There have been a lot of articles and discussion on SemiWiki about Intel. These articles have all been written from the perspective of an outsider commenting on what Intel is doing, or should or shouldn’t be doing. I thought it would be interesting to take a look at how Intel got to where they currently are, what their current strengths and weaknesses are and what Intel’s options are. I am not an Intel insider nor do I profess to have inside knowledge of their situation, I am however someone who has worked in the semiconductor industry for over 30 years and run a semiconductor division and I think Intel’s options are fairly clear.
In 1971 Intel invented the PC microprocessor. As PCs became the driver for the semiconductor industry the microprocessor grew into one of the largest and the most profitable segments of the semiconductor industry. Intel built and maintained a market leading position in microprocessors and rode that success to become the largest and most profitable semiconductor company in the world.
The tremendous profits generated by Intel’s microprocessor business funded the construction of a network of state-of-the-art wafers fabs and the development of what I believe to be the most advanced IC logic technology in the world.
I know there is some debate about whether Intel really has the most advanced logic process technology but I think on a fundamental level they do and my argument is pretty straight forward. In 2007 Intel introduced high-k metal gates (HKMG) at their 45nm node. It wasn’t until approximately 1-1/2 nodes and 3 years later that other logic IC producers introduced HKMG. In 2011 Intel introduced FinFETs at their 22nm node. Other leading logic producers are expected to introduce FinFETs later this year, three years after Intel. By the time the 14/16nm first generation FinFETs are introduced from other leading producers Intel will already be producing their second generation 14nm FinFET technology that I believe will include another major new innovation, 2 to 3 years ahead of everyone else. These are fundamental innovations not convoluted with design and operating system issues.
The changing competitive landscape
While Intel has been dominating the microprocessor business, the semiconductor landscape has been changing under their feet.
The foundry/fabless models have been steadily developing in size and capability. Many fabless companies have sprung up focused on system-on-a-chip (SOC) development. SOCs are perfect for small form factor products such as smart phones and tablets and companies such as Qualcomm, Broadcom, Media Tek and even Apple (who now designs their own SOCs) dominate the SOC market for communications. I don’t think Intel was blind to this developing market; Intel has invested billions of dollars in communications over the years. What I think is the key issue is that inside Intel communications has always been second priority to microprocessors. All you have to do is look at Intel’s process technology where at each new node they first introduce the microprocessor version of a process and then around a year later they introduce the communications version. You will know they are really serious about communications when a new node is introduced with the communications version of the process coming out first.
The other thing that I think has happened is that Intel was surprised by how rapidly tablets and smart phones have grown and how they have cannibalized notebook computer sales (in fairness to Intel I think this has surprised most everyone). In 2012 unit sales of PCs declined for the first time and in 2013 they declined again. In my opinion PC unit sales will likely continue to be flat to down for the next several years. At the same time, although server sales are growing to support all of these connected devices, unit volumes for servers are far lower than for notebooks and Intel is facing increasing competition from the ARM camp for server business. I suspect Intel may also have expected that Ultrabooks would help fend off the tide of tablets but so far that hasn’t happened.
I do want to add a side note here that the Microsoft Surface Pro 2 tablet uses Intel microprocessors. This Christmas I had no problem getting an iPad air for my wife but couldn’t find a surface 2 anywhere. The surface 2 uses an NVIDIA Tegra processor but Surface Pro 2 that use Intel microprocessors was also in short supply. This could be due to a lot of reasons including Apple just planning better, but I thought it was interesting.
Intel’s current position
Intel is still the world’s largest semiconductor company with industry leading margins and lots of cash. They have industry leading process technology and a huge network of state-of-the-art fabs. They have a strong brand, strong marketing organization and sales channels and lots of engineers.
On the other hand only a few quarters ago there were widespread reports that utilization at Intel’s fabs was only 60%. In recent financial announcements Intel has claimed 80% but that is still lower than they would like. Intel also has their 14nm process coming on-line in the ramping Fab 11x and they have fab 42 ready to turn on for 14nm production. Intel needs to find a way to fill these fabs and keep them full or they will be facing a serious cost crisis and longer term have difficulty funding their continued lead in process technology. In short Intel needs to find a way to resume growing their business.
The way I see it Intel has three main options:
The bottom line of all this is that with a declining PC microprocessor market Intel has to either prepare itself for being a mature – no growth company or succeed in communications or foundry or to some extent in both. I don’t think Intel can or will except no growth and so they are pursuing the only options they have. It has been argued on SemiWiki that Intel shouldn’t be in the foundry business but I think the answer is what choice do they have? Intel isn’t going to disappear but they need to find a path to resumed growth or they will be managing a whole set of really difficult problems due to shrinking revenue or shrinking gross margins or both.