STMicro Shifts Strategy, Dumps ST-Ericsson

STMicroelectronics NV (NYSE: STM) announced today that it was taking a new strategic direction, which will include exiting its chipmaking joint venture with Ericsson AB (Nasdaq: ERIC).

Long a drag on the European bellwether's balance sheet, Geneva-based semiconductor maker STMicro will pull out of the joint venture it formed in 2009 with telecommunications OEM Ericsson to produce cellphone chips. Pointing to "major changes that occurred in the dynamics of the wireless market," STMicro said today it would exit the JV after a transition period expected to end during the third quarter of 2013.

The company is negotiating options, and Bloomberg reported that the company may sell its stake in the unprofitable venture. Bloomberg, citing estimates by Sebastien Sztabowicz, an analyst at Kepler Capital Markets, noted that ST-Ericsson’s net loss will be $900 million this year and $550 million in 2013.

STMicroelectronics said, while it will continue to support ST-Ericsson as a supply chain and advanced process-technology (FD-SOI) partner and application-processor IP provider, it will continue to "pursue significant growth opportunities in wireless through its leading product portfolio."

Additionally, the company is looking to build out its expertise in automotive and embedded processing segments, which stand to generate more cash than the cellphone chips.

"Our new strategy is centered on leadership in sense and power and automotive products, and in embedded-processing solutions," said Carlo Bozotti, STMicro's president and CEO, in the press release. "Our specific focus is on five product areas: MEMS and sensors, smart power, automotive products, microcontrollers, and application processors including digital consumer."

Under the company's new financial model, STMicro is targeting an operating margin of 10 percent or more. To achieve that, the company anticipates reducing quarterly net operating expenses to an average quarterly rate in the range of $600 million to $650 million by the beginning of 2014, according to the press release.

As EBN has been reporting, STMicroelectronics, much like its other European counterparts, has been struggling the last couple years. The global financial crisis, weakened demand, increased competition from Asia, and sales slumps from key phone customers Nokia and RIM have impinged on its sales and profits.

In another statement, Ericsson said it will work with STMicro to "find a suitable strategic solution" for the JV and that it

is in the middle of executing on company transformation aiming at lowering its break-even point and introducing new technologies. Ericsson continues to believe that the modem technology, which it originally contributed to the Joint Venture, has a strategic value for the wireless industry. For Ericsson, a key priority in this process is a successful market introduction of the new LTE modems that it is certain will be very competitive and needed in the market.

While the news was made official today, many analysts, industry watchers, and reporters have speculated for months that this could be a likely outcome. Rethink Wireless had a column back in October about the likelihood that Ericsson would pull out of the joint venture, especially since it exited a handset JV it created with Sony.

So, I guess now the industry will be asking: Will the end of the ST-Ericsson JV be a great loss for the industry? But, perhaps the better questions are: Was the joint venture useful during the time it existed, and could some of that IP be used in ways that better address 2013's expected market dynamics? And, if the JV has run its course, will leaving it behind give STMicroelectronics and Ericsson greater momentum to compete more effectively in the near-term?