Monday, October 20, 2014

IBM exits chip business to concentrate on systems and solutions

Surprising to few, satisfying many, IBM has announced signing of a Definitive Agreement with GLOBALFOUNDRIES for the latter to acquire IBM's global commercial semiconductor technology business as well as the commercial electronics business (including ADIC and specialty foundry, manufacturing, related operations and sales). The deal includes all intellectual property, world-class technologists and technologies related to IBM Microelectronics. The move has, in fact, been anticipated and rumored for some time. 

Subject to completion and approval of all applicable regulatory reviews, GLOBALFOUNDRIES will become IBM's exclusive provider for 22nm, 14nm and 10nm semiconductors for the next 10 years. The deal calls for IBM to pay GLOBALFOUNDRIES a cash consideration of $1.5B over the next 3 years.

IBM employees and facilities at Fishkill, NY and Essex Junction, VT will transition to GLOBALFOUNDRIES. Semiconductor server group employees as well as those doing semiconductor system assembly, test and fix ‘n repair facilities located in Albany, NY and Bromount, Canada will remain with IBM.

The agreement is structured to provide maximum benefit to the employees and business functioning of both companies. For example, executives in both companies as well as state and local politicians have been working together to protect jobs and investments in the region. GLOBALFOUNDRIES plans close to $10B in capital expenditures in 2014-2015, primarily in New York state.

This marks the final step in IBM’s gradual exit out of what it recognizes as low-margin, hi-volume businesses. IBM recognizes its business strength to be in value-added, service intense businesses. Acknowledging their strength in value-added solutions motivated earlier sales to Lenovo of the System x and PC business. Arguably, these moves could have been implemented earlier, but IBM deserves credit for decisively moving forward to make a clean exit.

Without having access to the details of the underlying financials, I suspect these decisions was made somewhat easier once internal analysis revealed that the end-to-end supply chain integration was neither financially viable nor operationally mandatory. IBM identified a weakness in their operations, evaluated alternatives, and selected what they saw as the best way to move forward.

IBM will be able to concentrate on the areas of high-end and mid-range systems market with mainframes and Power-based servers and solutions. Freed from day-to-day responsibility of semiconductor manufacture, IBM will focus where they have proven ability to drive profitable business. There are some questions though: Isn’t there a risk to the future of their servers if they cannot control the basic chip technology? Future platform capabilities and innovation are closely tied to the underlying chip. Won’t IBM be at a disadvantage if they don’t control the chip?

First, IBM will still develop its POWER and System z processor chips. GLOBALFOUNDRIES will manufacture those chips for IBM. So, IBM maintains control of the design of the chips. This means they will continue to be able to optimize the chip architectures for its systems.

IBM competitors like HP and Oracle have not manufactured their own chip products for a long time. In fact, today HP is almost completely reliant on Intel-sourced commodity chips for its servers – meaning, they have almost no input to the design of those chips. At the very least, it’s clear that control over manufacturing isn’t all that critical. IBM has nearly a decade long close relationship with GLOBALFOUNDRIES, which continues even after they become the largest semiconductor manufacturing employer in the Northeast.

IBM confronts other aspects of this challenge in multiple ways. There are the earlier mentioned plans for continued investment in basic research. There are plans for continuing the close collaboration with GLOBALFOUNDRIES as a partner supplier and design of chips. Next, IBM and GLOBALFOUNDRIES remain active partners in several collaborative semiconductor research activities in joint efforts with the Colleges of Nanoscale Science and Engineering 9CNSE) and SUNY (State University of New York) Polytechnic Institute in Albany, NY.  Thus, IBM has assured that they remain close to and influential in the basic platforms their servers and mainframes depend upon.

IBM will continue to influence semiconductor chip technology through its on-going R&D investment ($3B over 5 year) in semiconductors which complement on-going leading-edge research in cloud, mobile, big data analytics and secure transaction-optimized systems. Silicon chip technology will remain at the heart of basic chip technology for at least a decade, possibly more. IBM has publicly outlined multiple areas of research for the post-silicon world (discussed in our soon-to-be published blog about IBM’s Enterprise 2014 event). 

It’s our opinion that IBM has made a difficult but necessary decision. This business lost $700 million last year.  Many times, often it is compelling and necessary for a decision to be made among alternatives that are not clearly bad, good, better, best. Choices can be all good, all bad or a combination. Worst case, the only decision that can be made requires choosing the least damaging from a collection of bad decisions, then living with the consequences. The ability to make that decision and live with it separates the true leader from imitators. I don’t think this was one of those worst case decisions. Congratulations to IBM’s management that did make a decision, as IBM continues to reshape itself to grow in the changing IT landscape.