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Europe's high-tech sector suffering from midlife crisis

02 февраля 2009

We knew it was coming to Europe, and that it was just a matter of time. Nonetheless, when the tidal wave of industrial job cuts finally hit the high-technology industry last week it was still something of a shock

No one has been surprised about the dire state of affairs in the automotive sector, where overcapacity has long been a problem in Europe. But, secretly perhaps many had hoped that Europe's high-tech champions SAP, the German business management software group, and STMicroelectronics, the Franco-Italian chipmaker, might be able to hold out just a little longer.

After all, SAP is Germany's shining example of a home-grown Silicon Valley-style success, the third-biggest software group in the world after Microsoft and Oracle. It even went on a hiring spree last year and was voted the country's best employer in 2006.


As for STMicro, it may have struggled against the weak dollar last year, but the continent's biggest chipmaker has been putting its house in order and still carried the hope that Europe could sustain a powerful player at the very frontier of high-tech industries.


These illusions were dashed on Wednesday with news that each would slash jobs and reduce costs; SAP is set for the first cuts in its 30-odd year history in spite of a relatively good performance in 2008. STMicro was equally shocking in its gloomy forecast that its market would tumble by at least 25 per cent this year.


Their announcement of a total 7,500 job cuts followed the descent into bankruptcy last week of Qimonda, the German memory chipmaker ranked fourth in the world.


To say that these job-cut programmes are the consequences of the dramatic slowdown in investment and spending around the globe may not come as any great insight. But looking at the causes of the cuts a little more closely suggests there may be much more at stake. The real question is whether what were once growth markets, with room for everyone, are today mature industries where the rules are very different.


Take SAP for example. No longer can it rely solely on market growth to keep the wheels turning. Now it has to think about boring things such as how to keep margins going in slow growth markets at a time when price competition is mounting and the costs of innovation are high.


Software may not yet be as commoditised as semiconductors or memory chips, but it is clearly on its way. And while the likes of SAP and STMicro may still be European champions, the question must be: just how much longer can they hold on to their titles when new competitors are selling more cheaply and while they remain much smaller than their next biggest rivals.


Scale will matter in mature markets and, after the job cuts, it may be that these Continental champions will have to think about finding new allies if they want to stay in the game.


Thomson's image problem

Speaking of high-tech markets, there can be no better example of how far the mighty can tumble than Thomson, the French media services group. Once a proud symbol of innovation in image technology, Thomson this week looked dangerously vulnerable unless creditors agree to the latest restructuring plan.


With debt at a gross €2.9bn ($3.8bn), the group will be in breach of its banking covenants, says Frédéric Rose, chief executive. To tempt his bankers, Mr Rose plans to sell non-core businesses accounting for €1bn in sales. The question is whether he can find anyone to buy them, and whether what is left - providing image services to film studios and broadcasters - can make any money.


To be fair to Mr Rose, he has his back against the wall. He has to convince bankers there is a new, sustainable life for Thomson if he wants to resolve the immediate crisis. But the reality is that any plan may now be too late. The group has no more financial flexibility, having drawn down the last of its credit lines in the past few months. Buyers will be scarce and Thomson's ability to pay down debt looks pretty slim.


The only real decision may be the one that the French government failed to take many years ago, when it began breaking up the old state-owned Thomson conglomerate to create a raft of other industrial groups from Thales to STMicro. Instead of leaving a consumer electronics company - one that has struggled to find a new life as a media services group - Paris might have been better to continue parcelling Thomson out.


But it may not be too late. There remain some decent cash cows in the company today - the lucrative licensing and patents business, for example, generating a few hundred million a year.

There are some who suggest this business would be better used to bolster the struggling Alcatel-Lucent. And France Telecom would have an interest in finding a safe home for Thomson's set-top box business, as one of its main customers.

 

By Peggy Hollinger

 

Источник: Financial Times

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