How Apple and US-China tensions ultimately led to the closure of a division at Orbotech
Five years after its acquisition by U.S. company KLA, the flat panel display division at Orbotech is set to be closed, with the initial number of 100 layoffs expected to double by the end of the year
The day after Mobileye announced the closure of its aftermarket division and the laying off of 90 Israeli employees, American company KLA informed more than 100 employees of Orbotech in Yavne on Tuesday that they are being laid off following the closure of the flat panel display (FPD) division, test systems for flat screens. It is one of the two main divisions that make up Israeli company Orbotech, which was sold to KLA in 2019 for $3.4 billion.
Orbotech, established in 1992 as a merger between Orbotech and Optrotech, is considered one of Israel’s first high-tech companies. The closing of the division and the subsequent layoffs are seen as a dramatic event and a testament to the company's decline since its sale.
"The sharp decline in demand for consumer electronics severely weakens the Israeli site, and employees in Yavne have been describing an empty production floor for over a year," sources at the company said. According to estimates, Orbotech's local workforce has not only failed to expand since the sale but has been shrinking over the years, affecting local senior personnel who have also departed.
Employees describe a slow process of transferring management functions in marketing and sales to the company's management in the United States, alongside an increase in bureaucratic processes and a reduction in the center's autonomy in Yavne. The company, headquartered in Yavne, developed systems for testing machines for producing printed circuits and flat displays. Its products were primarily sold to chip and electronics manufacturers in East Asia, and following the sale to KLA, it grew rapidly and employed around 3,500 employees, including about 800 in Israel.
KLA plans to end the division's operations by the end of 2024, though they have yet to disclose the final number of employees that will be affected. On Tuesday, more than 100 employees from the company's offices in Yavne received immediate termination notices. According to estimates, there will be another round of layoffs before the end of the year. KLA will write off inventory of approximately $70 million and incur termination expenses totaling $50-70 million following the division's closure. Before KLA's acquisition of Orbotech, they had no activity in the flat panel display systems field.
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"KLA announced today a strategic decision to close the equipment division for flat panel display manufacturers due to a continuous decline in this market and the cancellation of a project with a major customer. We are committed to providing continued support to existing customers, as we have already informed them. We maintain our full commitment to our business activities in other divisions and to the demands of the electronics, advanced packaging, and components market, preparing for renewed growth across all areas of the company's activities, in accordance with forecasts," KLA stated yesterday.
In recent quarters, KLA has suffered from a slowdown in its overall business, which has already led to workforce reductions, but Orbotech’s traditional activity has shown particularly significant weakness in recent quarters. The company's activity in the field of test systems for printed circuits and flat panel displays accounted for only 3% of KLA's total revenue and amounted to $283 million in 2023, falling by 48%. Together with revenues from services in Orbotech's traditional field of activity, the annual turnover amounted to half a billion dollars, but even this was after a decline of 34%.
Flat displays alone accounted for 1.5% of the company's sales in 2023, approximately $150 million, and the activity was less profitable than the company's overall profitability, contributing to the decision to discontinue operations. KLA's revenues in 2023 totaled $10 billion - an 8% decline from 2022. Orbotech’s numbers in KLA's reports reveal that, not only have the Israeli company’s activities not grown since the sale but they’ve actually shrunk. In 2018, Orbotech's last independent year, it reached annual revenues of a billion dollars and was profitable.
The weakness in Orbotech's traditional core business is due to several factors: the general cyclical nature of the flat panel and printed circuit board market, even during Orbotech's time as an independent company; geopolitical tensions between the U.S. and China; and Apple's dramatic decision last year to switch to self-production of screens. Apple traditionally manufactured smartphone screens in Asian factories, primarily using their rival Samsung who was a customer of Orbotech. The decision to switch to self-production led to significant revenue loss and a chain reaction throughout the supply chain. In addition, precision testing equipment for printed circuits and flat displays was defined as strategic by the U.S. and therefore export restrictions to factories in Asia became more challenging.
It is possible that if Orbotech remained an independent Israeli company, it would have been less affected by the trade war between the U.S. and China. Estimates suggest that export restrictions to China, which apply to American companies in the chip field, cut almost a billion dollars from KLA's revenues in 2023. KLA currently employs 1,500 people in Israel, and beyond Orbotech, it also has had a plant in Migdal HaEmek since the 1980s. Last year, it began promoting the establishment of a new plant in Zippori National Park in the Galilee.
