Analyst, economist weigh potential of IBM sale to Globalfoundries

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.

A microchip at IBM. Photo by Nat Rudarakanchana

A microchip at IBM. Photo by Nat Rudarakanchana

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.

IBM worker Jim Clairmont.

Software engineer Jim Clairmont was laid off from IBM in June 2013 after working 33 for the corporation.

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.

Art Woolf, economics professor at the University of Vermont. Photo by Hilary Niles/VTDigger

Art Woolf, economics professor at the University of Vermont. Photo by Hilary Niles/VTDigger

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.

Hilary Niles

Comments

  1. This is a prime example of an industry that would benefit from being turned over to the workers. The people who work at IBM in Essex know how to do their jobs creating electronics. The bean counters who want to close the plant for higher profits exploiting poorly paid workers in other countries do not give anything to Vermont or to the people who work at IBM.Put the plant in the hands of the real stakeholders, the workers and the community without shareholder compensation.

    • Dan Thompson :

      These aren’t slave workers, they are well paid regardless of VT or at the Singapore FAB.

      It isn’t “Bean counters” putting them out of business, it is VT. VT isn’t near any other kind of manufacturing base, or near customers, nor does it have cheap power or readily available talent. IBM is highly silo’d, and we have no business trying to prop up a failing venture.

    • Paul Lutz :

      Turned over. Pehaps they should try to purchase it. Or in your world of make believe, would IBM just “give ” them the company??? I see how Obama got elected.

  2. Walter Carpenter :

    “This is a prime example of an industry that would benefit from being turned over to the workers.”

    I agree, Marina.

  3. Townsend Peters :

    Vermont government’s been giving IBM incentives to stay and employ people for decades, but it lays off employees anyway and now appears poised to leave.

  4. Kevin McGrath :

    I agree with much of is said in this article, but what the article doesn’t talk about is how a very successful Essex Junction plant in the late 1990’s goes to totally unproductive facility in such a short time in the early part of the 21st century. The blame rest equally on IBM and the State of Vermont. The loss of the critical skill base needed to manufacture semiductors was fueled by highly unethical

    • Kevin McGrath :

      continued…

      treatment of the skilled workforce by IBM and local managers in Vermont. I would be totally surprised if that plant could ever be successful as a semiconductor manufacturer in the future. IBM Vermont is good at development but lost its customers because of yield and quality problems. The manufacturing of semiconductors is a complex process and when you rely on temporary employees and the management has competency issues you are bound to fail. I agree Vermont can overcome the loss of IBM manufacturing, but that will take time and could lead a more diverse economic bases in Essex in the future. Whatever the outcome, one thing is for certain the present employee structure at the IBM facility in Essex can never be successful in the future without major changes in management and a large influx of ethical skilled employees.

  5. Tony Redington :

    Vermont could make IBM and it Technology Park a competitive worksite in terms of transportation by installing commuter rail right from its parking lot to Burlington, Montpelier ans St Albans–the plan and data have been in plain sight for for two and a half decades. Also, the two terrible entrances in Essex along with the refusal of that town to place an safe, efficient, single-lane roundabout at 5-Corners speaks louder than words about the lack of Essex community concern for its bread-and-butter employer.

    Tony Redington Burlington Blog: TonyRVT.blogspot.com

    • Glenn Thompson :

      Tony,

      Never happen! Have we NOT learned our lessons yet from the now ‘dead’ Champlain Flyer???

      1. Wasted Federal $$$$
      2. Under estimated costs, over estimated ridership.
      3. Made NBC’s fleecing of America segment 3 times.
      4. Turned over to the state. The state couldn’t find the funding to operate it…thus the Champlain Flyer was shutdown!

      Vermont (Chittenden County in particular) is a low to moderate density population center. Light rail is not economically feasible. Plus light right would compete directly with CCTA. Can we afford to subsidize two mass transit systems in such a small area?

      As for the 5-corner roundabout proposal. That was never going to happen. Keep in mind 5 corners is a 5 point intersection. Adds to the complexity of the engineering design. The state did a prelimary engineering design. (which I saw) and it showed a large area within 5-corners being impacted, including 2 historical buildings and the memorial park. Essex officials did NOT want 5 corners to turn into the main traffic hub within Chittenden County. The proposed 5 corners roundabout would have done nothing to reduce traffic volumes leading into and out of 5 corners.

      Finally, IBM wanted the Williston portion of the Circ completed. The plan was to run an access road off of the Williston segment directly to IBM…thus avoiding truck traffic from having to go through that mess at 5 corners and other secondary roads that are increasing in traffic volumes. The last group of people you should be blaming is Essex planners,administrators, and officials.

  6. Ken McPherson :

    Many people recognize Moore’s (First) Law – the power of chips will double every 18 months or 2 years. Far fewer recognize Moore’s Second Law – the cost of the fab plant will be proportional to the power of the chip. The huge cost of developing a new fab plant – in the $5 billion range for the new IBM/Globalfoundries/SUNY Albany fab plany in Malta NY that will start production at the 32 nanometer scale – means that there will be fewer fab plants and new fab plants will be located close to nanotechnology centers of excellence – places that can supply the bleeding edge scientific and production staffs that they require.

    The nanotech center that will support the Malta site represents federal, state, and private investments in the billions of dollars. Unfortunately, UVM is simply not a leading edge STEM university, let alone a nanotech center of excellence.

    Essex Junction and Fishkill are fabs nearing the end of their useful lives. No rotaries can change that. Employee ownership is simply not an option – I find it hard to imagine a financial institution that would lend the employees enough money to buy an increasingly outdated plant, And I cannot imagine that $1.5 million dollars in Shumlin’s pocket could influence a decision that involves $billions.

    I have to strongly recommend that the Gov use that money to help foster new businesses that are of a Vermont scale, at the leading edge of emerging markets where a small state can support a bleeding edge market leader and provide opportunities for Essex Junction’s skilled workforce.

  7. Glenn Thompson :

    From the article!

    “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.”

    That would be my guess! Globalfoundries would purchase the division for the technology and take the manufacturing process to some other part of the country or overseas due to Vermont’s non competitiveness in this type of business! I hope that it turns out …NOT..to be the case, but fear it’s going to happen!

    Next question becomes? What is Shumlin planning to do if indeed IBM sells off it’s computer chip division?

    1. Lower the facilities electric rates further?
    2. Give the new company massive tax breaks to stay?
    3. Order the completion of the Williston Segment of the CIRC highway to give easy access from the facility to a major highway which would be considerably quicker than the current options now?

    My guess, Shumlin will do none of the above, thus another horse gets to gallop out of the barn when the doors are left wide open!

    • David Dempsey :

      Glenn,
      I couldn’t agree more. There is nothing Leahy, Shumlin or Cioffi can do to influence IBM’s decision.

  8. Robert Wellington :

    I am disappointed by the first line of the story. Globalfoundries may have a headquarters in California, but make no mistake, the company is owned by the Emirate of Abu Dhabi. A California HQ is a cover for making U.S. acquisitions. Now consider that the Essex Jct IBM site does government work and you have to wonder why we are letting this happen.

Comments

*

Annual fundraising appeal: If we had a dollar for every comment, we could end this annual fund drive now. Donate now.
Comment policy Privacy policy
Thanks for reporting an error with the story, "Analyst, economist weigh potential of IBM sale to Globalfoundries"