Intel: Still leading the pack
December 26, 2000 12:00 AM PT
by James Judd
From the January 2001 issue of UPSIDE magazine
Company: Intel
Founded: 1968
CEO: Craig Barrett
Location: Santa Clara, Calif.
Number of employees: 80,000
Exchange/symbol: Nasdaq/INTC
Shares outstanding: 6.7 billion
Market capitalization: $283 billion (as of 11/29/00)
The brass at Intel (INTC) must surely be glad to see 2000 pass into history. It was a bit tough at the end for the world's leading chipmaker. Diminished earnings expectations in the third quarter caused a serious stock fall and a ripple effect throughout the semiconductor industry -- which was already vulnerable to almost any whisper of trouble. There was also a recall of some of Intel's signature Pentium III chips, the scrapping of plans for a new under-$1,000 PC chip, and grumblings within the industry that the Pentium IV and Itanium products, with their 64-bit architecture, are too much power, too soon.
Intel is moving ahead with its IA-64 invasion with the confidence that if it builds it, people will buy it.
In the center of the maelstrom is Intel's IA-64, the new and improved version of 32-bit microprocessors. It's supposed to be a much-needed solution to the ever-increasing demand on microprocessing, particularly in the areas of financial transactions and real-time data mining. However, once the switch in microprocessors is complete, all the 32-bit compatible software applications will have to be updated. That will mean considerable additional expense for the end users. Meanwhile, the IA-64 proprietary technology will provide Intel with a major head start in 64-bit profits.
On the other hand, competitors, namely AMD (AMD), are shouting from the rooftops that IA-64 is unnecessary or premature. Regardless, Intel is moving ahead with its IA-64 invasion with the confidence that if it builds it, people will buy it.
And speaking of building, that confidence is nowhere more evident than in Intel's expansion of its wafer-fabrication plants. No fewer than 11 new plants are being built from the ground up, with several overhauls in progress, most of which average about 130,000 feet of clean room -- the dust-free labs where the chips are composed.
Consider this partial list of recent or ongoing construction: Arizona: 150,000 feet of clean-room space; California: 100,000 feet dedicated to flash in Santa Clara; Oregon: 300,000 feet in place, with a third being upgraded; Massachusetts: a 2-year-old purchase from Digital Equipment undergoing an $800 million, 2-year conversion process; New Mexico: three fabs with at least $2 billion being spent to build 133,000 feet dedicated to producing .13 micron chips; Ireland: two fabs in excess of 100,000 feet already up, with another $2 billion fab in excess of 130,000 feet coming online in 2001; Israel: 130,000 feet of clean-room space.
The total is well in excess of 1 million feet of semiconductor fabrication -- all the more impressive when you consider that each plant requires about 900,000 square feet of support space. That's a lot of dust-free real estate.
Recycling and spare parts
Upgrading factories every couple of years to meet the requirements of new technology is born of necessity, something that Intel has to consider when constructing a new plant. By the time the new plant is up and running, another cycle of Moore's Law has come and gone. Is it possible to innovate yourself out of profitability?
"Building new, leading-edge capacity is not a high-risk proposition," says Paul Otellini, Intel's executive vice president and general manager of Intel's architecture group, and formerly the EVP of sales and marketing.
Yet, as the leader in new, high-end products, depreciation is always an issue. According to Otellini, Intel's strategy to protect against losses in this area is twofold: First, find ways to convert older technology into newer technology; and second, find ways to integrate older technology into newer technology. In other words, if you must reinvent the wheel every 18 months, at least make sure the hubcaps are reusable.
Intel: Still leading the pack
page 2: Bring in the funk
One industry insider who would rather not risk the wrath of Intel by speaking publicly offered an unsubstantiated example of how far Intel will go -- and how cleverly -- to reuse the spare parts. According to the story -- or rumor -- Intel produced far more Pentium III chips during its initial launch than the market could absorb. Rather than reduce the cost and its high-end status, Intel warehoused the chips and wrote them off as a loss.
"There is an insatiable demand for performance at the end of the day."
Meanwhile, other semiconductor companies tried to jump in and fill a high-performance, low-cost chip gap. Rather than cede that market, Intel recycled its supply of
Pentium III chips into its Celeron products. Although the Celeron was sold at a lower cost than the Pentium III, it represented a higher margin of profit because Intel had already written the chips off.
Of course, there are still the lingering questions about whether we really need new wheels. Is all this money earned during the technology boom being spent on something its customers don't really need? Otellini laughs off the question but has an edge of real weariness and irritation. "Every time we bring out a new generation, you can look in the press and see the same series of articles," Otellini gripes. "Who needs a 286? Who needs a 386? The only thing that has ever been true in the history of the 35 years of the computer industry is that performance sells. There is an insatiable demand for performance at the end of the day."
Bring in the funk
Everyone wants to slay a dragon or knock off a giant. It isn't really anything about good vs. evil, as it is a deeply ingrained cultural bent to applaud any person or thing that manages to topple something bigger. Antitrust law, which was a scarcely attended subject in most law schools a decade ago, is now hotter than Harry Potter. And it's not just in the United States. European courts are cozying up to antitrust law like someone who has spent a long night in the forest, and anything labeled USA is an immediate target. Intel, which has been gobbling up European companies for a decade, has got to be feeling some heat. Here at home, the Microsoft (MSFT) decision has sparked a public appetite for corporate deconstruction. After years of big mergers that have wrought scarce benefit to the little guy, there is a new beacon of hope for the hundreds of hungry young attorneys looking to make a big killing in the jungles of the Department of Justice.
What has this got to do with Intel? Simply, Intel is reaching the level of cultural saturation at which there is a belief -- real or imagined -- that we simply cannot do without it, and therefore, we're beginning to hate it. "Intel Inside" as a brand is on its way to being as universally recognized as "Coke," "Xerox" and "Kleenex" (with the failure of those companies to adequately protect their trademarks aside.) It's almost synonymous with internal technology and anything that beeps, whirs, and sends information, regardless of whether Intel is actually involved.
But while just about everybody loves Coke, Intel is closely associated with our growing dissatisfaction with computers and the negative implications of technology on modern life. Whereas "Intel Inside" used to almost automatically generate a feeling of hopeful expectation in consumers, it now generates a collective and underlying sense of ennui.
Of course, AMD has been warming up its slingshot arm since Jerry Sanders hung out his "AMD open" sign. But Intel's dominance in the high-end semiconductor market shows no genuine signs of abatement, despite hopeful predictions from AMD. In fact, the determined and slowly strengthening forces of AMD, ever ready with a disparaging remark against its biggest competition, are Intel's best defense against any threat from antitrust forces. There is real competition in the market, and one of Intel's great strengths is its ability and willingness to use its resources competitively. |
