IBM set to exit again

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This isn’t your father’s IBM. Your father’s IBM used to make calculating machines and computers, mostly in New York State, and export them all over the world. This generation’s IBM describes itself as a $100-billion worldwide business that seeks to structure big data for the world, to teach customers about cloud computing, and to connect effectively to social business through peripheral devices.

Buying components from other manufacturers, the new IBM makes fewer and fewer machines itself. Instead, IBM provides business services for a digital world.

“Every generation of IBMers has the opportunity — and, I believe, the responsibility — to invent a new IBM,” wrote IBM president Virginia Rometty in IBM’s 2013 annual report. “This is our time. We are working to make this not just a successful business, but an essential institution for our clients and the world in a new era.”

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IBM top management has decided that this generation’s IBM, the sole broad-based computer maker still making its own chips, no longer needs to do so. So it hopes to shed that business, which contributes about two per cent of the company’s revenues. It’s also in the process of selling its low-end server business to Lenovo Group, a Chinese firm.

IBM has only two plants that make microchips. One is in East Fishkill, the other in Essex Junction, Vermont.

GlobalFoundries, owned by the investment arm of the government of Abu Dhabi, Advanced Technology Investment Co. (ATIC), is the second largest in the world of the companies that manufacture microchips. High labor and capital equipment costs in the production of semiconductors creates a niche for these specialized companies, which have become increasingly dominant as other players have focused on other opportunities.

A recent incomplete and unreliable census in Wikipedia of microprocessor chip plants, called chip fabs, listed 168 worldwide. Of these, 60 were in the United States, and of that number nine were in New York State: the IBM plant in East Fishkill, seven at the College of Nanoscale Science and Engineering (CNSE) in the Albany area, and the other one at the new GlobalFoundries plant in Malta, near Saratoga (one of eight GlobalFoundries chip plants in the world: six in Singapore, one in Abu Dhabi and the American one).

Abu Dhabi has plenty of capital, and it appears willing to provide it to support this capital-intensive industry. ATIC, which bought out joint-venture Advanced Micro Devices in March 2012, plans to invest up to $10 billion over the next two years in GlobalFoundries’ Malta semiconductor factory, chief executive Ibrahim Ajami told Reuters news agency in January.

There are always more advanced chips on the horizon. ATIC wants to expand the Malta factory to produce chips with features measuring a billionth of a meter, which will be growth areas in the next three to four years, Ajami said.

New York put together an incentive package worth about $1.5 billion for GlobalFoundries, with $650 million in grants and the balance in tax credits, company spokesperson Travis Bullard told the Albany Times-Union. Bullard said that GlobalFoundries has worked with IBM and other industry partners for about a decade at CNSE. “Being able to locate manufacturing close to R&D is a big advantage for us,” Bullard said. “We’ve been doing a lot of college recruiting from local campuses.”

Where the jobs are
During 2013, the IBM workforce head count at East Fishkill averaged 3675 people. CSNE, an educational institution as well as a chipmaker, employed about 3100, with expansion plans for adding more than 1000. GlobalFoundries at Malta, opened in 2012, provides 2400 jobs, according to a recent Albany Business Review, and has announced plans to add an additional 600 to 800 this year. It also provides about 650 contractor jobs, many filled by IBMers, most on rotating assignments.

So in all the number of advanced manufacturing jobs in the nine local chip plants clustered from East Fishkill to the south to Malta in the north amounts to about 10,000.

Of the slightly fewer than 450,000 manufacturing jobs in New York State in May 2014, 56,400 were in the manufacture of computer and electronic parts, and of these 19,600 were in the manufacture of semiconductors and other electronic components. My guess is that at least half the state’s jobs in the latter category are in the local regional cluster of chip fabs, and that these represent about a fifth of total manufacturing jobs of all kinds in the region — and undoubtedly the best-paying fifth.

With the rise of such giants as Apple, Google and Facebook and the increasing number of smaller innovators of digital technology and its surrounding ecosystem, your technology is no longer your father’s technology, either.

The number of tech jobs has exploded, particularly in the larger cities. A recent study by HR&A concluded, for instance, that the New York City tech ecosystem now includes 291,000 jobs that are enabled by, produce, or facilitate technology. Tech industries, HR&A found, generate 58,000 tech jobs and 83,000 non-tech jobs, while non-tech industries in New York City generate 150,000 tech jobs. In total, New York City’s tech ecosystem employs 291,000 people or seven per cent of the 4.27 million people working in New York City.

In the past decade, the New York City tech sector has added 45,000 jobs. The people in tech jobs get paid 49 per cent more than the average wage, according to HR&A.

As is now well known, IBM is itself one of the big new players on the New York City tech scene. Its recently formed IBM Watson Group, to be headquartered near Cooper Union on Astor Place in the East Village, already has over 2000 employees. Its goals are nothing if not ambitious. According to Forbes Magazine, “The company hopes [Watson] will help it reach a $20-billion revenue projection for its big data and analytics services by 2015.”
Is that doable? Can the relatively new focus really generate ten times the revenue of IBM’s chipmaking operations by next year? Forbes is skeptical: “But aside from the snazzy new digs, Watson will have to make serious money before long if the company will meet its revenue goals. IBM says early test clients in healthcare have reached 3000 doctor’s services today, while over 700 companies have applied to the two-month-old open Watson application system, the IBM Watson Developers Cloud.”

East Fishkill on the chopping block

The business pages have been full of speculation in the past month about the possibility that IBM will make some sort of deal for its chip-manufacturing business with GlobalFoundries. A Bloomberg News article on June 11 outlined the parameters of the proposed deal at that time: “GlobalFoundries is primarily interested in acquiring IBM’s engineers and intellectual property rather than manufacturing facilities, which have little value as they are more than a decade old, said people with knowledge of the matter who asked not to be named because the talks are private. GlobalFoundries, which has its own plant in New York State and a technology joint development project with IBM, will act as a supplier for IBM’s microprocessors, the people said.”

Though no deal has yet been announced, prospects for the East Fishkill plant seem bleak. Those who remember the dishonorable way IBM handled its departure from its Kingston plant more than 20 years ago will find disturbing parallels. There’s definitely an echo there. But this story could yet have a different ending. There’s always hope. As Yogi Berra put it, “It ain’t over ’til it’s over.”

Technology brings change, and change inevitably brings difficulty for some and opportunity for others.

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