"I'm excited to write Tower's next chapter"

Russell Ellwanger  credit: Inbal Marmari
Russell Ellwanger credit: Inbal Marmari

Tower Semiconductor CEO Russell Ellwanger sees the company almost doubling its revenue in five years, and is still inspired by helping people reach their potential.

Eight years ago, a head hunter approached Russell Ellwanger, CEO of analog chip maker Tower Semiconductor (TASE: RSEM; Nasdaq: TSEM), to recruit him to manage a well known public industrial company. Ellwanger, who had already been at the helm of Tower Semiconductor for eleven years, had no intention of leaving, but out of curiosity he decided to meet the company and hear about the job. The chairperson of the company in question spoke to him, and the terms were good. "I called my son and told him," says Ellwanger in an interview with "Globes." "He asked ‘What do you really think about it?’ and I said to him ‘It’s a lot of money.’ Then he asked: ‘But will it inspire you?’ And really, what you do has to inspire you, otherwise what’s the point? The most important thing about success is that you have to love what you do. That’s one of the reasons that Tower is successful."

Even today, after almost two decades as CEO of Tower, Ellwanger finds the chip company inspiring. At age 69, he has no intention of retiring. "Home-work balance? Work is my balance in life," he says. "At work, I grow, instill values that I believe in. I decided not to retire. But at some point the board will kick me out, or what will happen is what sometimes happens to people my age, that they die after living a full life. But you only live once, so why retire?"

It’s hard to imagine a scenario in which the Tower board of directors will have any cause to kick Ellwanger out. The American CEO came to the company at a difficult time for it, when it was burning cash and it was not clear whether it would be able to repay debts to the banks that had soared to over $500 million. He led the company to debt settlements with the banks and repayment of the debt balance, to growth, a switch to profitability, and expansion through acquisitions. The pinnacle was supposed to be the sale of the company to Intel for $5.4 billion, a deal reported in February 2022.

In the end, the Intel deal never took place, after the Chinese regulator delayed his decision and the deadline for completing the deal (after an extension) passed last summer. Tower remains an independent company, but it is currently traded at a share price 38% below the price it was due to receive from Intel, and its market cap is $3.7 billion. From Tower’s annual financial statements we learn that between 2103 and 2022, Ellwanger received 390,000 restricted shares. Assuming he has not sold them, then at the Intel deal price he would have received a maximum of $20 million. During his time at the company, the return on its shares has been in the thousands of percentage points.

When did you realize that the deal wasn’t going to happen?

"I worked to make it happen almost until the final days. I tend to be an optimistic person, and I saw no legitimate reason for China not to approve the deal. I thought that we would receive approval, and we provided all the information that they requested. I suppose that when we didn’t hear from them a day or two beforehand, we understood that the deal wouldn’t happen, and that another extension would be useless, because it was a political decision.

"At an early stage of the deal, I pushed to transfer production capacity to an Intel fab, and that was a very wise move, because without it we wouldn’t have been able to retain the customers (after the deal was cancelled, Tower signed an agreement to use an Intel foundry in New Mexico, S. H-V.). That was one of our biggest achievements in 2023."

Ellwanger says that Tower learned a great deal from the process with Intel. "For decades, Intel was the number one chip company. Only when we were with Intel did we realize how efficient we are, the degree to which excellence is the center of what we do. The efficiency can be measured in financial terms. When you work effectively and on a large scale, there’s a high gross profit, because the customers pay. We didn’t have enough scale. Over the years we have made acquisitions, but we had to continue to focus on that. The efficiency is measured in the transition from gross profit to operating profit, and at that we’re the best in the industry. It’s not just financially positive, but also an indicator of how fast you can work."

How did you feel when the deal was cancelled?

"I won’t say it’s good that the deal didn’t happen, but it wasn’t a big slap in the face. We now have capacity, although of course there are things to improve, and on the whole, it was a positive experience."

"We’re not under pressure"

Expanding production capacity was a declared aim of Tower even before the Intel deal, and to that end it examined various possibilities for acquisitions or collaborations. The company has six production facilities in Israel, the US, and Japan, to which it has added two new ones, one in Italy and the other the Intel foundry in New Mexico, for 300 mm production. In fact, as emerges from past Intel reports, the Intel deal began from a meeting that Ellwanger held with a senior executive from Intel with the aim of obtaining access to, or even buying, an Intel production facility, as part of the effort to expand capacity. It was recently reported that Tower was examining the possibility of building a foundry in India at an investment of $8 billion, with the Indian government subsidizing 75% of the construction cost, although the matter is at an early stage and it is not certain that it will go ahead.

"We announced a model that will bring us to revenue of $2.66 billion, from $1.4 billion in 2023," says Ellwanger. The model does not set a target date, and is based on 85% utilization of production capacity (including the fabs in New Mexico and Italy). It is meant to add $386 million to gross profit, $326 million to operating profit, and $271 million to net profit, which, under the model, will total $500 million.

"That’s almost doubling the company, very nice numbers, that could give a boost to the market cap. We’re not under pressure to invest more (in expanding production capacity, S. H-V.) but we’re certainly looking at the opportunities, and if there’s a financially good opportunity, we’ll do it. It’s no secret that in India they want to set up chip foundries, and the state will give incentives, but we’ll look at every place where we can add value without harming the shareholders. Our eyes are open."

At the same time, Ellwanger stresses: "We have enough production capacity now, and we’re not in a hurry for another deal. I was asked at the investor conference at the stock exchange where Tower will be in another five years, and I replied that it will be deployed much more globally, with revenue in the billions of dollars, and recognized as the market leader in analog chips. There will be opportunities."

Why India particularly, and not Israel?

"If we had an opportunity to build in Israel, that would certainly be more logical than in a country where we have no presence at all. If all the conditions were equal, Israel would be the first place in which to expand. But Israel has no history of 75% grants like India. If Israel is interested in subsidizing up to 75% in order to be competitive, it’s certainly a preferred destination. I owe a lot to Israel. Israel enabled Tower to become what it is, a strong player in the industry."

Has anyone in Israel talked to you about it?

"They haven’t approached us. I think they’re busy with other things."

On the subject of activity in Israel, with the release of its 2023 financials, Tower announced the cessation of activity at Fab 1, one of its two production facilities at Migdal Ha’emek. Bank Hapoalim wrote at the time that Fab 1 produced not very advanced power supply chips and sensors on 150 mm diameter wafers, and that the reason for the closure was the decline in demand for some of these fairly obsolete chips, and the low profitability of producing them. The bank also said that the fab was operating at 60% capacity, versus 75% capacity for Fab 2, also in Migdal Ha’emek. "It may be semantics, but we’re not talking about closure, but about a merger," Ellwanger stresses. "The installation itself will be closed, but the employees will transfer to other parts of the company. There will be zero layoffs. The activity will cease at the end of the year."

Tower’s share price has risen by 8% so far this year, after falling 29% in 2023, following the cancellation of the acquisition by Intel. The PHLX Semiconductor Index (SOX) rose 65% in 2023 and is up 17.4% for 2024 to date. One of the main drivers of the positive momentum is the rise of artificial intelligence (AI). The growth in AI applications has led to growing demand for chips. Tower produces analog rather than digital chips, and is perhaps not perceived as part of the AI hype, but its chips are integrated in datacenters that host AI applications, and in other technologies, such as VR/AR. A basic condition for AI applications is speed of data communications, and that’s where Tower is. Ellwanger says that Tower collaborates with InnoLight and Coherent, large integration companies that work with the world’s leading companies, and that Tower’s Silicon Photonics are installed in datacenters, generating tens of millions of dollars in revenue.

"The most important thing that many people don’t understand in connection with our business model is our collaborations with customers that are number one or two in the market. In Silicon Photonics, we have the two biggest players in the market, and others in the top ten," says Ellwanger. "We have wonderful partnerships that are based on confidence, and when the partnerships are so close, you do things for each other. Morris Chang, the founder of chip giant TSMC, once said that you can lose five deals in a row, you won’t necessarily win every deal, but you give what the partner needs and you know that you will receive when you need it. I learned very early on that with true friendship and knowledge of the customer, relationships can continue to win. For me, the best thing in the job is the ability to meet many very intelligent people."

Is there a chance that another deal will come along, another company that will try to acquire you after the Intel deal fell through?

"For Intel it was very logical to buy Tower, because it was going into the foundry business (that is, producing chips for third parties and not just for Intel itself, S. H-V.), and it suited it that Tower should lead Intel’s foundry. Tower is strong financially and growing, so it was a very good target. Does it make sense for someone else to buy Tower? Yes, depending on what they’re looking for. I don’t want Tower to be sold, but if there’s a good deal that makes sense for the workers, the shareholders and the customers - in that order - the board will consider it. I don’t think that anyone is looking at us at the moment, and I’m happy to continue with an independent Tower, but I can’t predict, just as I didn’t predict the Intel deal."

You were asked at the investor conference where Tower would be in five years’ time. Where will you be personally?

"I honestly don’t know. I have no intention of retiring. Perhaps I would have retired if the Intel deal had happened, perhaps I would have stayed. But I’m genuinely excited to write the next chapter in the life of Tower.

"There’s a writer I love, Orson Scott Card, who wrote beautifully: ‘Changing the world is good for those who want their names in books. But being happy, that is for those who write their names in the lives of others, and hold the hearts of others as the treasure most dear.’ Between Christmas and New Year, all the family gathered together from different parts of the world, and we talked about what we would like to leave behind us. All my life has been creating value, not necessarily financial, but in affecting the lives of people, and as CEO of Tower I can affect the lives of people and play a role in the fulfilment of their potential and seeing them grow. If I were to retire, I would lose an important part of my life that I love. In business, the substance is creating value for the shareholders, but I very much believe that any company that focuses on the shareholders will not succeed, and that if it focuses on the workers, it will also succeed with the shareholders. When the workers receive the opportunity to grow and succeed, the customers are happy, and the share price rises.

"In the presentation for investors, I presented another beautiful quote: ‘What's past is prologue’. We have a wonderful past, and it’s a fine chapter in advance of the next chapter. We’re in an excellent position. Where were we in 2005, and where are we now?"

Ellwanger, an American and a member of the Mormon Church, finds himself in Israel in one of the toughest periods the country has ever known.

What’s your view of the current situation here, the war, the political uncertainty?

"I see myself as a guest of the government, and it wouldn’t be proper for me to remark on the matter, even if I have opinions. It would be like being someone’s dinner guest and telling him that the house is a mess."

What can you tell us about the workers and activity at Tower during the war?

"We have many employees serving in the reserves. What has always touched me, is that, in Israel, when there’s a need, Israelis straightaway come together. Israel is the only country in the world where the car that drives you into a ditch is also the one that drives you to hospital afterwards," he laughs.

Ellwanger says that those employees who have not been drafted into the reserves feel an obligation to work even harder and to compensate for the absence of the reservists. "That’s the beauty of Israel, there’s moral responsibility about that here."

Published by Globes, Israel business news - en.globes.co.il - on March 31, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Russell Ellwanger  credit: Inbal Marmari
Russell Ellwanger credit: Inbal Marmari
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