An update on our restructuring

Many factors have adversely affected company performance over the last year. These factors include increased competition, pressure on prices, market evolution, and the dollar/euro exchange rate. By the beginning of 2005, our gross margin had declined to a level significantly below that of our comparable competitors. Indeed, the results of the first quarter of 2005 showed a loss.

This state of affairs led management to implement measures aimed at reshaping the company and restoring the competitive excellence we used to have. These measures included a restructuring involving:

• Redeploying about 1,000 engineers on selected projects and products
• Recruiting 500 people to complement this redeployment
• A workforce reduction by about 3,000 positions – about 2,300 in Europe (1,200 in Italy and 1,000 in France), about 700 in the Mediterranean region, and the remainder in other European countries and our Americas region.

Of these 3,000 positions, about 850 relate to projects from which we are disinvesting – 150 in Italy and 700 in our Mediterranean region.

The changes to our workforce were linked and also included changes already announced two years ago concerning the upgrading and closing of former 6-inch 'fabs' (manufacturing facilities) in France and Italy. To maintain production levels at the 6-inch fabs while also starting the new fabs, we hired about 700 operators on special short-term contracts to cover the overlap period.

The aim was to implement these changes within 18 months, completing the program in mid 2006.

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Negotiations with workers about the changes took place at a country level apart from in Europe, where we have a European worker council, and so negotiations took place at both a European and country level. Inevitably, the detail of negotiations varied according to local practices and employment legislation but in every case the priority was to minimize the social impact of our restructuring and, ideally, to have no compulsory redundancies.

We achieved this in two main ways:

• By giving priority to voluntary solutions whereby staff:

  • took early retirement
  • found a new job either within or outside the company
  • set up their own business
  • went part time
  • left to follow personal projects
• By giving stakeholders sufficient time to analyze, present, and negotiate the practical conditions on which they implemented one of these solutions.

All of the actions mentioned above are carried out with the full support of ST.

In all cases, we made every effort to help those affected as much as possible by, for example, identifying other possible jobs in ST, helping them look for jobs outside ST, retraining them, or helping them relocate to another area.

In France, in agreement with the unions, we paid external consultants to advise affected employees on any ideas they might have about their future employment, both inside and outside ST. If these ideas were judged to be realistic we helped employees put them into practice.

As a result of this initiative, by the end of 2005, before formal negotiations were completed, almost 200 volunteers had registered for:

• Other internal jobs: 6%
• External jobs: 27%
• Setting up their own business: 40%
• Training/personal projects: 10%
• Retirement/early retirement/part time: 17%

This means we can reasonably anticipate that we will achieve our target of zero lay-offs. Our initiative has met with considerable favor from the French authorities and discussions are under way to extend the concept outside ST to create a permanent body available to assist affiliated companies and their employees with redundancy and mobility situations.

In Italy, our first step was a voluntary separation program for people who had reached pensionable age during 2005. The second step was to negotiate an agreement with unions to modify working patterns with a new 21-shift pattern and to introduce phased retirement for up to 270 people. We expect this agreement to come into force during spring 2006 in line with our completion target. At the same time, about 200 employees from our Castelletto plant have agreed to commute to our Agrate plant, taking advantage of transport measures we have put in place.

In all our locations subcontractor, agency and short-term contracts will cease at the fixed date – especially all special temporary contracts linked to fab upgrading – and will not be renewed. These contracts represent about 30% of the total positions that need to be eliminated. By the end of 2005, we had achieved about 40% of the changes required by our restructuring program.