Friday, August 16, 2024

Intel was once a Silicon Valley leader. How did it fall so far?

The semiconductor manufacturer announced huge job cuts and a dividend pause after losing out on AI.



by Ellen Ioanes
Aug 12, 2024
VOX


Visitors visit the booth of Intel at the 2023 Apsara Conference in Hangzhou, East China’s Zhejiang province, November 1, 2023.
CFOTO/Future Publishing via Getty Images

Ellen Ioanes covers breaking and general assignment news as the weekend reporter at Vox. She previously worked at Business Insider covering the military and global conflicts.


Intel stock is tumbling amid news that the company will lay off 15 percent of its staff after a steep decline in revenue and billions in losses in its chip foundry business.


It’s the largest drop for the company in half a century; at Friday’s closing bell, shares were trading at $21.48 — a price not seen since 2013.


The company is scrambling to shore up reserves by introducing layoffs and suspending stock dividends. But even those moves may not be enough to return the veteran tech company to its once-vaunted spot as an industry leader, especially in the face of heavy competition, particularly from rival chipmaker Nvidia.


Intel’s bad week really is more of a bad quarter: It started back in April, when the company revealed during an investor presentation that its chip manufacturing unit had, through a series of poor decisions, sustained $7 billion in losses in 2023, on top of a 31 percent decrease in revenue from 2022. Cost-cutting and other measures will save the company $10 billion in 2025, according to CEO Pat Gelsinger.


Semiconductor technology — which is crucial to everything from our phones to operating airplanes — was the foundation of Intel’s business when the company started in the 1960s. (Co-founder Gordon Moore was responsible for Moore’s Law, which theorized that semiconductor power would grow exponentially smaller, more powerful, and less expensive over time.) But as the company’s recent announcements indicate, Intel is no longer the innovative leader it once was.


There are also concerns about the global semiconductor industry — shares of other major chip companies like Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung were down at closing on Friday, too, and industry leader Nvidia is reportedly facing an antitrust investigation by the Department of Justice. But Intel is in a particularly difficult position.

How did things get so bad for Intel?


This is not the first time the company has had to implement cost-cutting measures — Intel did mass layoffs back in October 2022, after a brief, Covid-powered bump in the company’s fortunes.


“In February ’22, they put out revenue targets that — I mean, I use the phrase outlandish, they were ridiculously high,” Stacy Rasgon, senior analyst at Bernstein Research, told Vox. “They were sizing the company and sizing the investments to that COVID level of revenue,” based on the need for technology that allowed people to work from home or for kids to attend school remotely — a business that collapsed nearly as quickly as it arose.


But the current CEO, Pat Gelsinger, inherited a business that was coming off a decade of stumbles when he started in 2021. “He came into a situation that they were dire straits; they had no competitive product to really bring to market,” while Jensen Huang’s Nvidia dominated the curve on AI tech, Daniel Newman, CEO of the Futurum Group, told Vox.

Intel’s other recent big bet has been its foundry businessthree facilities in the US and three overseas to manufacture semiconductor chips, with other facilities in Asia and Latin America for testing and assembly. But that’s gotten a bumpy start; for instance, Intel declined to invest in cost-effective extreme ultraviolet machines for its manufacturing facilities, then had to outsource 30 percent of the manufacturing to a rival company, TSMC.

Intel is no longer ahead of the technological pack

“Historically, Intel has been the company that was pushing the leading edge,” Newman said. But in the lead-up to Gelsinger’s tenure, the company “missed the AI transition,” he said — and companies like Nvidia, AMD, and TSMC, which are manufacturing semiconductor chips that can be used to accelerate AI technology, filled the market.

Nvidia, in particular, has become a dominant force. As my colleague Nicole Narea explained, some of the technical capabilities of its earlier work in graphics cards for gaming translated well to the needs of generative AI. Starting in 2018, well before ChatGPT came on the scene, the company bet big on that possibility:



The company structured its research and development and mergers and acquisitions strategies to benefit from a coming AI boom.

“They were playing the game when nobody else was,” Newman said.


Intel is now trying to catch up with its Gaudi technology, but in the meantime, companies that used to use Intel products are shifting away from the company. Apple, for instance, switched from Intel processors to manufacturing their own processors in 2020 and reportedly relied on Google to build Apple Intelligence — Intel wasn’t even in the running.


Intel will survive (for now), on the money saved from the layoffs and dividend pause. Government subsidies from the CHIPs Act, and investments from hedge funds like Brookstone and Apollo, which have bought into the foundry business, will also help.


“I think they are a critical infrastructure company to the US and to the world,” Newman said. But getting back on track will depend on making sure the foundry business becomes profitable.


“Even if they’re number two, or number three behind Samsung, we still need it — this demand for AI change, nobody can go fast enough,” Newman told Vox.


But even if Intel can slot itself into that number two or three spot, there’s still the question of AI’s place in the tech sector and society — whether it needs to be more tightly regulated, or if it’s getting overhyped.


“In general for AI, people are just nervous that the numbers have gotten so big, so quickly, you just worry about sustainability,” Rasgon said.


For now, the silver lining of Intel’s current situation is that there’s nowhere to go but up.

No comments: