Intel's recent announcement to cut 15% of its workforce (approximately 15,000 employees) and reduce capital expenditures to save US$10 billion may undermine its goal of reclaiming leadership in the semiconductor industry.
The company's share price plunged 26% on August 2, marking its worst single-day decline in 50 years, reflecting the market's disappointment and signaling potential challenges ahead. This raises questions about the viability of Intel's strategy to regain industry leadership.
For the second quarter of 2024, Intel reported a 1% drop in revenue to US$12.83 billion and an unexpected loss of US$0.38 per share (GAAP), both falling short of analyst expectations (US$12.94 billion in revenue and US$0.10 EPS).
During a conference call with analysts, Intel CEO Pat Gelsinger attributed the loss to the accelerated production of Core Ultra chips for AI PCs. He emphasized that, given the anticipated robust growth of AI PCs in the coming years, this short-term loss is a necessary tradeoff for gaining market share.
Core Ultra chips are manufactured by Taiwan Semiconductor Manufacturing Company (TSMC) using N3B and N6 technologies to meet the initial demand for AI PCs. Although production was originally slated for September, Intel expedited the order, resulting in higher costs.
Industry experts warn that Intel faces stiff competition from Qualcomm, whose collaboration with Microsoft in AI PCs poses a disruptive threat to market incumbents.
A company planning massive layoffs and a more than 20% reduction in capital expenditures over two consecutive years does not appear to be on a winning streak. Instead, it seems to be struggling for survival. Despite receiving US$8.5 billion from the CHIPS Act, this aid appears insufficient to address Intel's immediate challenges.
Intel announced it would cut gross capital expenditures this year by more than 20%, reducing its budget to between US$25 billion and US$27 billion, with further reductions planned for next year to between US$20 billion and US$23 billion. In contrast, TSMC has announced a 2024 capital budget ranging from US$30 billion to US$32 billion, with a Semiconductor Intelligence report predicting a 10% increase in TSMC's capex for 2025.
During the 2008-2009 global financial crisis, when most semiconductor companies were cutting capex and laying off employees, TSMC's founder Morris Chang returned as CEO and increased investments. Many believe this move was crucial to TSMC's competitiveness and its eventual surpassing of Intel in advanced chip processes.
Despite Gelsinger's ambitious goal of achieving 5 nodes in 4 years, a lack of sufficient talent for research and development could hinder Intel's future competitiveness.
Challenges facing Intel Foundry Services (IFS)
Intel's foray into foundry services is also facing hurdles. IFS has reportedly secured GPU packaging orders from Nvidia, but its revenue continues to decline, and losses have widened in the first two quarters of 2024.
The likelihood of Intel taking back Core Ultra chip production and manufacturing them through its foundry service, IFS, appears slim. Unless Intel simultaneously manufactures these chips in small quantities and achieves the same yield and quality, ready to scale up anytime, this possibility is dimming, especially with the current layoffs and capital expenditure cuts.
Intel is actively seeking customers for IFS. CFO Dave Zinsser mentioned in the earnings call that moving Intel 4 and 3 chip wafer production to its fab in Ireland from Oregon will increase short-term costs but improve gross margins later.
This move may expedite foundry services for customers in countries not on friendly terms with the US but not subject to US export controls. However, it remains uncertain whether these customers will trust Intel to produce their chips or if IFS can compete with Samsung and TSMC in terms of yield and price.
Interestingly, Intel's partners, Tower Semiconductor and United Microelectronics Corp (UMC), are reporting better earnings performance in the first half of the year and optimistic outlooks for the second half.
If manufacturing is not Intel's strong suit, the company should acknowledge this and address the shortcoming, possibly by outsourcing, leveraging partners' complementary strengths, or spinning off the manufacturing division through joint ventures or sales to cut losses. With competition intensifying in the AI PC era, Intel should focus on its core strengths to address its pressing challenges and regain its competitive edge in the semiconductor industry.
