Intel has succumbed to market pressures that see its PC chips business weakening, prompting it to shift focus away to more promising businesses and compelling it to cut 11% of its more than 120,000 workforce worldwide.
Intel had dominated the chip manufacturing industry as it provided processors for long-time partner Microsoft, but the company was unable to immediately adopt its product offerings to be lead components supplier for mobile devices like smartphones and tablets, which have snatched market share away from desktops and laptops. Sales for PCs have been continuously dropping, with a decrease of 10% in the first quarter.
Brian Krzanich, Chief Executive of the company, explained that the job cuts are tough and are taken seriously by the company, but would serve the purpose of cutting costs and freeing up money to be used for businesses that are growing.
Although some see that Intel will pursue winning Apple’s orders for wireless chips, Intel is not looking to play catch up with the smartphone market. Krzanich wants the company to focus on the Internet of Things, a business dedicated to developing non-computing appliances. These devices are being designed to have data processing and communication capabilities, bringing them online. This had been a focus of Krzanich and generated $2 billion in sales in 2015. In the last month lay-offs of 1,155 workers, though, this division suffered the greatest percentage loss, at 4.3%. Even Doug Davis, who leads the division, announced that he would be leaving.
The company is said to be actively looking for new talent and letting go of some employees.
Krzanich also believes that there is growth for selling chips to computers for data servers and cloud computing, as well as memory chips and programmable processors.
Analysts welcome the idea of the cuts, no matter how painful. “As they forge forward, they need to pare down and invest in the right area. As much as I hate that — it’s terrible for people who are laid off that — for the investors its positive,” said Betsy Van Hees of Wedbush Securities.
The company announced that it anticipates $750 million in savings during the year from the job cuts. However, a one-time $1.2 billion charge would have to be posted in relation to the program, covering severance packages. Investors are also disappointed due to the lowering of revenue guidance for growth during the year. Polls from Thomson Reuters showed that investors expected $14.16 billion in revenue but Intel only announced expectations at $13.5 billion for the second quarter. This results to a 2.4% drop in Intel’s stock price.
Intel had been undergoing restructuring over the last three years, so the layoffs are not really a surprise. What is surprising is why only now and at such magnitude. Oregon business writer Bill Connerly says that Intel’s move is a sign of bad management. “Certainly circumstances change and reductions in workforces are required. But why not a few hundred last week, another hundred next month, in a gradual process that has a similar result,” he writes.
Regions expected to be significantly hit by the job cuts are Oregon (for which Intel is the largest employer with 18,500 workers in Portland) and Chandler, Arizona which has 11,000 employees.