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ST seems finally to have woken up to the fact that ST-Ericsson is a ticking timebomb which could wreck it.
ST-E has been racking up debt at an alarming rate. So far it’s $800m. By the end of the year it’ll be $1.7bn if it continues at the current rate. ST is responsible for this debt.
So, yesterday, ST transferred its cost-cutting CFO, Carlo Ferro, to be COO of ST-E.
The hopeful analysis of the Ferro move is that ST top management has got fed up with Ferro’s cost-cutting ways and now intends to invest boldly and enthusiastically in the future and wants Ferro out of the way so it can get on with its new investment plans.
The less hopeful analysis is that ST-E employees will be so terrified by Ferro’s appointment that they will all leave ST-E in droves so saving ST-E an absolute fortune in redundancy costs.
ST-E has 6,700 employees. Assuming STE can gain a 20% share of the 3G chipset market for smart phones – a market share which is essential because third party developers will only fully support the top two or three chip-sets – and assuming the 2012-13 TAM will be 600m to 700m units with an average price of $8, then STE could command revenues of $1 billion a year.
Assuming a margin of 30%, then this level of sales will permit an R&D budget of about $500 million a year – which allows for the employment – at European salary levels – of about 2000 people.
Making 4,700 professional Continentals redundant is probably more than ST-E can stand. Especially as the French government, on which ST depends for financial assistance, would take a very dim view of wholesale sackings which involved French people.
So the second, analysis, envisages Ferro making life so miserable for ST-E employees that they leave of their own accord.
There’s a third analysis. When Ferro found the flash business congenitally loss-making at ST he devised a cunning plan. With Intel, which also had a loss-making flash business, he formed a flash joint venture called Numonyx. This wheezed along unprofitably until it was bought by Micron.
One rather expects it is this third analysis which is currently taking shape in Ferro’s accountancy-trained mind.
Of course ST-Ericsson has other problems: the collapse of Nokia its best customer, and the need to find new customers quickly; an obsolescent product line which costs ST-E $1:50 for ever sales $; a new product road map which is very late; and no announced source of 28nm fab.
But you wouldn’t employ an accountant to solve those problems.
Sadly, APM, you’re absolutely right. Having sold Infineon’s wireless business to Intel and made an absolute hash of ST-E, Europe has thrown away mobile comms leadership. Where next for MWC? San Diego?
STE is not a viable concern and possibly there is no sustainable business model anymore in the mobile chipset market because the point of aggregation is rapidly shifting to application processors and the baseband is becoming just another function.
This has been long in the making and the writing has been on the wall for several years. Better managed competitors – TI is a prime example – either stopped investing in the business or sold it years ago.
The STE wind-down will be one more basket case of the failure of Europe to compete in rapidly evolving high-tech markets. Europe is moving from undisputed leadership in Mobile Communications to irrelevance. Please note that there is no way back as the Mobile Computing revolution is now firmly led by the US and complemented by Korea, Taiwan and increasingly Mainland China. The UK is the only bright spot but a relatively minor player in the big game in spite of nurturing fine companies like ARM and Imagination Technologies.
Samsung has launched Galaxy Beam, Galaxy S Advance in Barcelona during MWC 2012 with STE novathor platform. Sony is also launching two xperia phones with novathor platform.
So, re-capping the history: NXP got rid of its wireless business because it wasn’t making money and they didn’t know how to fix it. Ericsson got rid of its modem business as it wasn’t making money and they didn’t know how to fix it. ST had a thoroughly non-commecial, ( i.e. University research based rather than product based) wireless group, with non-commercial oriented management, and they ended up in charge making all the strategic decisions….I’d be tempted to blame this on hubris, but I suspect the real reason is non-accountability amongst all management levels in ST.
It’s just a shame that good engineers will yet again pay for this.
Thanks for that, MGP-1, that’s appreciated. I suppose only time will tell what the ASP and the revenues will be. At the moment it’s speculation. But I do believe that leadership entails setting out how you’re going to save the company. STE can be saved but we don’t hear anyone saying how they can make STE into a fabulous company – we just get the appointment of ST’s Chief Cost-cutting Officer with the implication that ST just wants to get rid of STE as cheaply as possible. If ST persuaded Sanjay Jha to come over and turn STE into a great company, no one would be happier than me.
Alain … presumably you work for ST or ST-E? … either way or not I’m a little confused as to exactly what point you are trying to make. Whatever way you cut the numbers, yours or David’s, based on ST-E’s last results the firm is bleeding serious money, with every $1.00 in sales costing it $1.50 so if David’s logic for 2000 engineers is weak; where is the money going to come from to pay for more? And in any event the current revenue stream and profits must surely reflect your ASP assertion of $12 vs the $8 David assumed. It is therefore completely irrelevant. Even the new ST-E CEO has said things are going to get worse before they get better (falling revenues from current products and delayed revenues from new ones) means on a money in / money out cash flow basis, with money in forecast by ST-E to fall, losses are going to increase unless the money out is cut back. So if David underestimated the engineers at 2000, it surely will not be long before his number is correct?
Thanks very much, Alain, that is very encouraging indeed. I was assuming 3G handset ICs would constitute the bulk of the revenues for the next few years, with 4G some way off, and 2G declining rapidly. If I’m wrong about the revenue projections I’m really pleased.
@David: Why would you assume that revenue would come from only smartphone 3G segment? ST-E is addressing not only 3G, but also 2G and 4G segments. And not only by chipset, but including connectivity offering. With this in mind and also assuming higher ASP than $8, I would add at least 50% on the ASP and then connectivity on top, your logic of 2000 employees is weak.
Yes cheese, sadly I think this is the most likely way ahead because the STE strategy is driven by ST which appoints its execs from a Cosy Club of 25-year veterans. But STE could still be saved if a dynamic guy with imagination and business flair were put in charge. Just look at what Sanjay Jha did for Motorola. The handset business was as big a basket case as STE is now when Jha came in. He could have closed or sold off the business – as we suspect Carlo Ferro is planning to do at STE – but instead Jha articulated a vison – Android based handsets – he saw it through and ended up with a triumphant $12.5 billion sale of the business to Google last year. What a star!
“Of course ST-E has other problems…..But you wouldn’t employ an accountant to solve those”. David, that’s crisp. But you started by telling *the* big problem that STE has, and that’s not about 28nm fab or the fall of Nokia or technology roadmaps…it is the gaping hole in the fuel tank of ST-E. And God made accountants to fix exactly that !
My bets are on a new Numonyx like deal. But even that would bleed ST to quite some extent – Asian Cos now very well understand the costs of retrenchments in EU, and would not want blood on their hands.
I agree. Being owned by a decent company is the best bet, anon, and I’ve always heard that the Asian semiconductor companies employing Europeans in Europe are good employers. I don’t know much about the Chinese systems houses as employers, but Huawei or ZTE might value some first-rate European telecoms engineers, and the skills at ST-E are superb.
I share your doubt.
But, this “being owned by a decent company” may actually be a nice change for said employees.
Not that I know any… 😉
Yes I expect that’s the best course, anon. You never know though, CF may come up with some wily accountancy wheeze which means the STE people end up being owned by a decent company but, I have to say, I doubt it. Get a good employment lawyer and maximise the dosh sounds the best advice.
The less hopeful analysis may be somewhat flawed, as employees may simply decide to look away, ignore the horror and wait for the inevitable redundancy.