Intel seeks to escape the quagmire

Once dominating the chip industry, Intel was gradually surpassed by rivals Nvidia and AMD, forcing CEO Pat Gelsinger to take a gamble that 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 overtaken 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, 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 designing microchips and manufacturing them in its own factories. But today, chipmakers are focused on only one of those two 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 is to invest hundreds of billions of dollars in new factories, manufacturing for other companies in addition to making Intel’s own products. But two years on, the contract manufacturing is still facing problems.

Mobile chip giant Qualcomm and electric car maker 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 withdrew after discovering some technical flaws in 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 fate, but also that of other companies. Taiwan’s TSMC and South Korea’s Samsung Electronics are the world’s most advanced chipmakers, with Chinese companies catching up. The US is also trying to bolster 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 computers commonly used 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, “it’s a must.”

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 chief technology officer 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 division to increase orders. Before taking the CEO position, he talked to Intel's board members about this plan. And they were all supportive.

He returned to Intel just as a global chip shortage was brewing as PC sales boomed during the pandemic. Industry profits spiked, but then tapered off as the pandemic subsided and people returned to work, leaving a chip glut once more. This complicated Gelsinger’s plans.

On April 27, Intel announced its worst quarterly loss in history and forecast another loss this quarter. They cut their dividend, launched a cost-cutting campaign (including mass layoffs) and reduced executive salaries. Intel set a goal of reducing 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 canceled, as has a $700 million Oregon lab project. Airline shuttles between manufacturing centers in Oregon and Arizona and Silicon Valley headquarters for employees are also suspended.

Intel shares have fallen 30% since Gelsinger was announced as CEO. Meanwhile, the PHLX Semiconductor Index, which tracks the semiconductor industry, has risen 10%. TSMC is now worth four times as much as Intel. Nvidia is worth eight times as much. Nvidia 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 that multi-year strategy,” said Andrew Boyd, chief investment officer at Gibraltar Capital Management, whose firm 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 until the end of the decade? The answer is 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 remain supportive of Gelsinger and said "the company is making progress." However, they still have a lot of work to do.

To accelerate its contract chipmaking business, 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 chips for mobile phones 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. Therefore, making chips for phones, with their limited battery life, requires new skills and designs. Intel recently announced that it is collaborating with Arm – a chip design company that specializes in making microchips for phones.

Tesla also began considering Intel to make the 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 only $895 million in foundry revenue, less than 2% of total revenue. In meetings last year, Gelsinger told chipmaking employees that he had bet his career on foundry and would do whatever it took to make it happen.

The US government is also looking to revive the activity, after allowing much of the production to move to Asia, where labor costs are lower and officials offer more generous incentives. Washington last year enacted the Chips Act, which provides $53 billion in funding for domestic chip production. US President Joe Biden later visited an Intel factory in Ohio.

Gelsinger’s plan is based on the assumption that chip demand will rebound strongly. When announcing business results at the end of April, he predicted that demand would recover by the end of this year.

While admitting that some Intel factories are being built without finding 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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