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By Leila Abboud and Niklas Pollard
PARIS/STOCKHOLM (Reuters) - STMicroelectronics and Ericsson will end their loss-making mobile chip joint venture ST-Ericsson by splitting parts of the business between them and closing the rest with the loss of about 1,600 jobs.
The announcement follows months of speculation about the future of ST-Ericsson, which has been hit by a big drop in orders from top customer Nokia as the phone maker lost market share to Apple and Samsung.
ST-Ericsson has also struggled to compete with more nimble chip makers in Asia, which outsource most of their production and so can react quickly to demand changes, and with the trend among some phone makers like Samsung to make their own chips.
Sweden's Ericsson, which makes telecom network gear, and Franco-Italian chip maker STMicro, had sought a buyer for ST-Ericsson but found no takers. JP Morgan advised the companies on options for the venture, which had not made a profit since it was formed in 2008.
"All possible scenarios were considered but the option announced today was always a real possibility," STMicro chief executive Carlo Bozotti told a conference call on Monday.
He added that STMicro had committed to keep making products for ST-Ericsson customers as long as they needed them.
Some European chip specialists, like ARM which is a major supplier for Apple, have prospered by focusing on research and development rather than manufacturing, while Germany's Infineon exited the competitive mobile chip space by selling to Intel in 2010.
But ST-Ericsson lacked either top technology or a low enough cost base to compete with U.S. and Asian rivals.
SPLITTING UP, CLOSING DOWN
It will also keep a product line of so-called thin 4G "multimode" modem chips which are used in smartphones, but said it was too early to say when that would break even.
The rest of ST-Ericsson will be shut down, hitting some 1,600 employees globally. Around 500-700 of those jobs will go in Europe, including 400-600 positions in Sweden and 50-80 in Germany. No factories will be closed, STMicro said.
STMicro said it expected $350 million (231 million pounds)-$450 million in cash costs from the shutdowns and restructuring, which is lower than the $500 million it predicted at the end of January.
Ericsson said it had made a provision of 3.3 billion Swedish crowns ($516 million) in 2012 to pay for the moves.
At 11:24 a.m. British time, STMicro shares were up 5.2 percent at 6.12 euros.
Max Kamir, broker at Louis Capital Markets, said investors welcomed the fact that STMicro's restructuring costs were lower than previously predicted and pointed out that the chip maker would get a revenue boost from bringing back products in-house.
"The return of the ST-Ericsson businesses to STMicro may also revive the idea of splitting the group up - into digital and analogue units - that the board decided against late in 2012," he added.
Ericsson's shares, however, slipped 1.4 percent to 84.25 Swedish crowns.
The company estimated the 4G chip product line would generate operating losses of approximately 500 million crowns in the fourth quarter of its financial year, largely due to research and development costs.
Ericsson Chief Executive Hans Vestberg said it aimed to make the product line a top three global player.
"We obviously have the ambition of making this profitable ... and with a slimmer organisation I believe we have a much greater chance of getting there," he said.
But some analysts were sceptical.
"I doubt that unit will profitable," said a Stockholm-based analyst who declined to be named. "My understanding is that it has no sales today and just one design win. Either it is a success or it is not, and then you are stuck with all the losses."
(Additional reporting by Alexandre Boksenbaum-Granier and Simon Johnson; Editing by Anthony Barker and Mark Potter)