Munich, Germany -- Joseph Borel, former executive vice president for central R&D at STMicroelectronics NV, has proposed that Europe's top three semiconductor companies--NXP, ST and Infineon--consolidate to form a unified European chip powerhouse.

A 12-page proposal from Borel has been sent to the French Senate and is being transferred to the office of French President Nicolas Sarkozy.

Borel disclosed de- tails of the proposal in an exclusive interview with EE Times Europe. It appears to be based on several dubious assumptions about both the practicality of such a union and its potential ability to compete against the likes of Intel Corp. and Samsung Electronics Inc.

Nonetheless, the concept pitched by Borel--a French engineer who spent 22 years in R&D at ST--is striking in its audacity. The very suggestion of such an arrangement points to a growing disillusionment in Europe with the market positions of the region's biggest electronics companies. Some market watchers contend the chip companies' competitiveness hasn't been sufficiently honed under their current operating structures.

Borel also has precedent on his side: the creation of European Aeronautic Defence and Space Company NV (EADS), the European aerospace corpora- tion formed by the merger in 2000 of Germany's DaimlerChrysler Aerospace AG, France's Aérospatiale-Matra and Spain's Construcciones Aeronáuticas SA.

Established to pursue European strategic interests, EADS develops and markets civil and military aircraft, missiles, space rockets, satellites and related systems. EADS unit Airbus SAS (Toulouse, France) has competed effectively against U.S. civil aviation giant Boeing Co.; EADS and U.S.-based partner Northrop Grumman recently beat out Boeing to win a U.S. Air Force contract for modernized refueling tankers .

Borel's argument hinges on the assertion that nanoelectronics R&D and manufacturing are of strategic interest to France and Europe and should not be left to evaporate. He is asking national and European authorities to bring three regional champions together to form a pan-European semiconductor heavyweight with global heft. The ability to compete on the scale of Intel and Samsung would be the commercial bonus; Europe's avoidance of reliance on companies like IBM Corp. and Taiwan Semiconductor Manufacturing Co. Ltd. would be the political side of the coin.

Tough times
All three European chip companies have struggled of late. At Infineon Technologies AG (Munich), multiyear losses have become the norm. Although the company's revenue continues to rise every year (except for a slight drop in the fiscal year ended Sept. 30, 2007), Infineon has piled up huge losses since fiscal 2005, dragged down by problems at Qimonda, its majority-owned memory business.

In response, Infineon has experimented with various forms of corporate restructurings, including a continuing effort to exit the troubled DRAM market.

NXP Semiconductors, for its part, saw revenue fall to 4.63 billion euros (roughly $7.23 billion at current exchange rates) in 2007, down 7 percent from 4.96 billion euros (approximately $7.75 billion) in the previous year, although its net loss improved to 495 million euros ($773 million) from 611 million euros ($954 million) in 2006.

ST, meanwhile had been consistently profitable for years but lost $477 million in 2007, compared with net income of $782 million in 2006.

ST's relatively better financial performance--coupled with its size ($10 billion in annual revenue) and structural history (it was formed from the union of France's Thomson Semiconducteurs and Italy's Società Generale Semiconduttori Microelettronica [SGS])--forms the kernel of Borel's argument. He notes the involvement of the French and Italian governments in ST's formation.

Borel's plan would merge Infineon, NXP and ST into a single organization to improve efficiency, leverage capital expenditures and R&D, reduce operating costs through process rationalization and improve competitive positioning by eliminating duplication of effort. The company that would emerge from the union would be able to take on the likes of Intel, Borel contends.

"There is room for investment rationalization and product synergies among the three European independent players, [which] at present address some overlapping parts of the market," he said. "The only way to save [Europe's industry] is to be just behind Intel and to put everyone under the same banner, so as to avoid duplication."

Not everyone is convinced that such a union is the best way forward, however, and some believe the move might even jeopardize the companies' market position if forced through by political leaders.

Malcolm Penn, CEO at consultancy group Future Horizons (Sevenoaks, England) called the proposal "an interesting but unrealistic suggestion" that would be unlikely to work "even if there were no politi- cal issues."

While Borel's goal may never be realized, his plan sends a clear signal to Infineon, NXP and ST that observers aren't pleased with the results of the multiyear restructurings and market repositionings in which the three companies have separately engaged.

Additionally, the proposal highlights some Westerners' unease about the transfer of operations to emerging tech manufacturing and R&D centers in Asia by top European companies, including wireless market leader Nokia of Finland. Some fear companies' "asset lite" manufacturing strategies will have negative economic and security implications for the continent.

Hints of these concerns are clearly visible in Borel's 12-page proposal.

"I believe in this convergence, which will bring new opportunities to create jobs, save our universities and our research base," Borel said.

Counterarguments
Although the problems at Infineon, NXP and ST are troubling for their investors and for the region at large, the idea that Europe is declining as a semiconductor power is less credible.The three companies today rank among the world's top 10 chip manufacturers, and despite huge operational problems, they remain major players in the industry.