Can Intel bounce back?

This is an audio transcript of the Behind the Money podcast episode: ‘Can Intel bounce back?’

Michela Tindera
For roughly 50 years, global dominance in the semiconductor chip industry sounded like this . . .

[CLIP FROM INTEL AD PLAYING]

Recognise that? It’s the longtime jingle for Intel, a company that’s made semiconductor chips for decades.

Richard Waters
Intel has been very, very successful and its entire fortune has been built on PCs. The PC world was Intel’s foundation.

Michela Tindera
That’s the FT’s West Coast editor Richard Waters. He says that the use of chips has grown far beyond something that’s inside a desktop PC. Today, we’re surrounded by technology that uses chips. You can find them in everything: cell phones and cars, from weapons used by the military to the dishwasher in your kitchen.

Richard Waters
Chips are the most overlooked of all technologies. We take them for granted. We just assume that every digital gadget or service we use is just going to work. And that is in many ways just a mark of the massive success in advances that have happened in the chip industry.

Michela Tindera
Intel led this charge for a long time. But lately it’s fallen behind, losing ground to competitors overseas. And this is happening at a time where chips in their supply chains’ role in geopolitics is becoming more important than ever.

Richard Waters
Semiconductors are a huge industry worth hundreds of billions of dollars, and obviously every country wants a piece of that. But more significantly, it is a strategic industry. Many people, including Intel’s CEO Pat Gelsinger, liked to talk about chips as oil, the modern oil of the digital economy. And in the same way that the industry for years couldn’t function without oil, our societies couldn’t function. Well in the same way modern economies, digital economies can’t function without chips.

Michela Tindera
Now Intel has a plan to get back on course. But for an industry that has so many complex parts and systems, it won’t be easy.

Richard Waters
Intel is really trying to pull off what must be the most complex tech turnround that anyone’s ever tried.

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Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re looking at how Intel fell behind in the global semiconductor chip industry and how this means much more than one company’s share price. Because when you’re talking about chips, you’re talking about global power.

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Intel’s origin story is the stuff of Silicon Valley legend. And it begins with one of the company’s founders, an engineer named Gordon Moore.

Richard Waters
Going back to, I think, the early seventies, he was trying to make the world understand just how important electronics was going to become. He felt that nobody really understood as he did, that as electronics collapsed in price, as the capability increased because of chips, that electronics were going to be everywhere and in everything. And so to try and reinforce this and make people understand, he came up with a very simple explanation, which we all know now is Moore’s Law. He said over the next decade, every year, the number of transistors — you know, the basic elements of chips — the number we can cram on to each chip is going to double every year. And if you think about that, that’s exponential growth.

Michela Tindera
Now, it’s important to point out just how complex it is to make one of these semiconductor chips.

Richard Waters
Chip is a good word because it originally started as a slice of silicon. You took a slice of a silicon disk and printed on top of it in absolutely minuscule form circuits and little electric circuits with transistors and wires. And it’s all been printed at such a microscopic level now that literally billions of features, different transistors are crammed onto each maybe one inch slice of silicon.

Michela Tindera
So you get it now? Silicon chips. Intel was a Silicon Valley pioneer. It’s all tied together. Anyway, back to Moore’s hypothesis.

Richard Waters
He’s basically been proven right. So not only did he set out this kind of trajectory that chips are going to be on, but he also you know, his law, Moore’s Law, became a rallying cry inside Intel. Because Intel engineers took this idea. And for half a century, Intel was ahead of the rest of the world.

Michela Tindera
So for decades, Intel held on to that top spot as the leading designer and manufacturer of chips, and they were put inside all kinds of PCs and servers. But then in the 2000s, Intel started to make some decisions that in hindsight don’t look so great. Here’s one example . . .

Richard Waters
Intel missed the boat on smartphones. They had the chance at the beginning of the iPhone. Steve Jobs came to Intel and said, “Would you like to bid on making chips for the iPhone?” And Intel said, “Not really.” They didn’t really think it was going to be the big product it is.

Michela Tindera
Instead, they doubled down on designing chips for PCs. And then another crucial error . . .

Richard Waters
With chip making, there are some vast technology bets that have to be made, and these are bets that play out over many years. So a particularly key technology known as extreme ultraviolet lithography, EUV, was actually devised in the US back in the sixties. And the idea essentially is that if you can produce light at a short enough wavelength and directed at a silicon wafer, you can basically carve smaller and smaller features on chips. Now, Intel around ten years ago decided the technology was just not ready yet.

Michela Tindera
Intel execs thought it would be years before EUV technology would become practical to use in manufacturing. But at the same time, another chip manufacturer halfway around the world decided that it could start using this EUV technology.

Richard Waters
Taiwan Semiconductor Manufacturing, TSMC, which is just a pure manufacturer based in Taiwan, did adopt EUV. TSMC decided it could make this workable technology and it was right. TSMC had a very, very sharp focus on one thing which was leading the development of the manufacturing, focusing on each generation of chips, honing its techniques, building bigger plants and just becoming a more efficient manufacturer. And with strong financial backing from Taiwan, they made it work. They lived in Intel’s shadow for many years, but took advantage of Intel’s stumble to take the lead.

Michela Tindera
Once they adopted this technology. TSMC leapfrogged Intel to become the world’s most advanced chip manufacturer. And TSMC’s rise played a key role in supporting a new generation of chip design companies. That’s companies like Nvidia and Qualcomm, which focused on designing their own chips and outsourcing manufacturing to TSMC. Some major Intel customers like Apple did the same rather than buying Intel’s chips. So Intel knew that it needed to make some big changes. In January 2021, the company brought back former Intel engineer Pat Gelsinger as its new CEO. Within a few months, Gelsinger mapped out a very ambitious plan to get Intel back on track.

Richard Waters
It’s essentially said, “Under new management, we are going to redouble our efforts. We’re going to take a technology road map that might have taken many years. We’re going to speed it up.”

Michela Tindera
Their plan to release five new generations of chips in just four years using that EUV technology. Richard says under more typical circumstances, that would take the company something like ten years.

Richard Waters
And with that, we are going to get right back into contention with TSMC and get ahead again. So is speeding up the clock just the most incredibly complex and difficult thing to do? But that’s the goal if something sells.

Michela Tindera
Now, all of these plans from Intel have been happening at the same time that the United States has also been realising just how important chips are. Think back to the early days of the pandemic. There was a chip shortage and used car prices shot up.

Richard Waters
Carmakers found themselves desperate for more chips and they couldn’t get them. And so suddenly there was a reminder here that if you did not have a good supply of chips, your industries were going to shut down.

Michela Tindera
Remember what we said about how chips are becoming the new oil? Here’s Intel CEO Pat Gelsinger talking about this recently.

Patrick Gelsinger
Geopolitics across the world has been defined by where the oil reserves are for the last five decades. For the next several decades, where the fabs are is more important because every aspect of human existence is becoming more digital.

Michela Tindera
Gelsinger’s talking about fabs. That’s industry lingo for factories that make chips. But regardless, this is bigger than just one company turning itself around. It’s about geopolitical power.

Richard Waters
The world is changing. It’s changing partly because China is threatening Taiwan, and that’s now put a question mark over chip supplies. It’s made everybody realise, you know, we have this huge reliance on chips coming from one corner of the world. If that supply is cut off, a large part of the world’s industry is going to shut down, simply shut down overnight. And this is why the US is so deeply concerned these days, both about the state of Intel and the state of its own chip manufacturing base. Because chips are both essential to the economic health of the country and to national security because chips are at the heart of all weapons systems. The US knows that it needs to maintain a chip lead to maintain its military and its economic lead. And so it is the core strategic industry.

Michela Tindera
To try and get a handle on this, Congress passed the Chips Act last year. This will commit $52bn in subsidies to support chip manufacturing and increase research and development inside the US.

Richard Waters
Intel has seen this and realised, you know, we are in a position to be the national champion, the US national champion in chip making, and Intel is racing to build bigger and bigger plants, is racing to develop the most advanced technology to put inside these plants. And it’s asking for US money to help it do this.

Michela Tindera
Richard says we probably won’t know until next year who exactly the Commerce Department decides to give these subsidies to. TSMC and another top chipmaker, Samsung, have factories in the US, too. So they’re also eligible for this money.

Richard Waters
How do you divide up this money between Intel, between other companies? And there are many others in this industry that want a piece of the cash as well. And I think, you know, Intel’s case is that they are the only US-based manufacturer, the only company that really has, you know, the American strategic interests at heart. And that’s a very overt pitch they’ve made in Washington in a “You need to back us because we are US through and through.” And I think it’s working. I think at the moment the signs are that they are going to get significant backing coming out of Washington. But you know, some of the money will be spread more widely. The question is how much?

Michela Tindera
So Intel’s in the middle of implementing this turnround. Since 2021 they release one out of the five new generations of chips Gelsinger had planned for. Still, even with the possibility of government funding, Intel faces several potential roadblocks. Remember how they went all in on chips for PCs?

Richard Waters
The actual products they designed at the end of the day are losing some of their market. And so the basic architecture of a chip, how it processes information, depends on what you want it to do. So it doesn’t matter about the size. There’s still this question of design, the actual product you’re trying to sell in the market. And Intel’s designs, the actual designs of its chips, are out of touch with some of these new needs.

Michela Tindera
Richard says the market’s moving towards chips for advanced technology like AI systems. And there’s another problem . . .

Richard Waters
It wants to build vast new plants, but it doesn’t have enough demand for its own products to fill up these plants.

Michela Tindera
That’s meant that Intel’s had to invent a whole new business strategy.

Richard Waters
It’s gone out and said, “All right, we’re now going to make chips for other companies.” So, “Don’t go to TSMC and get them to make your chip. Come to us and we’ll make it on our plants.” And it’s doing that because it has to keep up the volume inside its own plants to a large enough scale to justify the investment. So that means creating a whole new independent manufacturing company inside Intel. I mean, that is an astronomically hard thing to do. They’re trying to build TSMC inside Intel, and to make that work is a whole different culture and a whole different process. So to pull off all of this, to make this company work is this complex, integrated business that it is, I think is a real challenge.

Michela Tindera
Not to mention Intel’s attempts to get back on top have come at a tough time for the entire chip industry.

Richard Waters
We’re in a cyclical slump in chips. People aren’t buying PCs anymore. The economic uncertainty has led to a pullback and essentially the demand for chips has collapsed. This is always a boom and bust industry because inventory builds up in the good times and then as soon as things become uncertain, the customers stop buying and run down their inventory. And so the impact you see on chipmakers like Intel is extreme. In Intel’s case this year, we’ve seen a 40 per cent contraction in revenue. For a company with a massive fixed cost base, this is a crisis. This is a disaster to see your revenue just dry up. And so Intel, at the very moment when it’s looking to invest heavily in its business and its new manufacturing facilities, suddenly seeing its revenue and its cash flow dry up.

Michela Tindera
So right now, Intel is at an important turning point.

Richard Waters
And it’s happening at the very moment where Washington is trying to place some political bets. Washington has to decide how much of our $52bn of support that we’re trying to channel towards the chip industry, how much of that we want to bet on Intel because it is a bet. And if Intel can’t turn itself around, that’s an awful lot of taxpayer money that’s gone to waste.

Michela Tindera
Yeah, I mean, how realistic is this turnround, do you think?

Richard Waters
Wall Street is quite clearly decided that Intel has missed the boat. Stock price is on the floor. It hasn’t come up this year with the AI boom that’s bringing such excitement to the tech world. Investors are saying, “Well, we’ll just wait. Intel does have a big existing business. It does have a lot of technology. It is generating huge cash flow still. And once we get through this immediate downturn, it’ll go back to being more effective business.” But whether it’ll pull off this complex process to become a world leader in the way that it thinks, I think there’s a view that the turnround may not work completely as planned. But there may be some parts that will work and Intel’s future strategy may look different. It may be that it will eventually spin off its manufacturing arm into a separate company. That’s something that a lot of people on Wall Street have wanted for many years. They’re saying this is too complex a process. If you break apart the manufacturing, put it on its own, it can compete better with TSMC and then the rest of Intel can be more focused on what it does. So I think, you know, as we look ahead, I think there’ll be more questions like this for Intel. Does your current strategy work? Why don’t you refine it? What’s Plan B? I think we’re a couple of years away from that, but I think that’ll be the question everybody will be asking.

Michela Tindera
So when will we know that Intel has achieved this or not? Or what’s kind of the timeline we’re looking at here?

Richard Waters
We should find out fairly quickly in the next 18 months or so whether Intel can leap over the next big technology hurdles. And if it can do that, then it will at least be able to say, “Look, we can manufacture again at a higher level than we could before.” But that is only part of the process. The bigger question is: can it turn that technology into chips that claim back market share? And that’s going to take a few more years to work out.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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