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Analysts skeptical of NXP survival plan

Posted: 26 Sep 2008 ?? ?Print Version ?Bookmark and Share

Keywords:NXP restructuring? fab-lite plan? business wireless?

NXP BV's announced restructuring plan has left analysts pondering the company's future and dusting off age-old European chip company merger ideas. The plan is expected to cost about $800 million but it is hoped it will save $550 million annually.

At one level the cuts "up to 4,500 people across four manufacturing sites as well as from head office" could be seen as NXP catching up operationally with its fab-lite policy. However, the reasoning given for the cuts "the sell-off of the wireless business unit to STMicroelectronics and a credit crunch bearing down on end markets and financiers alike" left analysts asking whether NXP is at risk of entering a downward spiral where it's decreasing size forces it to sell off more divisions, potentially leading to an ultimate merger.

Away from manufacturing sheer volume may not be so important to margins and profits but dropping out of the world's semiconductor top ten, as NXP has done, has consequences. In an interview with EE Times NXP CEO Frans van Houten, stated: "Our strategy has not changed but we have to take the consequences of creating the wireless JV as well as the consequences of the weak economy into account. Therefore, we have to make adjustments in our cost base so that we can be profitable again next year."

Bigger picture
According to Malcolm Penn, founder and CEO of analysis firm Future Horizons, the creation of ST-NXP Wireless was not directly responsible for the drastic measures, but it is obviously part of a bigger picture. "I suspect that both moves were triggered by the change in the financial markets and the fact the private equity owners have ended up with an over-priced, debt-loaded asset with no chance of spinning it back out," said Penn.

"They are now stuck with it, so my analysis is that they are stripping its cost structure bare in order to boost the near-term financial performance, most probably with the longer-term intent of selling it off piece-meal, in the manner of the ST wireless JV."

And even with the declared cuts, 3,000 jobs coming from manufacturing and 1,500 from R&D and operations over the next two years, NXP has not gone completely fabless. Which begs the question: is this enough to bring NXP back onto an even keel or will the cuts be part of a continuing process?

Bruce Diesen, analyst at Carnegie Research ASA, said that such a large restructuring move suggested NXP was trying to get its bad news out of the way in one shot; so probably this is it for quite some time.

The company lost $408 million in 1H 08, recalled Gartner research director Alfonso Velosa. And, even by getting rid of the mobile group and its associated fab and R&D costs, the firm still had significant costs.

"I think we need to see how this reorganization settles down and see how they invest the proceeds of the sale of the mobile group," Velosa continued. "However, there will be significant pressure to continue to cut if the firm cannot lower its remaining costs and generate higher sales."

Penn delivered a more worrying message. He said this depends on the way the company responds, which in turn depends on van Houten's execution and leadership.

"The baggage left behind from a downsized infrastructure is horrendous and deadly. History tells us it is far more corrosive than the easy cost-cutting 'close down and layoff' measures. If they succeed, they will be one of the very few firms in history to have done so. In fact I can't think of a single successful precedent!"

Penn explained that, given NXP's approximate $5 billion annual sales, it's really hard to see how the $550 million annual cost savings can stack up, especially as the fabs they are closing are old and fully depreciated. "Obviously, I'm sure they crunched the numbers correctly but to an outsider it does seem like a bean-counter's paper-driven spreadsheet illusion!"

New business focus
Professing surprise at the size of the restructuring plan, one financial analyst, who spoke on the condition of anonymity, said it is positive for the company as it has had difficulties in growing its topline [sales] and has several assets that are not well-positioned, including the home, consumer electronics and wireless businesses. In the future, he said NXP's "footprint" will be much reduced, which will make the company more agile.

Echoing some of Penn's comments the analyst said the cuts could be considered as a prelude to a sale or a large-scale merger with a third party. "At some point, the people who bought NXP for several billion euros will want to sell it, and the assets will have to be sold at fine margins. Once restructured, as the company is privately owned and not listed on the stock exchange, they will be able to do so without hurrying. They have bondholders. They have some cash. I believe that in about three years it will be sold."

"I think that the home business is in the starting blocks. NXP will end up selling it to a third party. That is what they did with the wireless business. And in the mid-term, it is highly probable that NXP will sell its assets or create a joint venture with ST or someone else," the financial analyst commented.

Most of the analysts agreed that eventually NXP will become a company focused on the automotive, industrial, multimarket and identification sectors. Not only are those markets more concentrated, but also competition is less, product cycles are longer, the fabless model does not yet exist in those markets and the Europeans are one step ahead of the U.S. companies in terms of technological advancements.

To resist the harsh economic environment, Penn said there is only one realistic strategy for NXP, as well as for any other chipmaker. That comprises getting the cost structure right "meaning cutting overheads but not selling fabs or cutting R&D" and then building products the market wants and competing "like hell."

According to Diesen, NXP will probably favor a combination of innovation, fight for market share and the continued move towards a fabless or fab-sharing model.

For the time being, NXP has opted to consolidate its internal manufacturing in Nijmegen, Hamburg and Systems on Silicon Manufacturing Co. Pte Ltd, a Singaporean joint venture with leading foundry TSMC. The consequence is that NXP will close its fab in East Fishkill, New York, in 2009 and the ICN5 portion of Nijmegen and the ICH part of NXP's Hamburg facility in 2010. In addition, NXP plans to sell off or close a pilot fab in Caen, France, during 2009.

These measures, noted the unnamed analyst, are heralding what we will soon see at other chipmakers such as ST and Infineon. "It is clear that the semiconductor industry has matured and the market is less volatile than in the past. If you have several fabs in Europe or in the United States that are not legitimate, you either close them or merge with others but, in the end, you close them anyway."

Overspending
Gartner's Velosa said NXP has been losing money for a long time, and part of the issue is that it had too many manufacturing facilities in high cost geographies with older technologies. The other part of the issue is that it was spending too much on R&D & SGA.

"The sale of the facilities is a logical move as the company works on being more competitive," asserted Velosa. "The change for the R&D group makes sense as well, given their need to align better with their business units, and with the global nature of their customers." The big problem here is that going fabless, Penn explained, is not just about closing down your fabs, it is a mindset as well.

He commented: "Closing fabs is easy, changing 50 years of mindset is not. They will still be competing with much more responsive and nimbler competitors but now with potentially a demoralized workforce. Managing this requires the charisma of a Pistorio.

I am not saying Frans [van Houten] isn't up to it, but he's now done the easy bit. The next steps would be a testing time for anyone's leadership capabilities."

- Anne-Francoise Pele
EE Times Europe





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