Intel to Lay Off 10% of Work Force

Updated: The chip maker says it hopes to see savings of $2 billion in 2007 and $3 billion in 2008 through the restructuring program.

Intel on Sept. 5 announced that it will lay off about 10 percent of its work force, following the conclusion of a sweeping internal review.

The chip maker, which has already made several moves as part of the review, will cut 10,500 jobs by the middle of 2007, the company said in a statement. Prior to the action, Intel, based in Santa Clara, Calif., had about 102,000 employees.

By the end of 2006, Intel expects the employee headcount to drop to about 95,000. That number will be reduced to about 92,000 by the middle of next year, the company said.

The layoffs are a significant part of a restructuring that Intel said will save the company $2 billion in 2007 and $3 billion in 2008.

"These actions, while difficult, are essential to Intel becoming a more agile and efficient company, not just for this year or the next, but for years to come," Intel President and CEO Paul Otellini said in the statement.

Intel began the review and restructuring plan in April as an effort to right itself following a series of missteps that culminated in bloated processor inventories and battered its quarterly financials.

Otellini told analysts the review was designed to uncover ways of increasing the chip makers internal efficiency, such as speeding up decision making, while also streamlining its efforts.

The review itself also arrived at a time of intense competition for Intel. Advanced Micro Devices, Intels main rival, has grown stronger over the past few years and, of late, has gained market share at Intels expense, particularly in the market for x86 servers.

Overall, Intels market share fell to just short of 73 percent for the second quarter of 2006 versus 82.2 percent in the second quarter of 2005, according to Mercury Research.

AMD and VIA Technologies—VIA saw its shipments jump as it filled orders for an end-of-life PC processor—increased their market share during the same time period, data from Mercury Research shows.

"Pretty clearly this is something Intel feels [is] necessary to do in order to [remain] competitive in this environment and get its margin back to where [its] expected to be," said Dean McCarron, principal analyst at Mercury Research. "The competitive environment is significantly more difficult [for Intel] than it was a few a few years ago."

Right now, "AMDs presence is greater," McCarron said. "That impacts Intel. If Intels making less money, it needs to have fewer expenses. Its pretty straightforward budgeting—whether its one person or a company with 100,000 employees, when income goes down, you have to adjust to it.

Thus, for Intel, cutting expenses involves reducing headcount and other measures, including shuttering underperforming businesses and cutting capital expenditures and other costs.

/zimages/5/28571.gifClick here to read more about Intels internal efficiency review.

Although the internal review had been scheduled to conclude in the third quarter, Intel began making moves much earlier in an effort to become more agile. For one, it pledged to pull in product introductions—something it did with its Core 2 Duo PC processor, for example—and speed up its rollout of new processor architectures, which underpin those products.

Indeed, the chip maker is looking to a stronger product lineup, made up of the Core 2 Duo and chips such as its Xeon 5100 for servers, to vault it back into the minds of server buyers and desktop performance enthusiasts, two groups that had turned away from it in some numbers and chosen AMD instead.

Intel will also deliver, later the week of Sept. 4, its vPro chip platform for business desktops.

Intel hopes to ultimately combine better products with a more agile company, the company said. To that end, it has already taken several actions. Some, including reducing the number of managers it employs, were designed to improve internal communication and streamline decision making, the company said.

Prior to the layoffs, Intel had jettisoned its communications processor business, reorganized its Flash Memory Group, laid off 1,000 managers and shuffled its senior executive ranks, promoting senior executive Sean Maloney to chief sales and marketing officer, leading its Sales and Marketing Group.

Maloneys promotion, along with shifting the responsibilities of several other senior-level executives, reduced the number of people who report directly to Otellini, giving Intels chief executive more time to focus on larger strategic initiatives, the company said.

Given the number of actions Intel has taken since April, the job cuts didnt come as a major surprise.

Analysts have predicted for some time that the chip maker would part with at least 10,000 employees as part of its drive for efficiency.

Intel was expected to reduce its employee roster by between 10,000 and 15,000, for example, Doug Freedman, an analyst at American Technology Research in San Francisco, wrote in a July 13 report.

"Its clear that Intel has to realign its cost structure to compete with a revitalized AMD," said Roger Kay, president of EndPoint Technologies Associates, in Wayland, Mass., in a Sept. 1 interview with eWEEK.

"Part of that has to involve personnel cuts as well as other efficiencies such as manufacturing streamlining and possibly the sloughing of more non-core business units," Kay said.

Intel officials said the job losses in 2006 will be a combination of layoffs in management, marketing and IT functions, as well as previously announced sales of businesses and attrition.

Those job cuts in 2007 will come after further review as the company improves efficiencies in manufacturing and improved equipment utilization, gets rid of job redundancies and improves product design methods and processes.

The company said better utilization of its manufacturing equipment and space will cut expenses by $1 billion, and that in 2007, about a quarter of the restructuring programs savings will be applied to reduce the cost of sales.

The rest will be used to reduce operating expenses, the company said.

The severance costs connected to the layoffs will cost the company about $200 million, the company said.

Intel said it will give further updates on its restructuring plans when it releases its quarterly earnings on Oct. 17.

Editors Note: This story was updated to include analyst comments.

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