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IBM at the Crossroads: Employees Talk; In this first of a three-part series we talk to analysts and current and former IBM employees about the company’s future as a chipmaker

IBM at the Crossroads: Employees Talk

Rick Merritt

6/23/2014 08:40 AM EDT
In the Shadow of Layoffs

In this first of a three-part series we talk to analysts and current and former IBM employees about the company’s future as a chipmaker.

SAN JOSE, Calif. — IBM should sell its semiconductor plants and get out of the chip-making business, say a handful of analysts and current and former IBM employees, pointing to GlobalFoundries as the best potential buyer.

A senior executive in charge of the IBM group told us chip operations remain strategic and — at least for the moment — intact. He would not, however, comment directly onreports in February that the company is exploring a sale of one or both of its fabs.

While IBM’s role as a chipmaker is debated inside and outside the company, all sides agree on one thing: For decades the company has been a leader in semiconductors, developing technologies that gave it an edge and pushed the industry forward.

Despite its technical prowess, IBM should go fabless, some argue, claiming the company has under-invested in its two fabs for several years. The chip business hasn’t fit IBM’s corporate business model for years, they say.

IBM’s Power server business has served as one of the main motivations for making chips, but it hit a slump last year that the company has admitted it cannot reverse. The decline came on the heels of the loss to AMD of its high-volume, high-margin business making ASICs for videogame consoles.

On a human level, employees in IBM’s chip division say they are shell-shocked by multiplerounds of layoffs. They see a sale as a possible resolution after living under a cloud for years.

“Layoffs came in waves and there are rumors they are still coming — I lived through so many of them,” says a former IBMer laid off in July 2013. “It’s a tough environment where people are always nervous about what’s coming next. It’s not fun anymore.”

Some decide to leave
A current employee recalls how one colleague used a forced unpaid week off in 2013 to work on his resumé and ultimately left for Qualcomm. “We’ve lost a lot of people to Qualcomm,” says the IBM veteran who asked not to be named.

A former employee reports some IBMers have gone to support Intel’s growing foundry business; another said many former colleagues are now at AMD and Freescale. GlobalFoundries recently said it has hired on a temporary basis “200 experienced engineers and managers to support its current Fab 8 ramp” in upstate New York from May to December 2014.

Another former employee laid off in July shared two common complaints: IBM has not spent the money to keep its fabs up to date; and it has done a poor job communicating its plans to staff.

“They really are not transparent down to the trenches as they used to be,” he told us. The Burlington fab “has been treated as a cash cow with minimal investments and maximal extraction.”

“They just haven’t invested [in the fabs] to the point where now they have to sell them or exit the business,” another former employee says.

The bigger problem with morale is that IBM is out of step with the times, another former employee argues.

“They still have a 1950s model of lifetime employment and fellowships where you give all the fruits of your brain to the corporation. I don’t think today’s guys will sign up for that — they will take their best stuff and go out on their own,” he says, noting one recent example.

David Ferrucci, an artificial intelligence expert who led the Watson team, left the company in late 2013 to join hedge fund Bridgewater Associates where presumably he is developing custom AI algorithms.

Analysts’ views
Low morale goes back to the 1990s when IBM started scaling back its semiconductor ambitions, says G. Dan Hutcheson, chief executive of VLSI Research. At that time, one senior employee put goldfish in water detoxification tanks at one of the plants after he got a pink slip.

Reports in February that IBM is exploring options for selling the fabs have turned up the heat on employee angst. “The faster they can get the transaction done or at least be more transparent about it will be really helpful to them,” says Hutcheson.

Selling fabs in East Fishkill, N.Y., and Burlington, Vt., would be similar to past sales of other commodity hardware businesses such as hard disk drives, notebooks, and x86 servers, says analyst Nathan Brookwood.

IBM needed its own fabs to make custom processors for its mainframes and midrange computers when it got its start in chip making in the 1970s. Today big chip foundries support an increasingly wide range of processes for an industry of mainly fabless chip designers, says Brookwood.

“This could be the year they sell the [fabs], and the most likely buyers is GlobalFoundries. I think we will see East Fishkill sold to GlobalFoundries, probably before the end of year.”

IBM co-developed multiple generations of process technology with GlobalFoundries and others as part of its Common Platform Alliance. The effort set the stage for IBM to join most of the rest of the semiconductor industry in being fabless, Brookwood told us.

“There is no company left that hasn’t gone fabless in one way or another,” says Hutcheson of VLSI Research. These days “IBM doesn’t have the demand to fill an entire fab.”

The possibility of IBM selling one or both its fabs has been “a topic of debate and news coverage for more than 10 years,” says Rob Lineback, a senior analyst at market watcher IC Insights. “I think now is a good time to make that move,” he says, noting GlobalFoundries as a likely partner for East Fishkill that had “representatives seen in Burlington looking at the manufacturing complex in recent months.”

IBM sold $2.03 billion worth of chips in 2013, compared to $2.34 billion in 2012, a 13% drop, according to IC Insights. IBM’s 2013 annual report said it had external chip sales of $1.463 billion, down from $1.572 billion in 2012 and $2.930 billion in 2006, Lineback says.

 

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KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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