Munich “Only the paranoid survive,” wrote Intel co-founder Andy Grove in his legendary book of the same name in the mid-1990s. This survival strategy includes an important insight: every company always comes to a point where it has to radically change its business. Otherwise it will go under.
Intel has apparently arrived at such a turning point. The turnover of the once largest chip manufacturer in the world is shrinking rapidly. In the past quarter, revenue fell year-on-year by a fifth to $15.3 billion. And the margins that have been lavish for decades have almost completely melted away. Overall, profits fell 85 percent to $1 billion.
And there is nothing to suggest that the downtrend is ending any time soon. CEO Pat Gelsinger received his forecast late Thursday evening for the second time this year. If things go as announced, revenues in 2022 will fall by a fifth compared to the previous year. Instead of $76 billion, the US group will now have a maximum turnover of $64 billion.
Intel breaks with tradition
The 61-year-old is therefore breaking with traditions that have been cultivated for decades: factories and chip development have so far been closely intertwined. That should change: The plants should become internal contract manufacturers, i.e. a separate unit that only gets the orders if it is competitive. The developers, in turn, should look for the smartest solutions for the semiconductors and not favor those that the factories can handle best.
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Intel should become more agile and competitive, said CFO David Zinser. Above all, Intel needs to become more efficient. Next year, the costs are expected to drop by three billion dollars, and by 2025 by as much as ten billion. When the quarterly figures were announced, the US company left open how many jobs would be lost. According to a report by the Bloomberg news agency in mid-October, several thousand jobs are to be cut.
The Intel boss’ savings plan is well received on the stock exchange.
(Photo: Bloomberg)
CEO Gelsinger sees one reason for the misery: the economic downturn. “The deteriorating environment was and is the story,” Gelsinger said. There is simply no good economic news at the moment.
Intel is losing market share
That’s true, but it’s not the whole truth. Intel is losing market share because the competition is offering more compelling products. Competitor AMD is doing better than Intel. Sales in the third quarter grew by 29 percent year-on-year to $5.6 billion.
Intel essentially lives from processors for PCs, notebooks and servers. They are the brain of every computer. For decades, the group dominated the billion dollar market. But the gap to competitors like AMD and Nvidia is shrinking.
The current downturn is taking its toll on Intel’s continued reliance on the PC and notebook business and its failure to expand into new markets. The company generates half of its sales in this market. According to market researchers from Gartner, PC manufacturers shipped almost a fifth fewer devices in the third quarter than in the previous year. They are Intel’s most important customers.
“This quarter’s results could mark an historic slide in the PC market,” warned Gartner analyst Mikako Kitagawa.
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But even without the lull in the PC market, Intel would have a problem. More and more computer manufacturers are installing processors based on a competing concept from chip designer ARM. For example, the architecture of the British is used by Apple for its M chips. Microsoft, Nvidia and Qualcomm are now also using the platform, which has so far mainly been used in smartphones, for office computers or servers.
Cloud providers are turning away from Intel
The market researchers from Gartner assume that in three years every sixth PC will run with an ARM processor. In 2019, the market share was one percent, according to the experts. The advantage of ARM processors: longer battery life, less space, no fans and an integrated connection to the new 5G mobile communications standard.
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Cloud providers would also use processors that work with ARM architecture more frequently in the future. Corporations like Amazon or Google now develop their processors themselves – and do without Intel chips. “The flexibility of being able to design processors that are optimized for a workload offers significant benefits for cloud service providers that deploy large numbers of commodity servers,” said Gartner.
This is threatening for Intel. After all, the server chip business has been highly profitable for years. In the third quarter, however, the division’s operating profit fell to a meager $17 million, down more than 99 percent.
The stock market regains confidence in Intel
After all: With his cost-cutting plan, the Intel boss was able to convince investors at the end of the week for the first time in months. According to the investment consultancy Evercore, the measures are more aggressive than investors had expected. In after-hours trading in New York on Thursday evening, the price rose by almost six percent.
Already in the middle of the week, Gelsinger had achieved a respectable success on the floor: the share price of the Israeli subsidiary Mobileye shot up by 38 percent on Thursday, the first day of trading. Because the valuation in the run-up to the issue was far below Intel’s expectations, Gelsinger only sold a few papers from the autonomous driving specialist.
In view of the sharp rise in the price, the manager can expect significantly higher proceeds in the future if he sells further shares as announced. Gelsinger needs the proceeds to fund his investment program. The manager is building state-of-the-art plants worldwide for a double-digit billion amount in order to catch up with the technology leader TSMC – including in Magdeburg.
Despite the weak numbers, experts assume that Gelsinger will manage to get Intel back on its feet. “Pat Gelsinger is the ideal cast. As an engineer, he knows the technical challenges in detail and also understands the business necessities,” says Peter Fintl, chip expert at the consulting firm Capgemini.
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