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Summary
- Intel Corporation, which regained its position in 2019 as market leader, is a semiconductor vendor, going through a crisis that may rip it off from its position of being technologically the best in the world, causing a deep cut on its reputation.
- Intel recently announced a manufacturing lag of one year for its next generation of chips, giving a substantial edge to its competitors taking quantum leap in technology, while Intel remains fixated with a design and process that is a year old.
- As a step to mitigate the loss, the Company is considering outsourcing its chip (7nm) production, with a modified chip design to help build return on capital.
- With market sentiments, exhibiting shock on Intel’s decision to outsource its manufacturing, the semiconductor industry signals towards a paradigm change.
Intel Corporation (NASDAQ:INTC) is one of the pioneers in the chip making industry, with each new model taking quality and goodwill to a next level. According to a Gartner report of 2019, Intel was the market leader followed by Samsung in 2019.
Intel regained its position in 2019 from Samsung Electronics, which was the top vendor in 2017 and 2018. The semiconductor market itself experienced a decline of 12% in 2019 because of oversupply caused by fall in demand from the hyperscale market. Intel was also dealt with the falling prices in both the DRAM and NAND flash markets because of extreme inventory levels at OEM.
According to the World Semiconductor Trade Statistics organization, the annual global chip sales is expected to rise by 3.3% this year and 6.2% next year, after considering the effect of Covid-19 pandemic that is anticipated to slow down the semiconductor industry.
Intel’s manufacturing debacle
The latest decision of outsourcing the manufacturing of Intel chips did not go down well with the investors with shares plummeting by almost 16% on 24 July. Also, on 27 July 2020, INTC last traded at US$49.57, declining by 2.02% from its previous close.
It’s a big blow to the Company as it has always believed in keeping its technological know-how to itself, as an edge over competitors to stay ahead in the market.
Intel is known for its world-class designs, manufactured in state-of-the-art factories based primarily in the U.S. According to a market analyst, Intel’s chip fabrication plants demonstrated US’ leadership in the chip manufacturing business, with an edge over technology. Intel’s technology reflects Moore’s Law of doubling the number of transistors on a microchip in two years, thus boosting the computing power as the cost of computers get halved.
While most of its peer groups resorted to outsourcing manufacturing in Asia, Intel held on to its US located factories to maintain quality. However, the strategy has backfired with the Company struggling to measure up with the latest 7-nanometer production process.
On 24 July, Intel announced manufacturing lag of one year for its next generation of chips, giving a substantial edge to its competitors taking quantum leap in technology, while Intel is still stuck with a design and process, which is a year old.
As a step to mitigate the loss, its Chief Executive Officer Bob Swan is contemplating outsourcing its chip (7nm) production to keep pace with the existing generation of chip technology. The Company’s Chief Financial Officer George Davis says that outsourcing will help build return on capital. The Company also believes that location of the semiconductor manufacturing plant is not crucial.
Mr Swan further claimed that Intel can maintain technological edge over its products through modification to chip design. The designing of the chip, however, is expected to push the launch of products by another six months
Who stands to gain?
At present, Taiwanese chipmaker Taiwan Semiconductor Manufacturing Co (TSMC), a world leader in the manufacturing of chips is churning out billions of products annually to many mobile manufacturing companies who have created their own chips.
Due to having an edge, Intel’s manufacturing outsourcing is very likely to go to TSMC. Companies such as AMD, Mobile chip company Qualcomm, and graphics processor maker Nvidia, rely on TSMC for manufacturing of their chip.
Intel also lost its contract with Apple that has decided to go for in-house chip-making design for Macs.
Also, Intel has not been concentrating on the growing market of mobile chip making and had been focussed only on making microprocessors for PCs and servers, thus losing out on a bigger share of chip making market.
Also Read: A glance at Five tech-based companies tasting success amid COVID-19
A geopolitical issue and Role of Intel
The probability of Intel’s manufacturing going to TSMC is high, which is based in Hsinchu, Taiwan. Many US delegates and security experts think that sharing the technical knowhow- outsourcing chip, may be a dangerous call as Intel’s chips are used across computers, data centers at nuclear power stations, spacecraft and jets, which helps in decoding crucial information to governments.
Taiwan is situated close to China and it has lately observed that China has made domestic chip production as its priority. In 2019 October, China created a US$29 billion fund to boost the Chinese semiconductor industry.
According to media reports, China, which manufactures 16% of the total domestic demand for semiconductors, intends to generate 40% of all semiconductors it uses domestically by 2020. By 2025, China intends to produce 70% of all semiconductors it intends to use in 2025, prompted by a raging trade war with the US.
The US-China trade war played a crucial role in the semiconductor market, with the US adding Chinese corporations comprising Huawei to the Entity List restricting the sale of U.S. components. It prompted Huawei to look for alternative silicon suppliers outside the US. Alternate suppliers that are primarily based in the Asian continent such as Taiwan, China, Japan, and South Korea.
Bottom-line
Intel, which regained its position in 2019 as market leader is of late going through a crisis that may rip it off from its position of being technologically the best in the world, causing a deep cut on its reputation. With market sentiments, exhibiting shock on the Intel’s decision to outsource its manufacturing, the semiconductor industry signals towards a paradigm change with Asian manufacturers gaining prominence.
