Intel’s Moment of Truth

News broke this morning that Intel’s CEO Brian Krzanich was forced out after the board discovered that he violated the company’s non-fraternization policy with another employee. While this seems like an odd way for him to go, it is a welcomed move by many employees, investors, and Intel watchers. Over the past year, I’ve turned extremely bearish on Intel.

In the midst of the cornerstone struggles Intel has had through the years, the largest being competitors catching up with them on process technology quality, I outlined my best cast scenario thesis for Intel in this post called “Intel and the Last Foundry Standing Theory.” The arc of that thesis was that Intel would maintain a significant lead in process technology and manufacturing on leading-edge nodes and the competition would struggle to get to 7nm and beyond. In this scenario, the challenges for Intel’s competition would be too great, and so all road would lead back to Intel’s process technology and manufacturing. However, I ended that article with this important challenge to my thesis.

There is, of course, the scenario where Intel is wrong, and others do keep pace with them on process technology. Part of their manufacturing business plan to compete in manufacturing ARM chips for others is a segment of this backup plan I think. While we can argue they should have done this sooner, if we look back in 10 years and others have kept pace or beat them, then it could be said their lack of willingness to compete for ARM manufacturing earlier and more vigorously was financially irresponsible for shareholders.

I wrote this post in 2016, and here we are in 2018 and not only did my best case scenario for Intel not play out, but the statement I made above is what has played out exactly. Not only has the competition caught Intel they have surpassed them. TSMC is now sampling on 7nm and AMD will ship their architecture on 7nm technology in both servers and client PCs ahead of Intel. For those who know their history, this is the first time AMD has ever beat Intel to a process node. Not only that, but AMD will likely have at least an 18 month lead on Intel with 7nm, and I view that as conservative.

Now, an Intel defender could argue that Intel’s 10nm process technology is as good and similar to TSMC’s 7nm when it comes to density. I don’t want to dive in here to why density matters or doesn’t matter, but let’s just say that argument is sort of like saying my horse can run 5 miles an hour faster than your horse in an era where all horses run fast enough. Debating density aside, TSMCs 7nm solutions will yield similar, if not exact, performance specs in both power and performance as Intel’s 10nm. And that assumes Intel fixes the enormous problems they are having with 10nm at the moment.

As of late, I had become convinced Intel needed new management desperately and the board pushing Krzanich out is the first step on the road to recovery for Intel. Intel is facing a moment of truth and the decisions made around the next CEO over the next few months are critical to Intel’s future if they are to become a leader again in the industry and save their company from absolute disruption.

Intel’s management, board, and many employees firmly believed Intel could keep the lead over their competition. Once that became clear, about a year ago, things started to change. And right now, Intel finds themselves fighting tooth and nail for every sales account. A position they have never been in before. Consider this point as an umbrella insight about Intel competitively.

AMD has won the largest amount of design wins in the companies history. This includes client and server PCs. It is extremely likely that AMD could gain 15-20% sharer in BOTH PCs and server. Something Intel insiders thought could never happen. But this one observation hits me as the most damning. Intel recently cut their marketing program where if an OEM like Dell, HP, or Lenovo chose an Intel CPU, Intel would fund the marketing of those products and feature those OEM PCs in commercials and print ads. PC OEMs are already running on razer thin margins, and even if they felt AMD had a better product, those Intel market dollars were a key part of group managers at Dell, HP, Lenovo, etc., hitting their sales numbers. Now that Intel has cut that marketing program, AMD is gaining design wins at those same PC OEMs at a record pace. Which means the ONLY reason those OEMs choose Intel was for their marketing help not because they felt Intel had a superior product to AMD. And I could argue that with Ryzen, AMD actually does have a better product than Intel and it costs less.

So to recap. Intel’s competition has caught them. The countless number of manufacturing fabs they have are sitting at less than 70% (some much less) of their capacity which means they are losing money on these manufacturing warehouses. They are losing share in their cash cow in the server market and PC business. They are struggling mightily to ship new products on time and most depressingly, have lost a position of technology leadership and now feels more like a follower than a leader of a technology company.

So Intel faces a moment of truth. Picking the right CEO is the most important first step. My vote goes to Pat Gelsinger the current CEO of VMWare. Anyone who knows their Intel history knows that when Craig Barrett (AKA the Silicon Cowboy) retired, the choice was between Paul Otellini (then COO) and Pat Gelsinger (then CTO). The board chose Paul, and it was not universally loved by many inside Intel who would have preferred a technical CEO in Pat to operations driven CEO in Paul. I tended to agree and thought Pat was the right choice to keep Intel as an industry leader. The board should go hard after Pat Gelsinger as the new CEO, but Pat may not want it. The only other thing I think would be great for Intel is to merge with Nvidia and let Jensen Huang run both companies. That’s a wildcard statement if I’ve ever made one!

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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