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STMicro Shifts Strategy, Dumps ST-Ericsson

{complink 5218|STMicroelectronics NV} announced today that it was taking a new strategic direction, which will include exiting its chipmaking joint venture with {complink 1879|Ericsson AB}.

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?

8 comments on “STMicro Shifts Strategy, Dumps ST-Ericsson

  1. Cryptoman
    December 10, 2012

    A loss of $1.4B in two years is too much given the current economic crisis. If the phone manufacturers are not doing well, their chip manufacturers will inevitably suffer. In addition, the increased competition means the chip makers have to operate on quite narrow profit margins to be able to sell. There comes a point where the business just isn't viable and it's time to exit.

    I think ST has made the right decision by focusing on the automative market. As all the cars become electricity centric, there will be new opportunities to develop devices for new set of features that are going to be installed in them.

    Maybe in a few years' time the climate may change and ST may revisit this JV option. However, for now ST needs to make money to pay the bills and to stay afloat somehow.

     

  2. bolaji ojo
    December 10, 2012

    Exiting the ST-Ericsson joint venture is and should be only the first of steps ST needs to take to revitalize operations and make itself viable on a longer term basis. This is a start, one many people were expecting. There is still much to do.

  3. _hm
    December 10, 2012

    This is proper direction for ST. Embedded and sense market for auto industry has vast potential and ST can contribute many more innovative products.

     

  4. FLYINGSCOT
    December 11, 2012

    I hope that the split will benefit both companies as Europe needs a strong ST and a strong Ericsson.  I wonder what the future holds for Ericsson as it dissolves its joint ventures.

  5. Jennifer Baljko
    December 14, 2012

    Cryptoman – that's right. it's a trickle down thing — if big customers are hurting, it's just a matter of time before they have to make decisions like this.

  6. Jennifer Baljko
    December 14, 2012

    Bolaji, Agreed. Still lots to be done, and they have already taking steps towards revitalizing ops… but, it's a long road and the current in Europe is still very tough.

  7. Jennifer Baljko
    December 14, 2012

    HM – yes, the auto industry will offer a safe haven for a while. We'll see  if it lasts.

  8. Jennifer Baljko
    December 14, 2012

    FlyingScot – Well said… Europe really could use a few financially strong companies to be way-showers, especially since things here still seem so unsteady.

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