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Cisco intends 15% workforce cut and sale of factory

Cisco Systems plans to cut 15% of its staff and sell a set-top box factory as part of a plan to cut annual expenses by $1-billion as the network equipment maker tries to revive its fortunes.

The company said on Monday that it will cut 11 500 jobs, compared with the several thousand that analysts had predicted. The cuts come after Cisco’s chief executive John Chambers said in April that the company had “lost its way”.

Cisco had 73 408 employees as of the end of the last quarter, a spokeswoman said. Cisco will transfer 5 000 to Taiwan’s Hon Hai Precision Industry , which will buy the set-top box plant in Juarez, Mexico.

Of the other 6 500 who are leaving, 2 100 will take early retirement.

“This is a net positive for the company and for investors,” said Morningstar analyst Grady Burkett.

The announcement came on the same day that Borders Group, the second-largest US bookstore chain, cancelled its bankruptcy auction plans and said it would close for good. Nearly 11 000 people will lose their jobs.

Cisco’s global scale and a clientele spanning businesses and government agencies has made it one of the technology sector’s bellwethers.

Reduction of annual costs
The management team’s record of controlling costs and growing the business through acquisitions also made them a darling of tech investors over the years. But a fragile global economy proved more damaging than initially expected.

Cisco said in May that it would reorganise after losing ground in the network equipment business.

“We still need clarity around what different businesses the cuts are coming from, but Cisco has been very vocal about the fact that they are refocusing on their core businesses such as data centres, switching and routing,” Burkett said.

The job cuts will result in pre-tax restructuring charges of as high as $1.3-billion over several quarters.

Cisco expects to incur about $750-million of the charges in the fourth quarter of its fiscal year 2011, including $500-million for the early retirement programme. It did not say how close the cutbacks would bring it toward its goal of reducing annual costs by $1-billion.

About 15% of Cisco executives at the level of vice-president and higher will lose their jobs too.

Cisco will notify US and Canada-based employees who are losing their jobs in the first week of August. The layoffs in other countries will take place later in compliance with local laws and regulations, Cisco said.

Factory sale
The sale of the Juarez factory is in line with company strategy, said Cisco spokesperson Karen Tillman. Cisco outsources about 90% of its manufacturing to contract manufacturers.

Hon Hai is the flagship listed unit of the Foxconn group, which is best known for making Apple’s iPhones and iPads. Its various business units also make products for companies including Hewlett Packard and Dell .

It is seeking to transform itself into a technology firm and move away from the low-margin contract manufacturing.

It has bought LCD TV plants from Japan’s Sony in Mexico in 2009 and Slovakia in 2010 and is in cooperation talks with a number of top Japanese hi-tech firms, including Sharp , Canon and Hitachi.

Some investors are betting the purchase of the Mexico plant would guarantee orders and bring in strong margins.

“It is not clear about the operation’s scale, but set-top box makers usually get a gross margin of over 10% and that is not bad in the tech industry,” said Bevan Yeh, a fund manager at Prudential Financial in Taiwan.

Foxconn also said in April it was considering more investment in Brazil , a move analysts said could be linked to Apple’s plans to target the growing Brazilian market. Foxconn already makes mobile phone handsets in Brazil.

Shares in Hon Hai were up 0.23% by 4.09am GMT in a broader market down 0.1%.

“I suspect Hon Hai doesn’t need to pay much for the plant because factories depreciate very quickly; in the contract it may also get to secure future orders from Cisco,” said Vincent Chen, Yuanta Securities’ head of downstream technology analysis.

“It can use the plant to manufacture for other clients too such as Alcatel.”

The Foxconn group, which employs close to a million workers in China, made headlines last year after reports emerged about poor working conditions at factories in southern China, which critics say may have helped drive several employees to suicide. — Reuters

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Poornima Gupta
Poornima Gupta works from San Francisco. Exec Comms @ebay. Former @reuters Tech Correspondent. Still an amateur pundit. Constant gardener. Yoga warrior. Poornima Gupta has over 2606 followers on Twitter.

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