Conexant to Farm Out Production to Taiwan
Conexant Systems Inc. announced a dramatic shift in its manufacturing strategy Monday, saying it will farm out the bulk of its semiconductor production to factories in Taiwan.
The shift and other cost-cutting measures will result in the loss of an additional 450 jobs and are aimed at saving the company about $175 million annually, said the Newport Beach company, the largest maker of chips for modems.
Conexant will record a one-time pretax charge of about $475 million for the quarter, largely from the manufacturing cutbacks, Chief Executive Dwight Decker said.
The latest cuts--about 6% of the company’s work force--will bring total staff reductions to 25% since March. Most of the new layoffs will be at the company’s Newport Beach headquarters, where about 325 employees will lose their jobs. Fifteen jobs will be cut at the company’s manufacturing plant in Newbury Park. The remaining layoffs will be among full-time and contract employees at locations worldwide.
Conexant’s shift away from manufacturing will bring it more closely in line with some of the company’s fiercest competitors, such as Broadcom Corp. of Irvine, that rely on foreign fabrication facilities to produce all of their chips. Conexant has manufactured about 75% of its products in-house, a legacy of its days as a subsidiary of defense contractor Rockwell International Corp., which spun off Conexant in January 1999.
Though many of the largest U.S. semiconductor companies still manufacture their own products, newer companies have commonly turned to overseas factories.
A new chip plant costs $2 billion to $3 billion to start, and by 2010 that cost is expected to reach about $6 billion, said Molly Marr of the Semiconductor Industry Assn. in San Jose.
The intensive capital needed to maintain such a facility “is tough to come by,” especially when the demand for semiconductors is weak, Marr said. “If a fabrication facility is not running at full capacity, it can be more cost-effective to send it out.”
Of the job cuts announced this week, about 40% are from the manufacturing staff.
In phasing out most of its manufacturing, Conexant also eliminated the research and development team that focused on the fabrication process, Decker said.
To develop the last generation of products, Conexant spent $30 million on process development, Decker said. Research to support the in-house manufacture of Conexant’s next generation of chips probably would have cost $50 million, he said.
Conexant also said it expects losses for its third fiscal quarter ended June 30 to hit 45 cents a share. The company is facing particularly steep losses in its Internet infrastructure business, once considered its most promising area for growth.
The firm expects quarterly revenue of about $200 million, down from previous predictions of more than $206 million and less than half of its revenue in the same quarter last year.
Decker said Monday that the firm has enough cash on hand to survive the slowdown.
Investors applauded the moves, driving up the stock by 10%, or 74 cents a share, to $8.09 in Nasdaq trading. The stock has lost 83% of its value over the last year.
The company’s moves will help avoid cash-flow problems, said analyst Alvin Kressler of Friedman, Billings, Ramsey & Co. “They have to address it. The business was built for a level of revenue that is not currently sustainable.”
Conexant, which makes chips for cable and telephone modems, mobile phones and computer networking equipment, has been particularly hard hit by the sputtering technology market, but it is not alone. Worldwide semiconductor sales have plummeted this year. According to the association’s latest figures, sales fell 7.3% sequentially in May to $12.71 billion, down from $15.9 billion a year ago.
Nonetheless, Conexant’s move to downsize its manufacturing operations came as a shock Monday to those on the factory floor, who generally had expected reductions to occur over the next several years, not months.
“The sky is falling,” said one manufacturing supervisor after learning the scope of the cutbacks.
The plant, which started the year with 400 employees, will have 160 by the end of the month. Although most of Conexant’s orders are being channeled through its own factory in Newport Beach, sputtering sales have left the plant heavily underutilized. “Right now, we are using a Ferrari to go to 7-Eleven for milk,” said the factory supervisor, who spoke on the condition of anonymity.
Conexant will continue to manufacture its most sophisticated specialty chips, which use newer materials and production processes, at its plants in Newport Beach and Newbury Park. But chips made of the most common silicon compounds, which represent the bulk of Conexant’s products, will be outsourced. Those silicon chips currently account for 75% of the output at Conexant’s plant in Newport Beach.
The firm said annual savings from cuts announced in March should total $200 million.
