PARIS STMicroelectronics (STM.PA) plans to quit its loss-making mobile chip joint venture with Ericsson (ERICb.ST) in a drive to cut costs and catch up with larger, more profitable U.S. rivals.
However, some analysts said on Monday it would not be easy or cheap for the Franco-Italian group to back out of a venture which lost $841 million last year and which its Swedish partner was unlikely to want to take over on its own.
Europe's semiconductor firms are struggling to compete with bigger U.S. and Asian rivals, which have largely outsourced chip manufacturing to cope with volatility in demand and prices.
STMicro still makes its own chips, has been losing market share, and earns lower margins than larger rivals like Qualcomm Inc (QCOM.O) despite leadership in so-called analog motion-sensing chips that go in cars or video game consoles.
Its mobile chip joint venture, ST-Ericsson, has had a particularly tough few years as its once-biggest customer Nokia NOK1V.HE has been trounced in the lucrative smartphone market by the likes of Apple (AAPL.O) and Google (GOOG.O).
Another wireless rival, Texas Instruments Inc (TXN.O), is also moving away from making cellphone chips as it too had trouble competing with Qualcomm.
Analysts said ST-Ericsson, which has around 5,000 employees, could be shut down entirely, or parts could be sold to competitors such as Intel, Broadcom or Samsung, with Ericsson taking some others and the rest closed.
"I think it is going to be a complex deal including some reallocation of employees to Ericsson, and the sale of the wireless modem business to a competitor, and some layoffs," said Jerome Ramel, semiconductor industry analyst at Exane BNP Paribas in London.
However, he added that leaving the business would be good news for STMicro, even if it can't get any cash.
Ericsson declined to comment on its intentions, other than saying it would work with STMicro to find a "suitable strategic solution" for ST-Ericsson and the details would be ironed out in coming negotiations.
At 1410 GMT, STMicro shares were up 3.5 percent at 5.175 euros, the biggest rise by a European blue-chip stock .FTEU3. Ericsson shares were 1.4 percent higher at 65.7 Swedish crowns.
STMicro said its new strategy would focus the group on two main areas: its more profitable analog business which makes chips for motion sensors, power management and the automotive sector, as well as its digital business which makes "embedded processing solutions" for consumer electronics.
"Our portfolio of products will be much narrower," Chief Executive Carlo Bozotti said on a conference call. "We want to be less vulnerable to the cycles of the market."
The moves will allow the group to reduce quarterly net operating expenses to around $600 million-$650 million per quarter by early 2014, while operating margins would increase "rapidly" to reach 10 percent, it said.
Operating costs per quarter are roughly $900 million today, and it's not clear how much of that is due to ST-Ericsson. The group's operating margin was 2.4 percent in 2011.
STMicro provided little detail on how it would reduce operating costs and declined to say whether job cuts were being studied among its 50,000 strong workforce. With the French and Italian governments owning a combined 27.5 percent in the company, job cuts could prove politically touchy.
STMicro said in October it planned to cut costs by $150 million a year by the end of 2013, in a move that could affect as many as 500 positions. Analysts say its workforce needs to be more productive for the firm to get close to the profit margins of U.S. rivals like Texas Instruments and Analog Devices (ADI.O), which compete with STMicro in analog chips.
For every dollar of sales generated by an employee of STMicro in 2011, a Texas Instruments employee generated $2.01 and an Analog Devices employee generated $1.65, according to analysts at Morningstar.
ST-Ericsson has been unprofitable since it was formed in 2009 and successive cost-cutting plans have failed to staunch its losses, including an April announcement of 1,700 job cuts and the transfer of some product development to STMicro.
Santander investment bank analysts said STMicro's exit could prove "difficult and costly," predicting that Ericsson would not want to take full control.
"We believe that the current partners could take some assets from the JV but they will have to close down the rest of the company," they wrote.
(Reporting by Gwenaelle Barzic, Simon Johnson, Niklas Pollard; Editing by Mark Potter and Phil Berlowitz)