Announcing its biggest restructuring in 20 years, Intel said today that it will cut its work force by 10,500 employees, or about 10 percent, by the middle of 2007.
The job cuts, while severe, aren't as deep as feared among employees. The job cuts are expected to reduce expenses by about $2 billion in 2007.
The company will lay off employees in waves starting this year. By the end of this year, the company will cut its payroll from 102,500 to 95,000.
Of the 7,500 jobs being cut this year, about 2,500 will happen through additional layoffs. Intel has already announced layoffs of 1,000 managers, and asset sales that will cut 2,000 employees. The company expects about 2,000 more cuts through attrition, said Intel spokesman Chuck Mulloy.
By the middle of 2007, Intel will further reduce its head count to about 92,000 employees. Mulloy said that severance packages are still being worked out.
This year, most job cuts will be in management, marketing and information technology, as well as the sale of businesses and attrition. Next year, the company said the job cuts will be more broadly based as Intel tries to become more efficient in manufacturing, reduces duplicate jobs and works on creating more efficient processes and product design methods.
This is a huge story here in the Silicon Valley. First, Intel is the premier chip-making company, with its flagship Pentium computer chips. They have always dominated the market here, with upstart Advanced Micro Devices nipping at their heels. But something happened here that caught Intel completely off guard. Personal Computer sales have been slowing in 2006, with a deceleration of desktop PC replacements in an already mature desktop PC market. Consumers are not replacing or upgrading their desktop PCs. According to a March 2006 edition of PC World:
Shipments of PCs worldwide will grow at a slower pace in 2006 than in 2005, partly because the replacement cycle for desktop PCs has hit a peak, market researcher Gartner said last week.
Desktop PC shipments are projected to grow just 1.9 percent this year overall, declining 8.6 percent in mature markets while increasing 19.5 percent in emerging markets, according to Gartner. Mature markets include the U.S. and Western Europe. Mobile PC shipments are expected to grow 31.4 percent worldwide this year.
Gartner also warned that worldwide PC shipment growth could fall below the current forecast of 10.7 percent if Microsoft doesn't set a precise release date for its new Vista operating system and if end users shy away from adopting newly-introduced Intel technologies.
Those consumers who already have a desktop Windows PC are not planning to upgrade their system--at least not until Microsoft introduces their Vista operating system. And while laptop sales have been increasing, laptop computers are not yet going to take up the slack of the overall drag-down of desktop PC sales. In other words, consumers in the United States are not buying desktop PCs, which will be hurting Intel sales of their Pentium chips.
The second problem is obviously the Wintel relationship. The world's PC market runs on the relationship of the Microsoft operating system and the Intel chips going into every personal computer. The problem here is that the last Microsoft operating system of Windows XP was introduced back in October of 2001--almost five years ago. XP requires a 300 megahertz or higher computer system for it to run on. Intel has processors that are running at speeds of 3.8 gigahertz, and are probably already developing the 4 gigahertz processor. The question to ask here is why purchase these 3 gigahertz-plus processors from either Intel or AMD, when the operating system software to fully support this technology has yet to be developed? And even when Microsoft comes out with their new Vista OS, how many people are going to upgrade their older XP computer systems to even purchase this new Microsoft OS? I personally have two desktop systems that I use--a 3 gigahertz Pentium system and a 1.5 gigahertz Celeron system, both running Windows XP Home OS. And both systems are perfectly fine for running the software that I use and need for the next five years or so. I don't plan to upgrade my computers for a long while.
It is interesting that in the job cuts Intel is making, the cuts are targeting the management, marketing and information technology sectors, rather than in the manufacturing sector. It is almost like Intel realizes they are stuck in this pickle until either Microsoft finally comes out with the Vista OS, or until there is another profound reason as to why people should upgrade their computers (whatever that reason could be). It is interesting to note that Microsoft missed its earnings target for April 2006, according to CNN Money. While the story focuses on the XBox gaming console, I would have to wonder if there has also been slowing sales of the XP operating system (I can't find any current data on this subject).
This latest round of Intel layoffs could possibly show that the Silicon Valley is in a technological and software developing slump. After Windows XP came out and all the software developers adapted their current programs to the XP operating system, there really has not been any exciting innovations in software programs that could excite consumers. That is not to say that software companies are not introducing new products--software companies are always upgrading their products with later revisions. But for the past four years, there really hasn't been anything new to excite consumers into upgrading both their hardware and their software, similar to the Windows 95 craze. Hardware and software have a relationship together--both sides must advance each other at times. Otherwise, the technology will stagnate.
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