Chip Manufacturers' Tactics Differ For Dealing With Global Recession

Three of the largest U.S. chipmakers are taking different tacks to cut manufacturing costs in the face of a steep global recession.
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Texas Instruments (TXN) is bringing more of its manufacturing back to the U.S. at a time when such a move will help it save money. National Semiconductor (NSM) plans some temporary work stoppages at some plants. And Intel (INTC) is shuttering five plants, two in the U.S. and three overseas.

Unlike past U.S. recessions, chipmakers can't count on boosting overseas sales this time because the economic slowdown has so quickly gone global. Slowing exports is a challenge for the chipmakers, which do most sales overseas.

"What chipmakers are going through is a microcosm of what is happening to many U.S. exporters generally," said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University.

Monthly Declines

The Census Bureau says U.S. exports have fallen every month since the summer, from $121.7 billion in July to $98.1 billion in November.

In October, chip exports fell 7% sequentially from September to $4.1 billion. For November, the preliminary figure of $3.8 billion is another 7% drop.

For Texas Instruments, one result of the slowdown is that it is bringing more of its manufacturing back from overseas to its U.S. plants, which are fabs, short for fabrication plants.

"We've pulled a lot of the digital chips back into our own fabs," said Tom Thorpe, TI's vice president for development and manufacturing. That's something TI wouldn't do, he said, "if we were in the middle of a boom."

Its U.S. plants are its most costly, and its most efficient. Those plants have the most modern gear, so to underutilize those plants, rather than the overseas plants, wouldn't be efficient, Thorpe says.

TI, a leading seller of chips for cell phones, has always made nearly all of its most advanced chips in the U.S. The company employs about 4,500 at its five domestic plants. Three are in Dallas, one in Houston and another just north of Dallas, in Sherman. It has three overseas plants. On Jan. 26, the company said it would ax 3,400 jobs companywide, a 12% reduction.

Bringing more manufacturing back to the U.S. does more than save money, says Gwendolyn Whitfield, a professor at Pepperdine University's business school. It helps exporters guard against any theft of intellectual property, she says.

"It's a way to protect the technology," Whitfield said.

If the economy doesn't improve, she expects more U.S. exporters to bring manufacturing back home.

National Semiconductor, like TI, is suffering as cell phone makers reduce orders. National Semi President Donald Macleod said in a recent interview that the company's shipments to cell phone makers last quarter fell 10%-12% from the previous quarter.

National makes 95% of its own chips. It has two factories in the U.S. and one in Greenock, Scotland.

Macleod said nothing about bringing more manufacturing back to the U.S. But he says National has had some plant shutdowns, to save costs.

"Our factories are taking days of shutdown in January and February. Our employees will take (mandatory) time off," Macleod said.

Too Much Inventory

The goals are to cut costs and shrink inventory, he says. National had 97 days' worth of inventory at the end of last quarter. The quarter before that, days' inventory was in the mid-80s, "which is more typical," Macleod said.

Intel, the world's No. 1 chipmaker, makes roughly 65% of its silicon wafers in its U.S. factories. It has nine factories in the U.S., two in Ireland and a new one in Israel. But last month, Intel said it planned to close five older facilities and lay off up to 6,000 people, many of them from the closed plants. Intel said it would close two wafer plants in the U.S., in Hillsboro, Ore., and in Santa Clara, Calif., near its headquarters.

It will also close two assembly plants in Malaysia and one in the Philippines.

On Jan. 15, after Intel issued fourth-quarter results, Chief Financial Officer Stacy Smith said the company planned "to take another $700 million out of spending next year (2010)." In its factories, it is rapidly "reducing build plans" to keep from building excess inventory, he said.

Intel forecasts sales of about $7 billion this quarter, which would be 28% below first-quarter 2008.

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BY JAMES DETAR
Source：INVESTOR'S BUSINESS DAILY

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