Philips to shutter chip fabs

Slow demand, combined with the increasing cost of making chips, is forcing Philips Electronics to shed workers and manufacturing plants in its chip division.

Philips Semiconductors, the chip division of the Dutch electronics giant, announced that it will close semiconductor fabrication facilities, or fabs, in San Antonio and in Albuquerque, N.M., this year in an effort to return to profitability. It also plans to shutter business offices in Europe and the United States.

The work performed at these fabs, which account for about 20 percent of Philips' semiconductor manufacturing capacity, will be transferred to foundries, such as Taiwan Semiconductor Manufacturing Co. (TSMC), which make chips on behalf of designers.

Overall, the shift will allow Philips Semiconductors to reduce operating expenses by 200 million euros (about $215 million) per year, the company said. It plans to reduce employee headcount by around 1,600 this year.

Like other chip companies, Philips, which makes a wide variety of chips for the communication market, is stuck between slow demand and high costs. Although industrywide, semiconductor revenue is rising, the rate of growth is slow. In 2002, global revenue grew 1.3 percent to $140.7 billion, according to the Semiconductor Industry Association. In this environment, many companies are finding it difficult to turn a profit.

"With the ongoing softness in the industry, we still face a tough couple of quarters before our efforts will truly show through," said Scott McGregor, CEO of Philips Semiconductor, in a prepared statement.

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Concurrently, the cost of making chips continues to rise. The price tag for building a fab currently runs between $2 billion to $3 billion and is rising. The cost is forcing companies to outsource work or to partner with other chip companies on research and development and manufacturing.

Philips, for instance, has entered an alliance with Motorola and European chipmaker STMicroelectronics that lets the companies share the costs of developing manufacturing technology for 90-nanometer chips and of other projects.

Some, such as Advanced Micro Devices CEO Hector Ruiz, have predicted that the costs will prompt consolidation in the chip industry.