Officials Say IBM's 'Sale' Is A Good Deal For Vermont. Is It?

Oct 20, 2014

The deal between IBM and GlobalFoundries for IBM’s chip manufacturing and sales divisions doesn’t fit the traditional definition of the word “sale.” In a sale, the money goes to one party and some asset or commodity goes to the other.

In the deal between IBM and GlobalFoundries, the money and the goods are all going from IBM to GlobalFoundries. According to University of Vermont economics professor Art Woolf, a transfer of assets like this is one of two basic ways companies can improve their performance.

“One is becoming more profitable by selling more things that it’s selling and making a profit on them,” Woolf said. “The other way is to get rid of the parts of your company that are not doing well, that are dragging your profits down.”

IBM’s chip division, which includes a high-tech  manufacturing facility that employs 4,000 people in Essex Junction, was the latter. The deal raises new questions about the plant’s future.

In the third quarter of 2014, IBM's overall chip division lost $100 million. Essentially, the tech giant is paying GlobalFoundries to save it from future losses.

In the third quarter of 2014, the division lost IBM $100 million. Essentially, the tech giant is paying GlobalFoundries to save IBM from future losses. But IBM will still need the microchips manufactured at the Essex Junction and East Fishkill, N.Y. plants it just transferred to GlobalFoundries. Part of the deal calls for GlobalFoundries to continue to sell the chips made at those facilities to IBM for at least 10 years.

That 10-year deal, along with GlobalFoundries executives’ assurances to Gov. Peter Shumlin that the plant will stay open, has some state leaders breathing a sigh of relief after a long period of uncertainty about its future.

Shumlin said Monday that GlobalFoundries – whose sole business is manufacturing computer chips – is an even better partner than IBM, which has a much wider mission. Economist Tom Kavet, who works for the state legislature on fiscal forecasts, isn’t so sure.

“I think it creates a great deal of uncertainty at this point in time. It’s hard to know exactly what the strategy of the new owner will be and how this fits into it,” Kavet said Monday. “We’ll be focusing on anything that they say about strategic direction, but it’s too early to know that.”

Shumlin played up the indications he'd received from GlobalFoundries executives that the jobs would stay on Monday. But UVM professor Art Woolf said those conversations aren't likely to drive the company's business decisions.

Shumlin played up the indications he’d received from GlobalFoundries executives that the jobs would stay on Monday. But UVM professor Art Woolf said those conversations aren’t likely to drive the company’s business decisions.

If it’s more profitable to move the work of the Essex Junction facility elsewhere, Woolf said, a profit-seeking company might go that route.

“When all costs are considered, renovating a plant, or redoing a plant in Fishkill or Albany, they’re going to probably look into that carefully,” he said. “And it may be expensive, but if it’s still cheaper than keeping the IBM Essex plant going, they’ll probably give it serious consideration.”

"Technology jobs are terrific, but it is an environment that changes very, very quickly, so something that's the hot product today can disappear pretty quickly and it requires constant innovation." - Economist Tom Kavet

After a meeting with GlobalFoundries CEO Sanjay Jha, Shumlin said that there is "far more demand than supply for the specialized chips made by this [plant], and GlobalFoundries is eager to use this strategic acquisition to grow its business with a tremendous workforce deeply rooted right here in Vermont.”

While the deal seems to have alleviated some earlier concerns that IBM might simply shutter the Essex Junction plant, the new ownership comes with new uncertainties, including those inherent in high-tech industry.

“Technology jobs are terrific,” Kavet said. "But it is an environment that changes very, very quickly, so something that’s the hot product today can disappear pretty quickly and it requires constant innovation.”