Intel confirms 10,500 job cuts by mid-2007

Intel announced plans on Tuesday to lay off thousands of workers over the next year after a strategic review designed to prepare the company for life with a smaller share of the chip market.

As first reported by silicon.com sister site CNET News.com, the layoffs primarily hit the marketing and IT departments. The company said it will have 10,500 fewer employees by the middle of 2007, as compared to its headcount at the end of this year's second quarter.

The company hopes to save $2bn in annual costs by knocking 10,500 employees off its payroll. That number includes several layoffs and divestitures already announced by the company, including the pending departure of 1,000 managers, and the sale of its communications unit to Marvell. Intel also sold some telecommunications assets to Eicon. About 2,000 employees were involved in those transactions.

Including those layoffs, divestitures and its normal rate of attrition, Intel has already shed 5,000 positions, said a company spokesman. The remaining 5,500 cuts will bring Intel's headcount down to 92,000 by the second quarter of 2007, and cost Intel $200m in severance pay, he said.

Intel CEO Paul Otellini said in a press release announcing the move: "These actions, while difficult, are essential to Intel becoming a more agile and efficient company, not just for this year or the next but for years to come."

The cuts will be focused on the previously mentioned departments in 2006 but will also expand to a broader base of Intel's population over the course of 2007, the company said. By 2008, Intel hopes the annual cost savings will reach $3bn.

Intel wants to increase the ratio of marketing employees who work directly with its customers, as opposed to internal employees, the spokesman said. The company will also look to improve the efficiency of its manufacturing operation. By next year, it will start looking to other areas, including human resources and other departments, as it works its way down to 92,000 employees, he said.

Intel has been hurt by inroads made by its chief rival, AMD, which has taken market share from the company in the desktop PC and server categories. AMD now owns 26 per cent of the server market, compared to virtually nothing before its Opteron processor arrived in 2003, and it thinks it can reach 40 per cent of that market by the end of the decade.

As a result, Intel's financial performance this year has disappointed investors. The company's profits have fallen as it has tried to shore up its market share with price cuts. Intel is pinning its hopes on a new generation of products based on a more energy-efficient blueprint that appears to outperform AMD's chips in several categories.

Intel is hoping that its restructuring and layoffs will have the same result that HP's 15,000 jobs cuts had on that company's results, said Roger Kay, an analyst with Endpoint Technologies Associates. HP's profits have returned just over a year after it downsized, and its stock price has also improved.

Kay said: "This is the other shoe dropping." Intel's partners and customers will at least have the uncertainty removed from their dealings with the company, which is no consolation to the Intel marketing employees about to learn their fate, he said.

Intel's marketing department has already gone through several disruptions this year. In July, the company announced that its two primary marketing and sales executives, Anand Chandrasekher and Eric Kim, were being assigned to other positions within the company. Sean Maloney was named the sole head of the sales and marketing group at that time.

Tom Krazit writes for CNET News.com