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Tuesday, 23 October, 2001, 05:34 GMT 06:34 UK
Silicon Valley: Cutting jobs to survive
3Com's headquarter in Santa Clara
3Com's Santa Clara campus: One year ago valued at $800m, now worth $250m
Faced with a global economic downturn, Silicon Valley's tech giants have axed thousands of workers. So what hopes are there for a turnaround?

BBC News Online's Tim Weber spoke to Bruce Claflin, chief executive of 3Com, one of the besieged firms.

Bruce Claflin is a man who exudes supreme confidence.

He fits the image of a chief executive, with gold-rimmed glasses, immaculately trimmed grey hair, a winning smile and a warm, authoritative voice.

I had to save the company, save as many jobs as possible and save as much shareholder value as possible

Bruce Claflin, 3Com
And he is a man who has fired 6,000 people during the past few months.

Talking about it, the self-assured Mr Claflin suddenly seems to feel uncomfortable.

But the decision to sack half his company's workforce, he says, was the right one.

"I had to save the company, save as many jobs as possible, and save as much shareholder value as possible," he argues.

So he took the "rational decision" to cut all divisions that were dragging down 3Com.

Emotionally - "eye to eye" - it was not that easy.

Mr Claflin fired 40% of the managers reporting directly to him, people he himself had hired.

The ABC of hi-tech trouble

How 3Com has fallen. The manufacturer of computer networking equipment is probably best known for its US Robotics brand of modems, and the fact that it once owned Palm, the maker of the ubiquitous palm top computers.

Bruce Claflin, 3Com chief executive
Bruce Claflin: "First survive, then thrive."

Less than two years ago, 3Com's share price peaked at about $22. It now trades at just over $4.

The firm once had more than 12,000 employees. Half of them have now gone.

And a few outsourcing deals and cutbacks later, 3com is left with only one production facility, in Ireland, having closed down factories in California and Singapore.

Faced with what he describes as the widest and broadest tech industry downturn in living memory, Bruce Claflin has cut everything that does not promise growth or good profits.

But what's left of 3Com reads like the ABC of hi-tech trouble.

3Com profile
Founded: 1979
HQ: Santa Clara, California
Staff: 6,000
Annual sales: $2.82bn (year ending 1 June 2001)

Its loss-making CommWorks subsidiary makes networking equipment for the telecoms industry.

The Business Networking division sells the hardware to build corporate computer networks, and the Business Connectivity division focuses on mobile access to computing.

All three segments have been hit by the economic downturn.

And 3Com's competitors are the biggest names in the industry - Nortel, Lucent, and the giant of them all, Cisco.

To make things worse, more competitors are warming up on the sidelines, with the likes of Dell among them.

The fall

Bruce Claflin cites three reasons for the rapid rise and even faster downfall of the industry.

  • The telecoms deregulation in the US in 1996 and in Europe in subsequent years kick-started demand for networking equipment.
  • Two years later, companies began to invest heavily to beat the millennium bug.
  • Then came the internet bubble, fuelled by low interest rates, easy money, "almost endless investor patience" and "excess industry hype".
With demand escalating, all manufacturers ramped up production.

You can't out-Cisco Cisco

Bruce Claflin

But the boom came to an end when scores of firms ran out of money, faltered and failed.

In the telecoms sector, for example, 85% of all firms set up during the boom went out of business.

Suddenly, investors rediscovered the value of caution and refused further financing.

Uncertain future

Bruce Claflin prides himself to be one of the first to have seen the slump coming.

3Com router switches
3Com focuses on market where it ranks first or second

One year ago, 3Com issued a profit warning and predicted a sharp industry-wide slowdown.

The same day, 3Com's nemesis Cisco confirmed its optimistic earnings outlook.

But having been proved right is unlikely to earn Mr Claflin any points with investors, who look to the future.

And there uncertainty rules.

"There is hardly any visibility" about how the industry will develop, the 3Com chief executive says.

Before the terror attacks on 11 September he believed the economic cycle was "pretty close to bottom".

The fundamental demand drivers [for the next upturn] are still here

Bruce Claflin
Now all he can say is that "I don't like the short-term, but I'm optimistic for the medium and long-term", with a possible recovery in the second half of 2002.

At least he has experienced the hard times before.

Unlike some of the "young people who entered the industry six or seven years ago", he has "seen slumps and downturns" in the business.

The perfect storm

Mr Claflin, a hobby sailor with a dock on the New Hampshire coast, believes he can "sail in the storm".

Bluetooth PC card
Wireless connectivity for computers is one of 3Com's growth markets

But he admits that this storm, this business slump, is worse than any he has seen before.

And so Mr Claflin keeps cutting back.

You can not "out-Cisco Cisco" and be present in every segment of the networking market, he says.

To achieve maximum returns, he has turned to the business practices espoused by former General Electric chief Jack Welch, and aimed 3Com at being a top player in each of its remaining markets.

Niche player?

The division making modems for ADSL and broadband internet access, for example, targeted a rapidly growing market but had thin profit margins - and 3Com was certainly not a market leader.

Bruce Claflin closed it down.

In some core server businesses, Cisco had a 60% market share, compared with 3Com's 4%.

Bruce Claflin pulled out.

Mr Claflin winces, when I ask him if that leaves his company to be a mere niche player.

In his dictionary, niche is not a nice word.

3Com now focuses its efforts exclusively on areas where it excels, and which have a potential for high growth, he says.

And he believes that there are opportunities for growth. "The fundamental demand drivers [for the next upturn] are still here."

Cutting deep and early, and clearly defining 3Com's strengths may have given the firm just the competitive edge it needs to pull ahead of much larger rivals.

See also:

03 Oct 01 | Business
Upbeat Cisco boosts tech sector
08 Aug 01 | Business
Cisco falls to earth
03 Oct 01 | Business
Shake-up for troubled Nortel
24 Jul 01 | Business
Lucent axes 20,000 more jobs
07 May 01 | Business
3Com cuts 3,000 jobs
26 Apr 01 | Business
Silicon Valley feels the pain
15 Feb 01 | Business
The Limits of Growth?
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