Intel Announces Layoffs, Reorganization

Continuing his quest to stop a slide in profits, Intel chief executive Paul Otellini today announced layoffs of about 7500 employees. Added to previously announced layoffs of middle-management executives and the sale of two business units in recent months, the actions reduce Intel's workforce by a total of 10,500 people by 2008--about 10 percent of the entire company.

The layoffs will happen in stages. Most job losses that take effect in 2006 have already been announced, including Intel's sale of its media and signaling business in August, the cut of 1000 executives in July, and the sale of its XScale smart-phone chip division in June. Those jobs include workers in management, marketing, and IT.

More Cuts in 2007

Many more cuts will happen in 2007, when Intel chops jobs in manufacturing and product design, improves equipment use, and eliminates other redundancies, the company says.

The total impact will leave Intel with 92,000 people by the middle of 2007, down from the 102,500 it reported in the second quarter of 2006. By cutting these jobs, the company will save $2 billion in 2007 and $3 billion per year beginning in 2008, Intel says.

The cuts were a dramatic move for a company that holds a commanding 80 percent worldwide market share of PC chips and that posted a profit of $885 million in the second quarter. Still, the company could have made more money, illustrated by Otellini's recent prediction that Intel would post profits of $9.3 billion for 2006, down from $12.1 billion in 2005.

Why Cuts Are Necessary

Intel's problem came from slowing growth in the PC market, a loss of share to rival Advanced Micro Devices (AMD), and Intel's move to preserve its market share by sharply reducing prices of its chips. To address those issues, Otellini told analysts in April he would "restructure, repurpose, and resize" the company over the coming quarter.

Analysts cheered Otellini's move, saying Intel had become bloated. Otellini can use the new cuts to achieve four goals, says Ted Schadler, vice president for consumer electronics research at Forrester Research.

He can eliminate redundant jobs, simplify operations by having fewer products, get out of businesses that don't match Intel's core strengths, and get out of businesses that aren't so profitable, Schadler says.

When Otellini succeeded former CEO Craig Barrett in May 2005, he found that there was a huge competitor lurking on his left flank--AMD--and he saw in Intel a company that was no longer a lean machine, but had grown to fill every nook and cranny, Schadler says.

"So he eliminated middle management, getting rid of 1000 executives. And now he's using that as a pry-bar into the organization to say 'Who do we really need?'" says Schadler.

"They need to react faster to changing markets. Power [efficiency] is a huge issue, but it took them two years to get a product out the door that was even arguably better. Their road map looks great now, but that's too long."

CEO's Other Actions

Since meeting with analysts in April, Otellini has also pushed new chips to market faster, resulting in a raft of new chips in recent months, including the "Woodcrest" chip for servers in June, the "Conroe" Core 2 Duo chip for desktops in July, and the "Merom" Core 2 Duo chip for notebooks in August. Intel also reached for the high-end server market with the new "Tulsa" Xeon and "Montecito" Itanium chips.

And with an eye to the future, Intel accelerated the launch of its quad-core chips for desktops and servers, pledging to release them in the fourth quarter of 2006 instead of the first half of 2007.

Intel hopes this flood of new products will stop the erosion of its dominant market share. The company manufactured 77.9 percent of all CPUs sold in PCs around the world during the first quarter of 2006, according to Gartner. That number is down from 80.5 percent in the first quarter of 2005 and 81.5 percent in the first quarter of 2004.

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