IBM plans $2.5 billion charge, layoffs

Big Blue tries to reinvigorate its ailing Technology Group with a pretax charge of up to $2.5 billion, 1,500 job cuts and a new focus on services for chip and device makers.

John G. Spooner Staff Writer, CNET News.com
John Spooner
covers the PC market, chips and automotive technology.
John G. Spooner
4 min read
To reinvigorate its ailing Technology Group, IBM will take a pretax charge of up to $2.5 billion, lay off 1,500 workers and refocus on a trio of services for chip and device makers it believes will tap large new revenue sources.

As part of those services--announced, along with the job cuts, on Tuesday--IBM will give customers access to technology the company previously held close to the vest.

The Technology Group job cuts number 950 at Big Blue's Burlington, Vt., chip manufacturing plant and 300 at its East Fishkill and Endicott, N.Y., sites. The rest come from other areas in the company. Employees were given 30 days to find jobs elsewhere inside the group or the company.

IBM said it would take most of its $2 billion to $2.5 billion charge in the second quarter and deferred any specific comments on earnings until it reports in mid-July. Analysts expect second-quarter earnings per share of 87 cents.

IBM's total number of second-quarter layoffs, after a first-quarter sales slowdown, comes to about 5,600, including 1,000 server-related jobs and 2,000 Global Services jobs, according to Alliance@IBM, an employee group.

IBM began eliminating jobs in the third week of May in the server organization, followed the next week by services layoffs. Analysts predicted that IBM could cut as many as 9,000 employees to help reduce costs.

For the Technology Group, which includes IBM's chip business, "Doing this means making some hard choices and some tough calls. It means we will have to divest certain operations and rebalance resources, eliminating some positions and skill sets while reassigning others to the focus areas," IBM's John Kelly, senior vice president and group executive for the Technology Group, said in a memo to employees, viewed by one source.

"While some of these changes may be difficult, it is clear we must make them. The success of our business depends on them," Kelly said.

One divestiture occurred Monday, when IBM finalized plans to spin off its hard drive business in a joint venture with Hitachi. With that money-losing business out of the way, IBM's new Technology Group will refocus on a trio of new or expanded services for chipmakers and device makers.

IBM's foundry service will build customers' chips alongside Big Blue's own chips, such as the PowerPC, in IBM factories. IBM will complement the foundry service with a new manufacturing and design service for computer products and an expansion of its chip-design services, scheduled for the near future.

The announcement mirrors a recent agreement with Sony and Toshiba that will give the two companies access to IBM chip technology and manufacturing for chips for consumer-electronics devices.

IBM believes that the 2001 semiconductor slump changed the market for chips, with many companies turning to a new outsourcing model. To save money, businesses are tapping other companies to manufacture their processors, circuit boards and sometimes even entire systems.

These companies "are looking for foundries with advanced technologies and the expertise on how to design (chips) both individually and on boards," said IBM spokesman Michael Loughran.

Gartner analysts John Monroe and Tom Bittman say IBM will continue to cast a cold eye on all of its multifaceted business units.

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But Big Blue will do more than just make chips for its partners. The company established a new Design Services division. The new division inside the Technology Group will design and manufacture computer products ranging from circuit boards to full-blown systems for outside customers. With combined capabilities, IBM could potentially manufacture a company's chips, circuit boards and even build its product for it.

The company thinks the return on its investment could be substantial. IBM said its research shows that the new Design Services division alone could be worth as much as $5.75 billion in revenues within a few years.

As part of the new chip foundry service, and an expansion of its custom chip-design services that makes up the third prong of IBM's new strategy, Big Blue will expand its custom chip, or ASIC, business.

The ASIC business offers both predesigned and custom chips for applications such as networking. IBM will begin to offer customers greater access to its advanced chip designs and manufacturing techniques, letting them use technology such as silicon-on-insulator (SOI), for example. SOI speeds up chips or makes them more power efficient by tweaking the manufacturing process.

Previously, IBM regarded such technologies as crown jewels, licensing them only to a few select partners.

IBM will manufacture the new custom chips in its Burlington chip plant and also in its newest manufacturing plant, at the East Fishkill site. That plant, which adds a large amount of manufacturing capacity for IBM, is expected to open in August.

The foundry announcement formalizes what was once an unofficial, small-volume foundry business. IBM manufactures chips for some customers, but typically only those that it is closely allied with. It manufactured processors for Transmeta, for example, but it also licensed Transmeta's technology. Currently it manufactures chips for Xilinx, but Xilinx licensed IBM's PowerPC processor.

Going forward, IBM will market its chipmaking services more aggressively, Loughran said.

Reuters contributed to this report.