he would also study physics. A year later, they got married in the Mormon temple in St. George, Utah. They both went to study at Brigham Young University: she continued her studies, and he began his.
At a certain point, while he was studying, he began working in the Utah branch of Dutch company Philips Semiconductors ("one of the reasons was that it was one of the only companies offering students medical insurance"). He did very well as an engineer, and was sent to work in the company's main laboratory in the Netherlands. "It was a very exciting time for us," he says. "We had three young children then (one more was born later), and they housed us in a 450 year-old farmhouse. We enjoyed the Netherlands a lot."
From Siemens to Applied Materials and Tower Semiconductor
Ellwanger was very successful at Philips, too, but his success turned a little sour. A costly joint project with Siemens, including the building of a fab, resulted in the development of excellent technology, but it was canceled ("somebody in marketing decided that Philips did not want to be in this business at all"). During this period, he moved between Japan in a delegation of researchers, Albuquerque, New Mexico, and France, where he worked on three more such projects. All of them were technologically successful, but all were canceled, and did not become products.
It sounds frustrating.
"You put your heart and soul into a project, and the creative work is very exciting, but you create and create, and nothing comes out of it. At a personal level, it was very unrewarding." Then, Ellwanger says, he learned an important lesson for the future, including at Tower Semiconductor: when research and development is cut off from marketing, wonderful technologies are consigned to the dustbin. On the other hand, marketing cannot offer the customers what they really need.
Ellwanger looked for a place where "I would have more influence on the direction we were going in, and more understanding of the market." He joined chip giant Novellus Systems (now part of Lam Research), also because it enabled him to realize his dream of going to Japan. He was the technology manager for Asia for five years, "and I had a direct connection with customers for the first time, and I learned how to work with them."
What did you learn there?
"I learn that if you prepare for it, it's easy to understand the customer's needs, and to make him your partner. If you make someone successful (because of the product you developed for him), he'll really want to go on working with you. It's sounds trivial, but not everyone understands this in our industry."
He was summoned back to the US to managed one of Novellus's divisions, and at the same time Applied Materials began to pursue him "mainly because they lost a considerable amount of market share to me," he laughs. Ellwanger accepted their offer, and worked at Applied Materials for a little over a decade. The president of Applied Materials at the time was Dr. Dan Maydan, and Ellwanger describes him as "an entrepreneur at heart, an amazing man. I consulted him a lot even before I came to Tower Semiconductor."
What did you learn from him?
"He didn't work according to rules. Not that he wanted to break the rules, but the rules weren't so important to him. The most important thing was to develop the right product and to be creative, and if there was some systematic way he was supposed to go, it was less important to him. He almost never came to meetings, but he influenced every important decision in the company. He didn't manage through force, but by influence. If you made a mistake with Dan, which happened to me once, he put you in the corner, in the penalty box. He was goodhearted, but one of the toughest people I've ever dealt with. He was brutal, so Israeli in this sense, but as soon as things were said, that was it. Then he told me, 'You're too strong. I'm closing your office and sending you to Israel'."
Applied Materials had a group in Israel that had a hard time in merging with the acquisitions it made then. For Ellwanger, it was his first attempt at working in Israel, and he remembers the cultural shock to this day. "I summoned the business heads and others to a meeting, lectured them about my plans, and one of the engineers stood up and said, 'You have no idea what you're talking about. I won't do any of what you say.' It was so Israeli, the opposite of trying to please the boss, but it was also so refreshing."
Ellwanger's term in Israel was a big success, and became one of the company's most successful acquisitions. He went back to work at several more positions in the company headquarters. Then Maydan left and was replaced by Michael Splinter.
You didn't like him as much.
"Whether or not I liked him isn't the question, although I didn't really like him. But the management method changed. There were 17 committees formed for everything."
"All the capital was in their heads"
Then came the offer to manage Tower Semiconductor. The one who hired Ellwanger, and also the first person who interviewed him for the job, was SanDisk Corporation (Nasdaq:SNDK) founder and then-CEO Eli Harari. SanDisk invested $85 million in Tower Semiconductor at that time (it has no holdings in Tower Semiconductor now), and was also one of its biggest customers. Harari was one of the directors at the time. Much later, after the company switched directions from digital to analogue, Ellwanger "fired" Harari as a customer.
"It was a hard thing to do, but it was the right thing to do," he remembers. "I told him, 'To produce for SanDisk is like wrapping the goods for you in dollar bills.' It's easy for a manager to make changes at the beginning, because he doesn't owe anybody anything. Later, however, when someone has served him loyally, and was also a friend, and he's no longer suitable - as either an employee or as a customer - it's harder. One of the important management principles I learned is that loyalty is something that kills a great many companies. We had a customer that was with us for a long time, SanDisk, and its proportion of our revenue was high - $100 million. The market thought that telling them they had to go in 2007 was awful, but we had to be brave, and to find a replacement quickly. That's what I bought Jazz for."
It was a money-losing company then.
"Right, and it couldn't be taken for granted that you'd succeed in taking two money-losing companies and turning them into one big company, but the board backed me up, and I mainly got, and still get, the support of the man who is now its chairman, Amir Elstein, a smart man who knows the industry well."
In 2005, after the interview with Harari came the interview with Idan Ofer. Ellwanger went to his home and met with him and with Yossi Rosen (now CEO of Israel Corporation (TASE: ILCO)). "Idan and I connected very quickly. His father was even more amazing. I really loved Sammy Ofer, and Idan kept his promise to us."
Much later, when the company's situation improved, did he ask for the distribution of a dividend, for example?
"The company never distributed a dividend, and still doesn't, and Idan never asked for one."
What did you see when you got here?
"First of all, the structure wasn't right. Here, the business was driven by the R&D group, and the R&D priorities were set here, with no connection to the market. The sales group, on the other hand, sat in Santa Clara, and had no influence on what was being developed here. This was something I thought would be very easy to correct, and I broke the R&D group into product lines; the manager of each of them was responsible for achieving profit targets. Secondly, I changed the focus. Sales are important, but the main interaction with the consumers should be conducted by the person managing the product."
The really significant change, however, which enabled a company like Tower Semiconductor, which was not large - especially then - to compete in a world of giants, particularly in view of its depressing financial situation, was the change in strategy. When Ellwanger arrived, most of the products were made using digital technology, and only a few with analogue technology. The investments in digital technology were enormous, and had to be made again each time. The continual miniaturization of digital chips requires replacement of machinery costing billions of dollars. In contrast, in analogue technology, the necessary investments are smaller, because the chip design is based more on software work, and less on hardware. As Ellwanger puts it, "Instead of spending billions a year on equipment, all the capital was in people's heads."
The vision, which was formed in the company already in 2005, has not changed: "to be the leaders in unique products in the analogue sector in the eyes of the customers, the employees, and the shareholders."
Looking towards China
It is working quite well for now, and Tower Semiconductor, in addition to its financial achievements, has also been regarded as the fastest growing company in the sector for several years. Six weeks ago, it opened trading on Nasdaq, where its market cap is $1.9 billion. The Drexel Hamilton investment house also recently listed Tower Semiconductor as one of its 10 most preferred shares for investment in 2017.
"We reinvented ourselves as a consumer-focused and decentralized company," Ellwanger says. "We eliminated the centralized R&D, and gave the product lines the power to compete."
What now? Where is Tower Semiconductor headed?
"We already have the capabilities to reach $1.6 billion in revenue, and we're turning towards China. We're very focused on developing a special model for the market in China, with an eye to combining with someone in China with production capabilities, so that we don't have to invest too much."
Is this compensation for India, where you announced you would build a fab, and it did not happen?
"It almost happened five years ago. We already had a memorandum of understanding with an infrastructure company named JP and with IBM, so we had to announce it, and we won a tender in India. There were problems between different government ministries there, however, and they went to a three-stage approval process through a special committee. Things were delayed so much that by the time we passed the second approval stage, IBM was no longer the same company, and JP didn't have the same resources it previously had.
"The worst part for us was not so much the thing being called off; it was the fact that we were being constantly asked what was going on, and we had to say that it was out of our hands. This is the victim's position - saying 'We didn't succeed because of others,' and showing that we had no control over events - that's something I fight against as a management philosophy. We learned from this that if we announce something in China, it will only be after we get a substantial amount of money. Only then will things be real."
Published by Globes [online], Israel Business News - www.globes-online.com - on January 29, 2017
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