If IBM were to sell its computer chip-making unit to California-based Globalfoundries — patents and all, as the company is widely rumored to be considering — would the new owner of Vermont’s largest manufacturing plant even want to keep it?
Probably not, according to Len Jelinek, a semiconductor manufacturing industry analyst for the global information firm IHS.
National press reports indicate Globalfoundries is primarily interested in IBM’s intellectual property — not the physical plant in Essex Junction, Vt. — and Jelinek holds the same view. The firms already collaborate and share some patents.
Jelinek, however, is not convinced the potential sale is a done deal — or even that selling the chip-making unit would be in IBM’s best interest.
“I think there’s a lot of people running around with doom and gloom with regards to IBM’s chip manufacturing,” Jelinek said. “I don’t entirely subscribe to that.”
Jelinek said financial analysts have been pressuring IBM to shed its chip-making division for years.
“As of about a year ago, they’ve really been adamant that it was strategically critical to their business,” he said.
But a lot has changed in the past year Jelinek noted. Meanwhile, speculation in the financial media about a pending sale involving IBM’s Essex Junction plant has intensified.
The Financial Times reported in February that IBM had hired investment firm Goldman Sachs to find a buyer for the division, and a June 10 Bloomberg article indicated Globalfoundries was close to signing a deal.
Neither company will confirm nor deny the buzz; both firms are keeping industry watchers guessing.
“IBM doesn’t comment on rumors,” IBM spokesman Jim Keller said in an email response Friday. Globalfoundries did not respond to inquiries by press time.
IBM is Vermont’s largest private employer, with about 4,000 workers, and anxiety about the impact of the plant’s sale and potential closure is palpable.
For decades, Big Blue has buttressed the Vermont economy and has swelled the growth of Chittenden County.
But waves of layoffs hit the plant in the 1990s, and IBM’s workforce has withered by half since its peak around 2001. Political and business leaders from Sen. Patrick Leahy, D-Vt., to Frank Cioffi, president of the Greater Burlington Industrial Corp., say they’ll do whatever they can to keep it. And even in a tight budget year, Gov. Peter Shumlin found $4.5 million in cash incentives for IBM or its replacement. A few weeks ago, the governor also brokered a deal between Green Mountain Power and IBM to lower electricity rates for the plant.
Despite these feverish efforts to keep IBM in the Green Mountain State, there is little the state can do to prevent a potential sale of the plant. Global trends are driving behind-the-scenes negotiations between powerful industry players.
Jelinek says if the rumored deal with Globalfoundries does gel, IBM likely would transfer production in Vermont to Singapore, not New York.
But, he underscored, that remains a big “if.”
Here are some of the factors in play:
- IBM’s chip-making unit is not profitable — by design. The company long ago chose to develop and produce its own patented technology to sell to itself, because to do so was cheaper than purchasing innovations on the open market, Jelinek said. The chip-making operations alone don’t turn a profit. But the value of the chip products more than makes up for the costs, he says.
- IBM has lost a significant portion of its customer base for products made in East Fishkill, Jelinek said, which means the value of the plant’s output has dropped substantially. The situation “has a lot of people concerned,” he said.
- Globalfoundries wants more market share. The Taiwan Semiconductor Manufacturing Co. is the world’s top producer of semiconductor chips. Globalfoundries, a subsidiary of Mubadala Technology, is the world’s second largest semiconductor manufacturer. The private company wants to surpass TSMC and commandeer the global market. Mubadala Technology (formerly Advanced Technology Investment Co., or ATIC) is part of a multi-sector corporate network wholly owned by the Emirate of Abu Dhabi.
- IBM is a smaller player among semiconductor foundries. In order for Globalfoundries to overtake Taiwan Semiconductor Manufacturing Co., it would need to acquire more manufacturing capacity or grow its output by a substantially higher margin. Globalfoundries could increase its production if it bought the IBM chip-making division, but it will take a lot more to push the company into top place.
- Globalfoundries is said to be more interested in IBM’s intellectual property than its physical holdings. “If part of the deal included IBM research labs, now we’re talking about a completely different discussion and that makes very good sense (for Globalfoundries),” Jelinek said. The research and development value could make up for overhead costs, he said.
- Globalfoundries has passed on rumored acquisitions before. Because Globalfoundries has already purchased plants and is clear about its intention to grow, Jelinek said, “every time a factory comes up for sale, everyone says, ‘Globalfoundries is going to buy it!’” But in at least a few cases, he said, past speculation or negotiations haven’t panned out.
- Globalfoundries manufactures chips on three continents: in Singapore, Germany and at its newer facility just north of Albany in Saratoga County, N.Y.
- IBM’s chip-making manufacturing plants are located in Essex Junction, Vt., and East Fishkill, N.Y., also near Albany. Some pre-production development work is done in Albany, and post-production assembling and testing in Quebec.
- Neither company currently is producing at full capacity. Globalfoundries’ Singapore operations are under-loaded, as are IBM’s — especially in East Fishkill, according to Jelinek.
- Globalfoundries and New York state are heavily invested in the company’s presence in Saratoga County. Globalfoundries put $6 billion into its New York plant, and has plans to double that investment.The company also promised to pour $2 billion into a Technology Development Center at its site in Malta, N.Y. According to a Greater Burlington Industrial Corp. situational analysis, the state of New York has provided about $1.865 billion in financial incentives to land Globalfoundries. In a 2011 assessment of Globalfoundries’ presence in New York, economist Everett Ehrlich said the site location would not have been possible without substantial state incentives.
- The technologies in Vermont and New York don’t match up. IBM’s facility in Essex Junction is manufacturing products that are similar to those Globalfoundries is making in Singapore, Jelinek said.
Economist: IBM closure wouldn’t kill Vermont’s economy
University of Vermont economics professor Art Woolf has tried to imagine the impact on the local economy if the plant were to close in a year.
Most obviously, it would mean the loss of about 4,000 high-paying jobs. The GBIC situational analysis estimates that IBM generates $200 million to $250 million in annual payroll and injects about $1 billion a year into the state’s economy.
Woolf thinks those estimates are probably low. But the local economy already has lost that many jobs or more since IBM’s peak, Woolf said.
“If they close down, we’d be repeating what’s happened in the last number of years, except it would happen much more quickly,” he said.
Job losses of that magnitude are easier to absorb over time, Woof acknowledged. Still, he said, the area’s financial engine is diversified and resilient enough that even such a “worst case scenario” would not kill the economy.
And depending on the structure of any sale, the plant could stay open for a time, or possibly be scaled down.
One factor that would temper the consequences of any job losses, Woolf said, is IBM’s highly trained workforce. The expertise and capabilities of these employees are an asset for the state’s economy, he said, suggesting a plant closure could free these highly trained workers to start new businesses or enhance other companies.
“Those freed resources can be absorbed by either existing firms or new firms,” Woolf said. “If there’s somebody out there that can make use of those resources, then that’s going to moderate the downside effect. And that happens all over the country when major companies close down.”
“You’re not going to have 4,000 people selling their houses and moving. And you’re not going to have 4,000 people totally unemployed,” Woolf said.