Once dominating the chip industry, Intel has been gradually surpassed by rivals Nvidia and AMD, forcing CEO Pat Gelsinger to take a gamble that will cost his entire career.
Gelsinger knows he must act quickly to avoid becoming the next American tech giant left behind by its rivals. Over the past decade, Nvidia has surpassed Intel as the world’s most valuable semiconductor maker. Rivals are constantly introducing the most advanced chips. Intel’s market share is also being eroded by its longtime rival AMD.
Intel has recently had to repeatedly delay new chip launches and face angry customers. "If everything was going well, we wouldn't be in this mess. Intel has serious problems to solve, from leadership, to people, to methods," he said when he took over as CEO in 2021.
Gelsinger sees Intel’s problems as stemming largely from a shift in chip manufacturing. Intel is famous for doing both designing its own microchips and manufacturing them in its own factories. But today, chipmakers are focused on only one of those things. Intel has yet to make much headway in manufacturing chips designed by other companies.
So far, the turnaround has been difficult. Gelsinger’s plan calls for hundreds of billions of dollars in new factories that manufacture for other companies, in addition to making Intel’s own products. But two years on, the contract manufacturing is still plagued by problems.
Mobile chip giant Qualcomm and electric carmaker Tesla explored having Intel manufacture chips for them, but later backed out, according to WSJ sources. Tesla said Intel could not provide chip design services as strong as other manufacturers. Qualcomm backed out after discovering some technical flaws at Intel.
“Chip manufacturing is a service industry. Intel doesn’t have that culture yet,” Gelsinger said in an interview.
Pat Gelsinger at a hearing in the US Senate in March 2022. Photo: Bloomberg
Whether he succeeds will affect not only Intel’s fortunes, but also those of other companies. Taiwan’s TSMC and South Korea’s Samsung Electronics are the world’s most advanced chipmakers. Chinese companies are catching up. The US is also trying to shore up its domestic chip industry, as tensions between the US and China rise and Covid-19 disrupts supplies from Asia.
Intel became a Silicon Valley giant in the 1980s and 1990s thanks to its microprocessors (CPUs) used in personal computers. Under CEO Andy Grove, Intel chips powered Microsoft's Windows operating system. IBM also used Intel products in popular computers in homes and offices.
In the 2000s, Intel tried and failed to make chips for mobile phones and high-end computer graphics processors. In recent years, TSMC and Samsung have surpassed Intel to produce chips with the smallest transistors and fastest processing speeds.
The global chip market is expected to exceed $1 trillion by the end of this decade, so becoming the world’s leading contract chipmaker “is not an option,” Gelsinger said, but a necessity.
Gelsinger grew up on a small farm in Pennsylvania, loved fixing TVs and radios, and attended a technical school near his home. At 18, he moved to California to work for Intel, rising to become the company's first CTO in 2001. He was later fired after a failed computer graphics chip project. Gelsinger moved to software company VMware, where he served as CEO for eight years.
He returned to Intel in February 2021, knowing that turning things around would not be easy. His plan was to significantly expand Intel’s factories and create a chip manufacturing business to increase orders. Before taking the CEO job, he talked to Intel’s board members about the plan. And they were all supportive.
He returned to Intel just as a global chip shortage was brewing as PC sales exploded during the pandemic. Industry profits spiked, but then fell as the pandemic passed and people returned to work, leaving a chip glut. That complicated Gelsinger’s plans.
On April 27, Intel announced its worst quarterly loss in history and forecast another loss this quarter. It cut its dividend, launched a cost-cutting campaign (including mass layoffs) and reduced executive pay. Intel aims to reduce costs by $10 billion per year by 2025.
They are also adding millions of dollars worth of chipmaking equipment to new factories to meet chip demand. Plans for a $200 million research center in Israel have been scrapped, as has a $700 million lab project in Oregon. Air travel to shuttle employees between manufacturing centers in Oregon and Arizona to their Silicon Valley headquarters has also been suspended.
Intel shares have fallen 30% since Gelsinger was named CEO. Meanwhile, the PHLX Semiconductor index, which tracks the semiconductor industry, has risen 10%. TSMC’s market cap is now four times that of Intel’s. Nvidia’s is eight times that. Nvidia’s market cap hit $1 trillion on May 30.
Stock price movements of Intel, AMD and Nvidia over the past 3 years. Chart: WSJ
Gelsinger said he was confident Intel could deliver on its promise of five advances in chip technology in four years. It would also produce the world's most advanced microprocessors within the next few years.
“There are a lot of challenges and risks to execution. It’s going to take a long time to execute on that multi-year strategy,” said Andrew Boyd, chief investment officer at Gibraltar Capital Management, which sold its entire stake in Intel in January after 15 years of treating it as a core asset.
Gelsinger is optimistic that Intel can become one of the world's two largest contract chipmakers. "Can TSMC continue to grow through the end of the decade? Yes. Can Samsung? Yes. And Intel? I expect us to grow much faster than both of them," he said.
Intel executives also aim to be number two behind TSMC by 2030. They estimate that attracting just a few big customers could add $20 billion to $25 billion a year to Intel’s revenue by the end of the decade.
Before each board meeting, Gelsinger invited them to dinner and asked for their support. "Are we still on the same page? Are we still on the right track? Is the strategy still working? This is a tough road, and once we get there, we need to stick together," he told them.
Intel Chairman Frank Yeary said they still support Gelsinger and that “the company is making progress.” But they still have a lot of work to do.
To accelerate its growth in contract chip manufacturing, Intel agreed last year to buy an Israeli contract manufacturer, Tower Semiconductor, for nearly $6 billion. However, the deal is facing legal troubles and is unlikely to close anytime soon.
Qualcomm, a chip designer and contract manufacturer, also wants to work with Intel. It has sent a team of engineers to study the production of mobile phone chips at Intel factories. Qualcomm is impressed with a manufacturing technology that Intel expects to be the most advanced in the world by the end of next year.
Early last year, Intel sent representatives to Qualcomm headquarters to meet with CEO Cristiano Amon. But by June, Intel missed a key milestone toward commercial production of the chip. In December 2022, it missed another deadline.
Qualcomm executives therefore believed that Intel would have difficulty producing the kind of mobile phone chips they wanted, and they announced a temporary suspension of cooperation while waiting for Intel to make progress, the WSJ source said.
The source explained that Intel has so far focused on chips for personal computers. So making chips for phones, which have limited battery life, requires new skills and designs. Intel recently announced that it is partnering with Arm, a chip design company that specializes in making microchips for phones.
Tesla also began considering Intel to make data and image processing chips for its self-driving cars in late 2021. Tesla has long used Samsung products and recently started working with TSMC. Tesla designs the chips, but needs other companies to manufacture them, something Intel has not been able to do.
Intel’s top customer is now chipmaker MediaTek. Intel supplies less advanced chips for MediaTek’s smart TVs and Wi-Fi transceiver modules. It also makes chips for computer hard drive maker Seagate.
Last year, Intel recorded just $895 million in foundry revenue, less than 2% of its total revenue. In meetings last year, Gelsinger told chipmaking employees that he had bet his entire career on foundry and would do whatever it took to make it happen.
The US government is also looking to revive the industry after allowing much of the manufacturing to move to Asia, where labor costs are lower and government incentives are more generous. Washington last year enacted the Chips Act, which provides $53 billion in funding for domestic chip production. President Joe Biden later visited an Intel plant in Ohio.
Gelsinger’s plan is based on the assumption that chip demand will rebound sharply. When he announced his business results in late April, he predicted that demand would recover by the end of this year.
While admitting that some Intel factories are under construction without any customers, Gelsinger said it was a bet he was willing to take.
“If you don't have a little bit of recklessness, you shouldn't go into the semiconductor industry,” he said.
Ha Thu (according to Wall Street Journal)
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