Intel's strategic transition: can new orders and cost cuts lead to a rebound?

Many still regard Intel as one of the greatest American companies. However, recent struggles have led to a less flattering label: "too big to fail." The critical question now is whether Intel can see a glimmer of hope amid news of new orders and ongoing efforts to cut costs by US$10 billion, including a significant reduction of 15,000 employees from its global workforce and real-estate exits.

Intel's recent announcement of a strategic alliance with Amazon Web Services (AWS), along with US$3 billion in funding from the CHIPS and Science Act for the Secure Enclave program, underscores the robust support Intel receives from both the government and the private sector. "The Board and I agreed that we have a lot of work ahead to drive greater efficiency, improve our profitability, and enhance our market competitiveness," stated Intel CEO Pat Gelsinger in a message to employees.

With a historic dominance in the CPU market—maintaining a 76% global market share as of the first quarter of 2024—it is challenging to envision such a giant stumbling. Yet, persistent financial challenges have plagued its operations and led to stagnant sales growth.

A recent 10-Q report filed on August 2 revealed that Intel's Client Computing Group experienced a 19% revenue growth in the first half of 2024, while areas like Data Center and AI, Network, and Edge showed little change. Although Intel Foundry's sales did rise slightly in the second quarter, overall sales for the first half of the year decreased by 3%. Intel Foundry consists substantially of process engineering, manufacturing, and foundry services groups that provide manufacturing, test, and assembly services to Intel Products business and third-party customers.

Taking a closer look, recent figures indicate a concerning trend: external customers are moving away from Intel Foundry Services (IFS). Sales contributions from these external parties dropped by more than 30% in the second quarter and the first half of this year compared to the same period last year while losses widened.

IFS' external sales are disappointing, with its losses easily consuming the hard-earned profits from other divisions.

Source: Intel 10-Q report, compiled by Judy Lin, September 2024.

Intel faces stiff competition from Qualcomm, a newcomer in the AI PC market, and the pressure is intensifying in the X86 architecture landscape. However, the challenge of IFS is greater than anything else.

Gelsinger has made extra efforts to maintain employee confidence in IFS, emphasizing the importance of building momentum as the company approaches the launch of Intel 18A. He highlighted the need for greater capital efficiency within this division while also focusing on creating a more competitive cost structure to achieve the US$10 billion savings target.

Additionally, Gelsinger stressed the importance of refocusing on the strength of the X86 franchise in driving Intel's AI strategy. The effectiveness of this pep talk remains to be seen.

While there are promises of increased independence for Intel Foundry as it transitions to a subsidiary, some analysts argue that this step may not be sufficient. "The CEO does not look like intending to spin off or sell the foundry business in the short term. We will continue to watch for indications of whether the company will reduce its stake in its foundry subsidiary when it might consider an IPO or spin-off, and how it plans to manage its capital expenditure-to-sales ratio and equipment depreciation, as GlobalFoundries has done," noted Andrew Lu, a senior semiconductor industry analyst in Taiwan. He added that any reduction in Intel's exposure to fabrication could bring positive news for the company.

As Intel continues to navigate these challenges and capitalize on new opportunities, the path ahead will require agility, innovation, and strategic partnerships to reclaim its position as a leader in the semiconductor industry.