Philips to restructure chip unit and cut 1,600 jobs

Europe's biggest consumer electronics firm, Philips Electronics, announced on Thursday 1,600 job cuts in its key semiconductors...

Europe's biggest consumer electronics firm, Philips Electronics, announced on Thursday 1,600 job cuts in its key semiconductors unit and a factory closure in the US to counter weak demand.

A day after saying there was little to lift the global chip industry out of its slump, Philips said it would close its San Antonio facility in Texas and take a charge of €200m spread across the first three quarters of this year.

The move comes four months after Philips announced the closure of a semiconductor plant employing 600 people in Albuquerque, New Mexico, and its shares rose over 6% as the market warmed to the cost-cutting effort.

"Cost cutting is a very efficient way to raise your profit level," said asset manager Lex Werkheim of Amsterdam brokerage Eureffect.

Philips was up 7.2% at €13.56 by 1200 GMT, outperforming a bounce in other cyclical and technology shares, which coincided with a broader rally from six-year lows seen in Europe on Wednesday. Philips, however, remains down just under 20% this year.

The third-largest maker of semiconductors in Europe has struggled to boost its capacity utilisation rate to the 70% needed to break even. But it forecast the new moves would return the division to profit by the fourth quarter.

It said in a statement the factory closures would cut overall capacity by around 20%, leading to a utilisation rate that would deliver positive operating results in the fourth quarter and still include capacity for growth.

"This underlines our thesis that Philips will become an outsource semiconductor manufacturer. With capacity utilisation rates of 52%, they are trailing the industry, which has rates of about 80% on average," said Schroder Salomon Smith Barney analyst Navdeep Sheera.

Semiconductor woes

Demand for semiconductors - used in consumer electronics products such as radios, cameras and mobile phones - has remained sluggish as the industry attempts to recover from its worst-ever slump.

Philips' difficulties, however, contrast with more optimistic statements recently from rivals STMicroelectronics and US group Advanced Micro Devices.

STMicro, the world's fourth largest semiconductor maker, reported in January a better than expected rise in fourth-quarter profit and pledged to outpace the rest of the industry. It also forecast that 2003 would be the year the battered semiconductor sector returns to meaningful growth.

The founder and chairman of AMD told an industry summit this week that the US group had seen "some recovery" and that the industry should see sales clawing back to 2000 levels as the sector pulls back.

Philips chief executive officer Gerard Kleisterlee, however, said on Wednesday there were still no drivers for growth in the semiconductor industry and said the year had started on a soft note.

The highly-cyclical semiconductor unit - employing 34,000 out of a total 170,000 workers - is key to the profitability of Philips and has swung widely to produce some of the largest profits or losses among the group's main five divisions.

In 2002 the unit lost €537m euros while the company overall turned in a net loss of €3.21bn. Boosted by the telecoms and Internet boom, the unit had made a €1.35bn profit in 2000.

Toughest challenge

Kleisterlee last month said the group's biggest operating challenge was its semiconductor unit, adding the company expected sales there to decline 10-12% in dollar terms in the first quarter.

Philips said the restructuring would lead to annual cost savings of €200m, but the savings would not be immediate.

"With the ongoing softness in the industry, we still face a tough couple of quarters before our efforts will truly show through," the unit's chief Scott McGregor said in a statement.

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