Over the weekend we heard about the founder of OnLive basically shuttering the company in order to protect himself and the property by using a California loophole that allowed better creditor repayment than bankruptcy, but for workers … they were totally screwed just as if the company went totally belly-up. But that doesn’t mean all is well for creditors and investors.
Today we start to learn about more of the fallout of the OnLive collapse: specifically, that troubled smartphone maker HTC is losing $40 million due to the restructuring. This is the same HTC who recently posted a 58% net income decline and has seen market share of its products cut in half over the last year and has rapidly fallen from a leader to an also-ran.
Last week we also heard that. AND that .
At the same time you can read just about any tech blog talking way-too-much about Apple and Samsung, in terms of the individual companies, their products, and of course the court cases. If you read some of the comments (be sure to wear fireproof clothing before wading in) you will see many folks wishing for the destruction of one company or the other (and sometimes both)!
The ‘People Problem’
Why do I bring all of this up? Well, in case you hadn’t noticed the economy for almost everyone is still in the toilet. So amongst the things I read when looking into OnLive situation was comments from former employees who were totally stressed out because they have mortgages, cars, spouses, kids, and so on. And nothing more coming from OnLive. And when reading about Moto/HTC/RIM I think about all of the talent getting let go and all of the projects that will wither on the vine as a result.
If you have ever been laid off, and particularly if you were in a situation where you had regular monthly debts that absolutely required a reasonable level of income … chances are you can empathize. When I was laid off just over four years ago I had all of those wonderful monthly obligations, and the Massachusetts economy had tanked in advance of the rest of the country. I was very fortunate to have four job offers come my way – in Seattle, Charlotte, Corning NY and in the Boston area.
Anyone who has lost their job in the last several years is likely thinking “FOUR offers, amazing!” Which I certain felt as well – but looking back I realize how smart/lucky I was with my selection. First, the Boston area startup I ended up doing a 3 month contract for before heading to Corning, and they had two large layoffs (10 people each in a company of 45 when I was there) within two months of my leaving and I would certainly have lost my job in a more vulnerable time. The Seattle company was having significant quality issues (the reason for some rush hiring) and I know they never fixed the issue and the entire division was dissolved. Finally, the Charlotte company (which had just been bought by a California-based IP-centric outfit) has abandoned the entire line I was offered to work on and instead licensed the IP, and there have been layoffs. Even at my present company there were significant layoffs in 2009 which had a large cascading impact on the entire region which is overly dependant on the fortunes of a single corporation.
So when I look at Google’s move at Motorola (or HTC’s share price drop or RIM’s continuing downward spiral), I don’t think about the cost implications for the billionaires running the company or the stockholders, but rather I think about the engineers, accountants, administrators, technicians, and more who are impacted. The cycle of layoffs has always been a factor in technology, but this cycle is worse than anything before, made worse by ‘bought off’ policy that ensures safety for top executives at the expense of normal workers.
I just mentioned the ‘large cascading impact’ that layoffs at my company had throughout the region. What does that mean? Well, closing a facility to consolidate to another means that restaurants and gas stations and other service places in the immediate vicinity of the plant are impacted – sometimes to the point of closing; that means that THOSE people have less money to spend on eateries, grocery stores, theaters and malls near THEM, and the impact keeps spreading.
It is easy to see how a single large economic impact can spread through regional support systems, and most people can probably think of more than a few favorite local businesses that have closed due to the economy over the last several years.
But there are other things that can happen – as I mentioned, typically with a large down-sizing the company will reassess their product development and research portfolios looking to trim down to the essentials. What does THAT impact look like?
Obviously I cannot speak much about things from my current job, but at my previous employer we worked in the semiconductor materials field, meaning that we made stuff that large chip-makers such as Intel, AMD, etc needed in order to create the devices we all love. If you have never seen all of the stages and layers required to produce a modern complex integrated circuit, I suggest you check it out. The facilities cost tens of billions of dollars and are loaded up with equipment.
Needless to say, the equipment in a given facility is produced by a wide array of vendors, and for the most part every piece of equipment requires supplies and/or consumables that are made by someone else. So if, as an example, Intel decided to add another photolithography step to a part and the existing lines were at full capacity, they would have to buy additional Stepper/Scanners (and associated reticle sets), photoresist coaters and developers (and associated photoresists, edge bead removers, and developers), thickness metrology equipment (and standards), and photoresist removal equipment (and chemistry). Also, they would need added wafer transport, robotics, storage, electrostatic discharge monitoring and removal, chemical filtering for the FAB space, and on and on.
So about a decade ago, a large chip-maker was investigating a specific approach to get to a ‘next gen’ approach that would really open things up for them. And given their size and the amount of business it would mean, all they had to do was mention it and every tool maker, chemical company and FAB supply vendor tore off in a frenzy of activity. A specific chunk of this process required totally new metrology and chemistry approaches, which required significant up-front investments by much smaller companies.
But when the telecom bust ripped apart the tech economy … suddenly that company needed to make some choices. And amongst the choices they made was that the early showings of that new ‘next gen’ approach were not promising enough to warrant investment at the current level. From the inside that meant pulling off resources and slowing timelines and shifting upcoming processes to other technologies.
But from the outside it was very different. For my company it meant about the same – shifting people to other projects mostly … and the other impacts of the telecom bust were much worse (actually seeing so many friends who had bolted to telecom startups with great promise and massive ‘options’ now without jobs was the worst). In fact, aside from cutting way back on summer college interns, there was almost no impact for us.
But I was also involved with an equipment vendor on a joint project that was very important to both of us and would eventually lead to great stuff. They had made huge investments based on past business with the chip maker and promise of future installations that would have led to monster profits. They had announced an IPO largely based on these things. But as the chip maker pulled back, suddenly the equipment maker was left with way too much stuff they would never be able to sell, way too many people working on a technology with a single application and uncertain future, and generally in big trouble.
You know what comes next – big layoffs, consolidating offices, altering service territories, and so on. Loads of people impacted.
I knew enough people in the metrology industry to know that this exact situation was playing out in EVERY company who depended upon the biggest chip makers for the majority of their revenues. In fact, at another company I was working with on a different project, when I visited six months prior there was a notebook out front with job openings with more than 200 openings … and now laying off even more people than that.
In the couple of years that followed, there was a massive consolidation, with many brand names disappearing as they were bought out by the biggest players or simply faded away. Promising startups died, and upcoming engineers became more risk-averse, which in turn impacted the way products were developed for several years.
The Law of Massive Cascading Effects
How many times have you read ‘I can’t wait until Apple dies’ or ‘I hate Motorola, glad Google bought them now they can just shut them down’, or ‘I hope that these patent lawsuits decimate Samsung like they deserve’? As someone who reads more blog comments than I probably should, I see them almost daily.
But think about the Apple iPhone; looking back at the iPhone 4S supply chain analysis you see a list of more than 30 suppliers used providing components to Apple to build the device – including giants such as Samsung and Sony and many smaller companies.
With each new device generation and iteration there are companies looking to displace their competition with ‘design wins’ – particularly for products from Apple and Samsung that sell millions of units. This is natural competition, and is core to the amazing innovation we see in mobile technology.
But when you look at Motorola’s – or rather Google’s – layoff move, you can see something different. Think about it – what is the Android product lifecycle? About 6 months on average or at most a year. But do you know what the development cycle is like for ‘next generation’ devices? Based on things we have learned from the Apple/Samsung trial, it is clear that they are cooking ideas for a couple of years before they hit the market.
So we can assume that Motorola already had the entire of its 2013 product pipeline in process, with some development work for 2014 likely well in process. I can actually do more than assume since I know enough people in the industry from my past jobs, but cannot (obviously) discuss anything more specific.
But similar to my past experiences, the tales told from some friends go like this: one week your plans are plowing ahead and you are being pushed by the handset maker to go faster; the end of that week you get a call saying not to do as much as planned based on re-evaluations; the following week you call to find that they have no idea what is happening; and a couple of days later their phone rings unanswered.
For the thousands of components in any mobile device, this means that all of the work on the program either stops or at least slows significantly. Which in turn means people need to be reassigned to other things. However, when you are seeing similar things from Motorola, HTC, RIM and the hapless ship that is Sony, suddenly the ‘reassigned to other things’ bucket starts to dry up. Which means that people are laid off.
At the same time, every company supplying materials, metrology, equipment, power, services, and so on to help build the components going into the device that was just shelved is impacted. Depending on where the product was in the development cycle, they could have built up infrastructure and inventory capacity, meaning being back to the situation I described earlier and having to find ways to address the financial impact – which almost always means laying off workers.
So what we have now is layoffs at Motorola, RIM and OnLive and tremendous uncertainty for HTC … and a ripple current of impact felt through out a variety of associated industries and local economies. Motorola’s layoff will likely cost them tax credits in Illinois as it also hurts the local economies.
So be careful when you go on a fanboy rant and wish for the destruction of Apple or Google or Samsung or Microsoft … those companies have billions upon billions of dollars of impact with other companies and local economies throughout the country – and maybe even in your own backyard.