Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Europe's politicians are fond of saying they want to nurture local technology companies to spur the economy and catch up with the U.S. and Asia.

Yet in the case of the STMicroelectronics, the presence of France and Italy as big shareholders has hamstrung the chipmaker, leaving it incapable of making tough strategic decisions quickly enough to keep up with competitors such as European peers NXP and Infineon, or U.S. giant Texas Instruments.

Chips are Down
STMicro shares have trailed European peers

It took STMicro nearly a year of debate to decide to shut down its money-losing set-top box business, which has suffered from competition with commodity Chinese chipmakers and the slow adoption of ultra-high definition 4K televisions. On Wednesday, it said it would wind down the unit, which accounts for about 13 percent of sales, and lay off 1,400 people. The aim is to save 170 million euros ($185 million) by 2017, with charges associated with the layoffs about the same size.

The decision was delayed by mistrust between the French and Italians, who together own 27.5 percent of company, as both dug in to try to protect jobs and investment on their turf. Italian CEO Carlo Bozzoti struggled to keep both countries happy, with the French losing confidence in the 10-year veteran.

Something must change or STMicro -- despite having some good products and respected technology know-how -- risks dooming itself to irrelevance. It slid from being the fifth largest global chipmaker in 2005 to ninth last year, according to Gartner. French telecoms equipment-maker Alcatel-Lucent is a cautionary tale: despite tech leadership in fixed networks and R&D prowess it has sold itself to Nokia after a decade of unsuccessful restructuring.

Costly Know-How
STMicro still spends a much bigger proportion of its sales on R&D than its rivals
Bloomberg Intelligence
Figures based on trailing 12 months

And STMicro has been a bystander while the global chip sector consolidates around it, with $120 billion in deals announced in the past two years. Dutch chipmaker NXP bought U.S. rival Freescale for about $11.8 billion to expand in sensors and technology for cars; Germany's Infineon bought International Rectifier for $3 billion for its expertise in power management; Singapore's Avago snapped up Broadcom for $37 billion.

Even if STMicro sits out the bout of deal-making, there are lessons to be learned. Bloomberg Intelligence analyst Anand Srinivasan says consolidation shows that not only do chipmakers need scale but also that they must choose carefully the segments where they can thrive and jettison the rest.

Chips for smartphones, tablets and other gadgets -- where STMicro still makes sensors -- is a particularly merciless segment where only the nimble can survive the rapid product cycles and investment needed, and it's not as if the Italian-French company has a good record on returns (as the chart below shows). Texas Instruments abandoned mobile chips in 2012. 

Meagre Returns
STMicro's Return on Invested Capital, compared with peers

With the set-top box restructuring behind it, STMicro still has decisions to make, which will determine whether it embarks on acquisitions or asset sales. It's sharpening its focus on its successful micro-controller business by redeploying 600 staff there from the set-top box unit. But it needs to refine its priorities further: chips for cars, consumer electronics, or power management? It shouldn't try to do everything.

And indecision has a price. STMicro's revenue per employee of $169,738 for 2014 trailed NXP's $202,517 and Texas Instruments' $420,760, although were just ahead of Infineon. STMicro's gross margin of 33.7 percent last year and operating margin of 2.3 percent is also worse than peers. 

Investors cheered the decision on set-top boxes, sending its shares up almost 4 percent. But the battle of national pride being waged behind the scenes by France and Italy could still wound the company. It has one upside though: it protects STMicro from becoming prey in the M&A game consuming the industry.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at

To contact the editor responsible for this story:
James Boxell at