IBM faces chip crossroads

With a whirlwind two weeks' worth of IBM news, the road ahead for Big Blue looks a little clearer, but key questions are publicly unanswered on which road the chip business will take. ♦ What's clearer is that IBM's chip division, microelectronics, continues to post declining revenues. Thursday's earnings report showed an 18 percent fall in the second quarter compared with one year earlier.

On Tuesday, Apple and IBM announced plans to team to sell more iPhones and iPads to corporate customers and government agencies. The partnership calls for the companies to work together on about 100 mobile applications designed for a wide range of industries.

The same day, IBM was among the companies included in an announcement that New York will partner with more than 100 other companies, universities and public authorities, including IBM and GlobalFoundries, to develop and manufacture new materials for semiconductors.

There was also a clarion statement from Chief Financial Officer Martin Schroeter that IBM's commitment to technology was strong, as shown by the July 9 announcement of a $3 billion investment over five years "in research and in early-stage development to create the next generation of chip technologies."

But research and development, R&D, is not manufacturing.

Here's what's not clear:

Will IBM Corp. sell off its semiconductor manufacturing business?

Will IBM do a joint venture?

Would IBM buy chips from partner GlobalFoundries?

Or, would it maintain its own chip fabricating facilities and people as it has since the modern era of semiconductor magic began?

And what would that mean for the major chip plant in East Fishkill and several thousand people whose livelihoods depend upon it?

Last week, the Poughkeepsie Journal reported that a potential deal with chipmaker GlobalFoundries, code-named Project Next, had stalled and perhaps fallen apart.

The Poughkeepsie Journal reported this deal based on sources in positions to know inside workings at IBM.

This could hardly be confirmed by the companies because they had never said they were in deal talks in the first place.

Wednesday, a clue was offered by Alain Kaloyeros, head of the SUNY College of Nanoscale Science and Engineering in Albany, where IBM is a major player in chip research.

He gave no specifics on the "rumors," but the Journal's Albany bureau quoted him saying to "stay tuned" about a deal.

On Thursday's conference call with brokerage analysts, IBM's Schroeter ducked out of a direct answer to a question about the chipmaking future.

The background here shows how IBM is torn between two paths.

Finances push it toward one road.

That's paved with cost issues, including the shrinking revenues of the chip division, the looming larger costs of staying in a very expensive game and IBM's own strategy of refocusing its efforts on businesses more profitable than hardware.

The other road is the one that has brought great prestige and profit to the company, which is being a highly integrated information technology giant with expertise in many areas that closely connect to each other — with chipmaking as a foundation technology.

Key here is that it was the mainframe computers made in Poughkeepsie that led IBM to get into building the East Fishkill complex to get better chips in order to have better computers than the competition.

If IBM left manufacturing, would it still have that edge? There's some doubt on that.

Dan Hutcheson, CEO and chairman of VLSI Research in San Jose, California, said, "Assuming IBM got out of semiconductor manufacturing, they would lose that level of prestige."

"You take out the semiconductors and all you really have is metal and plastic," he said.

While it can sell off the low end of the server business to Lenovo, now awaiting government approval, the high end computers are different.

"The hardware focus is on the stuff where they can add value with their architecture," said Hutcheson, "and the architecture is driven by their ability to make silicon."

He recalled that IBM competitor Hewlett Packard Co. used to make its own chips and spun that division off in 1999.

"They were just going to do research," he said. "It's never really had any credibility."

From a financial perspective, the road looks different to Scott Kessler, analyst with S&P Capital IQ.

"I think a lot of people outside of upstate New York and certain places around the world don't realize that IBM in many respects already is a services and a software company. And that's borne out by the revenue," Kessler said.

Of the quarter's $24.4 billion in revenue, about $14 billion was from services and about $6.5 billion was from software.

"To be frank, semiconductors does not fit within that more specific characterization," Kessler said.

Despite IBM putting $3 billion into chip research, "I'm not so sure that they need to maintain all of the manufacturing operations and capabilities even if they've committed to that level of investment in an ancillary area," he said.

Craig Wolf: 845-437-4815; cwolf@poughkeepsiejournal.com; Twitter: @craigwolfPJ

ONLINE

For the latest IBM news, including videos, articles, photos and interactives, go to www.Poughkeepsiejournal.com/business/ibm/

REVENUE

IBM posted Thursday second quarter revenue of $24.4 billion.

SOURCES

Of the second quarter revenue, about $14 billion was from services and $6.5 billion from software.

INVESTMENT

On July 9, IBM announced plans for a $3 billion investment over five years "in research and in early-stage development to create the next generation of chip technologies."