ST-Ericsson, the chipmaking venture of STMicroelectronics NV (STM) and Ericsson AB (ERICB), plans to eliminate 1,700 jobs and transfer development of some of its more advanced processors to STMicroelectronics to trim costs.
The impact of the plan on countries and sites will depend on local negotiations, said Geneva-based ST-Ericsson, which has about 6,700 employees. “Several hundred” workers will move to STMicroelectronics, Chief Executive Officer Didier Lamouche said in a conference call today. The company expects yearly savings of $320 million by the end of 2013 and total restructuring costs are estimated to be about $130 million to $150 million, it said.
ST-Ericsson, which competes with San Diego-based market leader Qualcomm Inc. (QCOM), hasn’t been profitable since it was formed in 2009 as its newer smartphone and tablet chips haven’t offset a fall in sales of older lines. The company has struggled to bring out higher-powered chipsets and platforms as the low-end phone business at major client Nokia Oyj (NOK1V) have declined.
STMicroelectronics fell 14 percent to 4.31 euros in Paris trading, the biggest drop since at least September 1998. Ericsson dropped 4.4 percent to 61.60 kronor at the 5:30 p.m. close in Stockholm. Qualcomm fell 1 percent to $61.60 in at 1:20 p.m. in New York.
Additional Development Costs
“We see it as negative for STM overall,” said Janardan Menon, an analyst at Liberum Capital in London. “STM is taking on additional application processor development costs on to itself whereas currently those costs are 50 percent owned by the JV.” Menon said it’s “not clear how much additional revenues can be generated from this processor development to offset the costs.”
Of the 1,700 reductions, roughly 700 workers will be transferred to STMicroelectronics, while 400 jobs will be cut and about 600 positions will be accounted for by retirement or not filling vacancies, according to a person familiar with the union negotiations who declined to be identified because the talks were not public.
Under the agreement, STMicroelectronics will take on the development of ST-Ericsson’s application processors, the chips that run programs in phones and tablet computers, and then license back technology to the Swiss joint venture, STMicroelectronics said.
Lamouche, appointed in November as the third chief executive in as many years, was asked by the parent companies to review the venture’s strategy and financial prospects, and has been working on a plan to help it gain share in the growing market for smartphone chips. In February, STMicroelectronics Finance Chief Carlo Ferro joined ST-Ericsson as chief operating officer to help its turnaround.
‘Turn Many Knobs’
“You need to turn many knobs in order to turn the company profitable. We need cost reductions but also revenue to increase,” Lamouche said in a conference call today. “This industry is dominated by one player, Qualcomm. Many of our customers are desperately requesting more competition and that is why they are encouraging us to be successful and are willing to help us.”
As part of the plan, ST-Ericsson will consolidate R&D activities into a “significantly smaller” number of sites, it said. The company will reduce selling, general and administrative expenses by about 25 percent compared to 2011 also by “substantially reducing positions within the top paid management.”
Lamouche said in a Feb. 28 interview at the Mobile World Congress in Barcelona that he expected the company to make “clear sacrifices.” He said then he wants to cut some of the company’s 44 research sites worldwide to reduce expenses. Lund - Sweden, and Grenoble -France are ST-Ericsson’s biggest sites.
In June, ST-Ericsson announced cost cuts aimed at saving $120 million a year, including a workforce review that may affect as many as 500 jobs.
ST-Ericsson said in January that its fourth-quarter net loss widened to $231 million from $177 million a year earlier while net sales fell 29 percent to $409 million. The company is set to report first-quarter earnings after the close of trading in New York today.
“While the measures announced today will reduce the cost structure of ST-Ericsson significantly, we believe the company will still continue to struggle to raise its top line adequately,” Menon said.
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Marie Mawad in Paris at email@example.com