HP's French Twist

Why its plan to lay off 1,200 in France has reverberated all the way up to President Chirac's office

Shock waves have been emanating from Grenoble ever since mid-September, when U.S. tech giant Hewlett-Packard Co. (HPQ ) announced it would eliminate more than 1,200 jobs in France. A big chunk of the cuts is likely to come from this pleasant city of 425,000 in the French Alps, where HP employs 2,400 people, about half its French work force. Angry HP workers poured into the streets when they learned of the plan, and Grenoble's mayor on Sept. 20 led a delegation to HP's Palo Alto headquarters, where he received a polite but noncommittal reception.

The protests didn't stop there. HP's European brass were summoned to Paris on Sept. 26 for a meeting with France's Labor Minister. Prime Minister Dominique de Villepin suggested that companies might be required to sign a "code of conduct" limiting their ability to lay off workers if, as in HP's case, the government financed road works and other improvements benefiting their factories. President Jacques Chirac even asked the European Commission to intervene, although his request was quickly rebuffed. HP, for its part, appears undeterred. "We all know how politicians are. For better or for worse, this has provided them a platform to get some air time. But we don't feel it's going to impact our ability to do what we've announced," Todd Bradley, executive vice-president of HP's Personal Systems Group, told an investors' conference in San Francisco on Sept. 22.

Grenoble seems an unlikely site for such an uproar. For more than a decade it has billed itself as France's answer to Silicon Valley -- and with good reason. It is a world-class research center, with scores of public and private labs studying everything from advanced materials to microelectronics. In valleys leading out of the city, cow pastures have given way to office parks and gleaming factories run by multinationals such as Royal Philips Electronics (PHG ) and STMicroelectronics (STM ), as well as successful local companies such as Sofileta, a manufacturer of high-tech industrial textiles, and IT company Groupe Silicomp. At 8.7%, Grenoble's unemployment rate is well below the national average of 10.1%. The tech workforce of 25,500 is set to grow over the next few years as Grenoble and the surrounding Isère region get a major infusion of aid from Paris to encourage nanotechnology research and development. "Can the local economy absorb the shock from HP? Yes," says Jean-Paul Giraud, president of the Agency for Studies and Promotion of Isère.

So why all the protests? Politics, for one thing. Chirac and his government have made fighting unemployment their top domestic priority. News of the HP layoffs plays into national fears that France is losing jobs to lower-cost countries in Eastern Europe and Asia. Companies such as Philips and IBM have already eliminated hundreds of jobs in France in recent months while expanding their payrolls in places such as Poland, China, and India. HP hasn't said whether any of the jobs in Grenoble will be transferred elsewhere. But employees note the company has a fast-growing facility in Slovakia that performs some of the same functions as its site in the Grenoble suburb of Eybens, which handles an array of functions from customer support to software development.

Eric Gaudé, an engineer at the Eybens facility, says that many laid-off workers could probably find other jobs in the area -- though probably not as high-paying as at HP, where employee unions say the average annual salary is about $48,000. The deeper fear, he says, is that HP, which first set up shop in Grenoble in 1971, will eventually shutter most of its operations here: "There's a sense of treason."

Grenoble's authorities have complained bitterly that when HP wanted to expand the Eybens site in 1998, local governments spent more than $2 million to acquire and clear a piece of adjacent property that they then resold to the company for less than $500,000. Patrick Starck, the president of HP France, says HP never promised to create jobs in exchange for the assistance. Moreover, he says that over the past decade HP has paid more than $840 million in French taxes, including about $90 million to the municipality of Eybens. "We've been a good citizen," he says.

Dig a little deeper, and there's still another reason for Grenoble's angst. Despite generous seeding from Paris, the Silicon Alps region has not developed the rich ecosystem of high-tech startups and spin-offs that makes Silicon Valley's labor market so resilient. True, government research sites such as the Laboratory for Electronic and Information Technology (LETI) have served as incubators for some successful startups. One is Soitec, a 13-year-old company with $167 million in annual sales that is a world leader in supplying advanced insulation technology to the semiconductor industry. Yet unlike Silicon Valley, it's relatively rare in Grenoble for people to quit their jobs at one of the big high-tech outfits and take a stab at starting their own businesses. Of 48 recent high-tech startups listed by the local economic development agency, only a dozen were spun off from other companies, while the rest were hatched at government labs. "France does not have a culture of risk and entrepreneurship," says Alain Lefebvre, one of four former HP employees who started VoluBill, a Grenoble-based company that provides customer-billing technology to mobile-phone operators.

Risk aversion may be one part of the problem, but government regulations are another. Even a startup like VoluBill, with 55 employees, has to give two months' paid vacation to its employees because of worker-friendly French labor laws. Strict anti-layoff laws mean that workers at big companies have come to expect that their jobs are guaranteed for life -- unless the company pays them handsomely to leave. That's what happened at HP in 2003, when the company eliminated 1,300 jobs in Grenoble through early-retirement plans and buyouts that topped $250,000 for some workers. Under those conditions, it's hardly surprising that few employees strike out on their own.

The outlook for Grenoble isn't all gloomy. The pace of high-tech business creation has picked up since 1999, when France passed legislation allowing government researchers to take leaves of absence to start innovative businesses, says Jean-Bernard Schmidt, president of venture-capital group Sofinnova Partners in Paris. More recently, France's center-right government has started providing tax breaks to companies trying to commercialize new technologies, while relaxing some regulations on small businesses. For instance, in August, a new type of contract was introduced that allows companies with fewer than 20 workers to fire new hires more easily. Some 30,000 such contracts were signed in August alone.

French startups also are benefiting from greater access to venture capital. Sofinnova has financed recent startups originating from such French giants as defense and electronics group Thales and pharmaceutical maker sanofi-aventis Group (SNY ). "The ingredients are now there," says Schmidt. But the allure of the Silicon Alps may no longer be enough to captivate HP and other multinationals.

By Carol Matlack in Grenoble, with Peter Burrows in San Mateo

— With assistance by Peter Burrows

    Before it's here, it's on the Bloomberg Terminal.