Fears that STMicroelectronics is actively thinking of closing its plant in Kirkop are increasing, especially after Carlo Bozotti, CEO of the Franco-Italian chipmaker giant, spoke of further "pruning" last week. The Times Business contacted a number of experts to gauge their reaction on the prevailing situation. They were asked five main questions:
• What impact will the closing down of the plant have on the Maltese economy?
• What will be the ripple effect?
• How easy will it be for other industries to absorb over 2,000 employees? Are the staff so technical they will need re-training in order to be able to adapt to other areas?
• What signal will the closing down of the plant transmit to foreign investors?
• What are the main problems which have led to the current situation whereby STM is considering closing shop at Kirkop?
STMicro announces further 'pruning'
The Financial Times reported last week that STMicroelectronics plans to close or sell a further 10 to 15 per cent of its operations as it struggles to cut costs in the face of a strengthening euro.
FT's technology correspondent Maija Palmer reported on May 28 that the company, Europe's largest chipmaker, "has undertaken considerable restructuring in the past year. It has spun off its poorly performing flash memory chip business and announced plans to close several factories.
"But Carlo Bozotti, chief executive, said this was not enough. 'We need to do more pruning. We have taken many measures in the past year but the euro-dollar exchange rate is a real challenge,' he said.
"The company's sales were all in dollars, he added, but '40 per cent of our manufacturing costs and two-thirds of our research and development costs' were in euros.
"Our costs have been increasing five per cent a quarter as the dollar weakens. It is the key issue we are facing. If we were still at 2001 currency levels, we would have a better profit margin than Texas Instruments."
"Mr Bozotti, who has been at the helm of STMicro since 2005, has repeatedly promised shareholders a return on net assets or 12 to 20 per cent. However, currency fluctuations are making the task increasingly difficult. In the first quarter the falling dollar cut $140 m from operating profits, helping push the company into a $84 m net loss. Mr Bozotti said he was looking to divest three to five of the company's 30 product divisions and would take a decision in the next few months.
"Analysts expect the company's low-margin imaging business, which makes the chips that run the cameras on Nokia mobile phones, to be a candidate for disposal.
"STMicro's chips are used in a wide range of products, from mobile phones to cars and set-top boxes.
"Mr Bozotti is also looking to save about $150 m from downsizing or closing six factories. He aimed to outsource 20 per cent of manufacturing by 2010 compared with just 10 per cent today, he said.
"'I want to take these decisions quickly. Time is a major issue. I would like to go much faster,' he said.
"Mr Bozotti was recently given a further three-year mandate as chief executive by the STMicro board. But a more than 44 per cent fall in the value of the company's shares over the past year is making it increasingly urgent for him to show improvements.
"STMicro recently merged its wireless chip operations with those of Dutch rival NXP Semiconductor."
Prominent player
Founded in April 1981, STMicroelectronics quickly established itself as a highly-important industrial reality in the island's industrialisation process.
STMicroelectronics is the largest private employer in Malta and a prominent member of the Maltese community and economy, providing 55 per cent of the country's total domestic exports.
The mission of STMicroelectronics in Malta is focused on the assembly and test of high-end complex devices achieving higher quality standards and guaranteeing customers top class and worldwide service.
The company's facility in Kirkop covers an area of 38,000 square metres, including 29,700 square metres dedicated to production.
ST Malta invests in staff training and education activities including the TQM culture, an integral part in its success in developing its people, which is necessary for a high-tech company aiming to achieve the highest standards and to compete equally with the world's leading semiconductor companies. About 25 per cent of the workforce of nearly 2,400 employees possess advanced technical and engineering qualifications. The Malta plant is also engaged in numerous activities in the area of environmental problems, establishing clear, well-planned objectives regarding energy saving, water conservation and the use of recycled material, which have surpassed the company's global objectives.
Rise to grave concerns - Gordon Cordina
The events surrounding the future of the STMicroelectronics operation in Malta bring to mind one of the main consequences of the vulnerability which small economies typically face. This is the fact that a negative shock usually has larger economic consequences than a positive shock of an equal magnitude.
The possible closing down of the STMicroelectronics plant in Malta gives rise to grave concerns regarding the potential loss of jobs, amounting to over one per cent of the labour force in Malta. Had we to experience an inflow of investment employing an equivalent number of people, the potential gains to the economy would not be as large as the losses as there would then be concerns regarding the availability of skilled labour, whether it would be detrimental to the development of other industries, etc.
Should the STMicroelectronics plant in Malta close down, the consequences would depend on the economic resilience of the Maltese economy and of the resources engaged directly and indirectly in its operations. Economic resilience is the ability of a country to withstand and recover from the effects of adverse shocks.
To an extent, the eventual closing down of the STMicroelectronics plant in Malta was to be expected, mainly as the economy moves to higher value added activities, increasing the overall level of wages and costs in the country. This is a normal part of the restructuring and development of any economy, akin to developments in Malta where the textiles sector was replaced by more productive ones. What is somewhat surprising is that this event should have happened now and not in the space of the next five to 10 years, a situation which is probably being precipitated by the emergence of lower-cost production bases, mainly in Asia.
The weakness of the dollar is also potentially a contributing factor, although probably not a determining one, because this situation may be expected to be reversed over the next two years. In this respect, it is augured that decisions regarding the Malta plant are undertaken within the context of the true fundamental and longer-term productivity to cost comparisons of the Malta operation relative to that in other countries rather than as an emergency action to obtain an increase in shareholder value in the short run.
The crucial question nevertheless remains tied to the ability of our economy to recover from this potential shock. In the past, the Maltese economy has shown remarkable resilience, with a significant amount of restructuring taking place without there being excessive shocks to the rate of unemployment or the generation of income. In view of this, it can be argued that the human resources, which could be released by STMicroelectronics, can find alternative employment of an equal level because the labour force involved is generally highly skilled and suitable for retraining and redeployment.
On the other hand, this would involve a degree of adjustment costs, at least in the short run. Given the complexity of the issues involved, it would be meaningless, and indeed irresponsible, to attempt at this stage to give an estimate of the impact of the closure of the STMicroelectronics factory on the Maltese economy.
What is however of importance is the fact that this event is a very eloquent reminder of the need to sustain Malta as a competitive business destination so as to be able to maintain the continuous process of the replacement of activities which can no longer be profitably undertaken here with others that are economically viable.
The imperatives for the competitiveness of the Maltese economy at this stage are a continuous focus on education and lifelong learning, the direction of substantial resources towards the development of SMEs and their internationalisation and persistent efforts to contain production costs, including those that arise from the operation of government.
In particular, in this case, there is an immediate need for active labour market policies that assist in smoothening the transition of workers who may be affected to the best possible alternative employment opportunities, including the rapid identification of possible suitable vacancies and provision of retraining where needed.
• Gordon Cordina is an economist
Very sad day indeed - Edward Scicluna
The day STM were to close its plant would definitely be a very sad day indeed for Malta. Not only would it leave a big hole in our economy but would also set us backward in our strive to sell Malta to overseas investors.
My thoughts however must go to the role of economic policy in our country. We seem to give little thought to the economic effects of public decisions, although we react instinctively and strongly to the political ones.
I believe joining the European Union has been the most significant positive event this century. Likewise, however, I still believe the decision to rush into the eurozone at that chosen exchange rate parity was also the most badly-advised policy decision. The fact that the party in opposition endorsed this view should not have sent the party in government rushing to the opposite view.
Malta's currency and its price competitiveness performed best when the exchange rate kept a level in between the euro, the dollar and sterling. In that respect we could have been less hasty in departing from a well-proven successful formula. However, if we had valid reasons for joining the eurozone at this point, then we had to ensure a competitive parity. If in doubt we should have opted for a notch downwards. It would have done us a lot of good. Malta's exports and tourist flows are highly sensitive to its relative external prices, definitely more than those of the other members of the eurozone.
Now that we cannot turn the clock back we must become more and more aware of the ravages which inflation could play with our competitiveness. This is the only economic tool left in our domain. Unit labour costs have been falling in the recent past. The IMF is not so sure that this trend will continue. We must therefore ensure that this trend would not end or else we would have more economic tragedies to recount.
• Edward Scicluna is an economist
Horrendous impact - Karm Farrugia
The impact is bound to be horrendous. It is an inevitable cost, small though it is in relation to the many benefits which the economy must bear for having relied to such a relatively large extent on one industrial unit, whatever the nature of its production. The obvious advantages of diversification are forfeited whenever this occurs inside a tiny economy like ours.
Sadly, such an ominous foreboding is now running parallel to a similar one in terms of added value to the economy, Malta Shipyards.
The consequences are better described as a "multiplier" rather than just a "ripple" effect, considering that, in addition to shedding of direct well-salaried employees, there exist also a number of small business units that are bound to be adversely affected.
It will not be at all easy for other businesses to absorb 2,000 employees. Besides the quantum, itself already scary, the chances of finding new employment are likely to be in the "services" sector of the economy not in "manufacturing" and certainly not in the short term. However, skilled employees are usually more adaptable to new surroundings, hence requiring a much shorter time span for settling in. It is the likely drop in their earnings which I consider to be the biggest deterrent to their proper job resettlement.
ST's closing down sends no signal at all to foreign investors: these have long realised what type of investment could possibly earn them enough dividends on a medium- to long-term scale.
Politicians with vision should have foreseen (and probably did) STM's "end-of-lease" tenure in Malta. Its internal rumblings some years back were even overheard by the media, let alone made known to the unions. It is surprising only that STM lasted 27 years.
The language of "globalisation" has been spoken for long enough to persuade the economy's management leaders to steer it properly and fast enough throughout the transformation process, popularly described as "restructuring". Malta Enterprise, as currently run, has yet to demonstrate that degree of dynamism so badly needed to attract to Malta the level of investment to adequately cope with suchlike disinvestment as STM's and, possibly, also others which hitherto still lie beyond the economic horizon but are already "visible" inside the purview of the visionaries.
• Karm Farrugia is an economist
Ripple effect - Lino Spiteri
There would be a very negative impact on the employment front. The jobs lost would be good, well-paid jobs.
There will be a ripple effect. All in all there would be a multiple effect on the employment sector. There would also be an obvious net effect on the balance of trade. STM is our major exporter, although its exports do not have a very high value added. Although that would have increased substantially over the years, the company's output has a large import content.
It will not be easy to absorb STM's employees. They are of a good quality, and, if no similar activity is attracted, they would re-train quite readily.
But the number is large, although if the worst comes to the worst, the rundown would probably be gradual, making it less difficult to absorb the impact. I do not think a negative signal would be transmitted to foreign investors if STM were to close down its Malta operation. It does not reflect on Malta and its qualities. STM is being massacred by the weak dollar, relative to the euro.
Indeed, the problem facing STM arises out of the weakness of the US dollar. Output sourced in euros or in non dollar areas is sold in dollars.
With the fall of the dollar the net earnings of the company have been declining.
It is trying to compensate for the decline by slashing costs, dropping lower margin products as well as by relocating, especially in respect of factories whose machinery has already been largely or wholly depreciated.
• Lino Spiteri is former Finance Minister
The unions' perspective
The closing down of any workplace brings a substantial amount of hardship both to the entrepreneur involved and the workers engaged within the same company. A manufacturing plant of such magnitude will certainly have a negative effect on both the national economy from the financial perspective and in human resources in terms of employment levels, apart, of course, from the hardship and stress each and every worker will have to endure during the period they are classified as unemployed. The Maltese economy will certainly be affected negatively. The transfer of business from one country to another is more then ever a reality. In this regard, while Malta has no other option but to live up to this harsh economic reality, it needs to ensure that further investment in our human resources is made available to encourage lifelong learning. Continuous investment in our workforce is a necessity. In this manner Malta can adjust at enterprise level in the event of transfer of business from one country to another.
Malta has benefited from companies that have transferred their business to Malta and left other countries. The country's selling point must at all times be the capabilities of our workforce and not the workers' salaries.
With a flexible, capable, hardworking, loyal and well-educated workforce Malta is well positioned to attract foreign direct investment with more value added in sectors of the economy that will be of benefit to workers engaged in specialised sectors and to our economy.
While higher productivity levels and competitiveness remain two measurements essential for any business to be attracted to these islands, Malta has a unique strategic location in the centre of the Mediterranean Sea giving an opportunity for business to flourish among the surrounding countries.
At this delicate moment in time, the interest of the General Workers' Union is to safeguard the interests of the workers. This can only be done if STMicroelectronics continues operating in Malta.
• Gejtu Vella is general secretary of the Union Ħaddiema Magħqudin
• Tony Zarb is general secretary of the General Workers' Union
• What impact will the closing down of the plant have on the Maltese economy?
• What will be the ripple effect?
• How easy will it be for other industries to absorb over 2,000 employees? Are the staff so technical they will need re-training in order to be able to adapt to other areas?
• What signal will the closing down of the plant transmit to foreign investors?
• What are the main problems which have led to the current situation whereby STM is considering closing shop at Kirkop?
STMicro announces further 'pruning'
The Financial Times reported last week that STMicroelectronics plans to close or sell a further 10 to 15 per cent of its operations as it struggles to cut costs in the face of a strengthening euro.
FT's technology correspondent Maija Palmer reported on May 28 that the company, Europe's largest chipmaker, "has undertaken considerable restructuring in the past year. It has spun off its poorly performing flash memory chip business and announced plans to close several factories.
"But Carlo Bozotti, chief executive, said this was not enough. 'We need to do more pruning. We have taken many measures in the past year but the euro-dollar exchange rate is a real challenge,' he said.
"The company's sales were all in dollars, he added, but '40 per cent of our manufacturing costs and two-thirds of our research and development costs' were in euros.
"Our costs have been increasing five per cent a quarter as the dollar weakens. It is the key issue we are facing. If we were still at 2001 currency levels, we would have a better profit margin than Texas Instruments."
"Mr Bozotti, who has been at the helm of STMicro since 2005, has repeatedly promised shareholders a return on net assets or 12 to 20 per cent. However, currency fluctuations are making the task increasingly difficult. In the first quarter the falling dollar cut $140 m from operating profits, helping push the company into a $84 m net loss. Mr Bozotti said he was looking to divest three to five of the company's 30 product divisions and would take a decision in the next few months.
"Analysts expect the company's low-margin imaging business, which makes the chips that run the cameras on Nokia mobile phones, to be a candidate for disposal.
"STMicro's chips are used in a wide range of products, from mobile phones to cars and set-top boxes.
"Mr Bozotti is also looking to save about $150 m from downsizing or closing six factories. He aimed to outsource 20 per cent of manufacturing by 2010 compared with just 10 per cent today, he said.
"'I want to take these decisions quickly. Time is a major issue. I would like to go much faster,' he said.
"Mr Bozotti was recently given a further three-year mandate as chief executive by the STMicro board. But a more than 44 per cent fall in the value of the company's shares over the past year is making it increasingly urgent for him to show improvements.
"STMicro recently merged its wireless chip operations with those of Dutch rival NXP Semiconductor."
Prominent player
Founded in April 1981, STMicroelectronics quickly established itself as a highly-important industrial reality in the island's industrialisation process.
STMicroelectronics is the largest private employer in Malta and a prominent member of the Maltese community and economy, providing 55 per cent of the country's total domestic exports.
The mission of STMicroelectronics in Malta is focused on the assembly and test of high-end complex devices achieving higher quality standards and guaranteeing customers top class and worldwide service.
The company's facility in Kirkop covers an area of 38,000 square metres, including 29,700 square metres dedicated to production.
ST Malta invests in staff training and education activities including the TQM culture, an integral part in its success in developing its people, which is necessary for a high-tech company aiming to achieve the highest standards and to compete equally with the world's leading semiconductor companies. About 25 per cent of the workforce of nearly 2,400 employees possess advanced technical and engineering qualifications. The Malta plant is also engaged in numerous activities in the area of environmental problems, establishing clear, well-planned objectives regarding energy saving, water conservation and the use of recycled material, which have surpassed the company's global objectives.
Rise to grave concerns - Gordon Cordina
The events surrounding the future of the STMicroelectronics operation in Malta bring to mind one of the main consequences of the vulnerability which small economies typically face. This is the fact that a negative shock usually has larger economic consequences than a positive shock of an equal magnitude.
The possible closing down of the STMicroelectronics plant in Malta gives rise to grave concerns regarding the potential loss of jobs, amounting to over one per cent of the labour force in Malta. Had we to experience an inflow of investment employing an equivalent number of people, the potential gains to the economy would not be as large as the losses as there would then be concerns regarding the availability of skilled labour, whether it would be detrimental to the development of other industries, etc.
Should the STMicroelectronics plant in Malta close down, the consequences would depend on the economic resilience of the Maltese economy and of the resources engaged directly and indirectly in its operations. Economic resilience is the ability of a country to withstand and recover from the effects of adverse shocks.
To an extent, the eventual closing down of the STMicroelectronics plant in Malta was to be expected, mainly as the economy moves to higher value added activities, increasing the overall level of wages and costs in the country. This is a normal part of the restructuring and development of any economy, akin to developments in Malta where the textiles sector was replaced by more productive ones. What is somewhat surprising is that this event should have happened now and not in the space of the next five to 10 years, a situation which is probably being precipitated by the emergence of lower-cost production bases, mainly in Asia.
The weakness of the dollar is also potentially a contributing factor, although probably not a determining one, because this situation may be expected to be reversed over the next two years. In this respect, it is augured that decisions regarding the Malta plant are undertaken within the context of the true fundamental and longer-term productivity to cost comparisons of the Malta operation relative to that in other countries rather than as an emergency action to obtain an increase in shareholder value in the short run.
The crucial question nevertheless remains tied to the ability of our economy to recover from this potential shock. In the past, the Maltese economy has shown remarkable resilience, with a significant amount of restructuring taking place without there being excessive shocks to the rate of unemployment or the generation of income. In view of this, it can be argued that the human resources, which could be released by STMicroelectronics, can find alternative employment of an equal level because the labour force involved is generally highly skilled and suitable for retraining and redeployment.
On the other hand, this would involve a degree of adjustment costs, at least in the short run. Given the complexity of the issues involved, it would be meaningless, and indeed irresponsible, to attempt at this stage to give an estimate of the impact of the closure of the STMicroelectronics factory on the Maltese economy.
What is however of importance is the fact that this event is a very eloquent reminder of the need to sustain Malta as a competitive business destination so as to be able to maintain the continuous process of the replacement of activities which can no longer be profitably undertaken here with others that are economically viable.
The imperatives for the competitiveness of the Maltese economy at this stage are a continuous focus on education and lifelong learning, the direction of substantial resources towards the development of SMEs and their internationalisation and persistent efforts to contain production costs, including those that arise from the operation of government.
In particular, in this case, there is an immediate need for active labour market policies that assist in smoothening the transition of workers who may be affected to the best possible alternative employment opportunities, including the rapid identification of possible suitable vacancies and provision of retraining where needed.
• Gordon Cordina is an economist
Very sad day indeed - Edward Scicluna
The day STM were to close its plant would definitely be a very sad day indeed for Malta. Not only would it leave a big hole in our economy but would also set us backward in our strive to sell Malta to overseas investors.
My thoughts however must go to the role of economic policy in our country. We seem to give little thought to the economic effects of public decisions, although we react instinctively and strongly to the political ones.
I believe joining the European Union has been the most significant positive event this century. Likewise, however, I still believe the decision to rush into the eurozone at that chosen exchange rate parity was also the most badly-advised policy decision. The fact that the party in opposition endorsed this view should not have sent the party in government rushing to the opposite view.
Malta's currency and its price competitiveness performed best when the exchange rate kept a level in between the euro, the dollar and sterling. In that respect we could have been less hasty in departing from a well-proven successful formula. However, if we had valid reasons for joining the eurozone at this point, then we had to ensure a competitive parity. If in doubt we should have opted for a notch downwards. It would have done us a lot of good. Malta's exports and tourist flows are highly sensitive to its relative external prices, definitely more than those of the other members of the eurozone.
Now that we cannot turn the clock back we must become more and more aware of the ravages which inflation could play with our competitiveness. This is the only economic tool left in our domain. Unit labour costs have been falling in the recent past. The IMF is not so sure that this trend will continue. We must therefore ensure that this trend would not end or else we would have more economic tragedies to recount.
• Edward Scicluna is an economist
Horrendous impact - Karm Farrugia
The impact is bound to be horrendous. It is an inevitable cost, small though it is in relation to the many benefits which the economy must bear for having relied to such a relatively large extent on one industrial unit, whatever the nature of its production. The obvious advantages of diversification are forfeited whenever this occurs inside a tiny economy like ours.
Sadly, such an ominous foreboding is now running parallel to a similar one in terms of added value to the economy, Malta Shipyards.
The consequences are better described as a "multiplier" rather than just a "ripple" effect, considering that, in addition to shedding of direct well-salaried employees, there exist also a number of small business units that are bound to be adversely affected.
It will not be at all easy for other businesses to absorb 2,000 employees. Besides the quantum, itself already scary, the chances of finding new employment are likely to be in the "services" sector of the economy not in "manufacturing" and certainly not in the short term. However, skilled employees are usually more adaptable to new surroundings, hence requiring a much shorter time span for settling in. It is the likely drop in their earnings which I consider to be the biggest deterrent to their proper job resettlement.
ST's closing down sends no signal at all to foreign investors: these have long realised what type of investment could possibly earn them enough dividends on a medium- to long-term scale.
Politicians with vision should have foreseen (and probably did) STM's "end-of-lease" tenure in Malta. Its internal rumblings some years back were even overheard by the media, let alone made known to the unions. It is surprising only that STM lasted 27 years.
The language of "globalisation" has been spoken for long enough to persuade the economy's management leaders to steer it properly and fast enough throughout the transformation process, popularly described as "restructuring". Malta Enterprise, as currently run, has yet to demonstrate that degree of dynamism so badly needed to attract to Malta the level of investment to adequately cope with suchlike disinvestment as STM's and, possibly, also others which hitherto still lie beyond the economic horizon but are already "visible" inside the purview of the visionaries.
• Karm Farrugia is an economist
Ripple effect - Lino Spiteri
There would be a very negative impact on the employment front. The jobs lost would be good, well-paid jobs.
There will be a ripple effect. All in all there would be a multiple effect on the employment sector. There would also be an obvious net effect on the balance of trade. STM is our major exporter, although its exports do not have a very high value added. Although that would have increased substantially over the years, the company's output has a large import content.
It will not be easy to absorb STM's employees. They are of a good quality, and, if no similar activity is attracted, they would re-train quite readily.
But the number is large, although if the worst comes to the worst, the rundown would probably be gradual, making it less difficult to absorb the impact. I do not think a negative signal would be transmitted to foreign investors if STM were to close down its Malta operation. It does not reflect on Malta and its qualities. STM is being massacred by the weak dollar, relative to the euro.
Indeed, the problem facing STM arises out of the weakness of the US dollar. Output sourced in euros or in non dollar areas is sold in dollars.
With the fall of the dollar the net earnings of the company have been declining.
It is trying to compensate for the decline by slashing costs, dropping lower margin products as well as by relocating, especially in respect of factories whose machinery has already been largely or wholly depreciated.
• Lino Spiteri is former Finance Minister
The unions' perspective
The closing down of any workplace brings a substantial amount of hardship both to the entrepreneur involved and the workers engaged within the same company. A manufacturing plant of such magnitude will certainly have a negative effect on both the national economy from the financial perspective and in human resources in terms of employment levels, apart, of course, from the hardship and stress each and every worker will have to endure during the period they are classified as unemployed. The Maltese economy will certainly be affected negatively. The transfer of business from one country to another is more then ever a reality. In this regard, while Malta has no other option but to live up to this harsh economic reality, it needs to ensure that further investment in our human resources is made available to encourage lifelong learning. Continuous investment in our workforce is a necessity. In this manner Malta can adjust at enterprise level in the event of transfer of business from one country to another.
Malta has benefited from companies that have transferred their business to Malta and left other countries. The country's selling point must at all times be the capabilities of our workforce and not the workers' salaries.
With a flexible, capable, hardworking, loyal and well-educated workforce Malta is well positioned to attract foreign direct investment with more value added in sectors of the economy that will be of benefit to workers engaged in specialised sectors and to our economy.
While higher productivity levels and competitiveness remain two measurements essential for any business to be attracted to these islands, Malta has a unique strategic location in the centre of the Mediterranean Sea giving an opportunity for business to flourish among the surrounding countries.
At this delicate moment in time, the interest of the General Workers' Union is to safeguard the interests of the workers. This can only be done if STMicroelectronics continues operating in Malta.
• Gejtu Vella is general secretary of the Union Ħaddiema Magħqudin
• Tony Zarb is general secretary of the General Workers' Union