Intel CEO says contract manufacturing business to expand

Intel CEO says contract manufacturing business to expand

4:15pm EST

By Noel Randewich

SAN FRANCISCO (Reuters) – Intel CEO Brian Krzanich said on Thursday he planned to expand his company’s small contract manufacturing business, paving the way for more chipmakers to tap into the world’s most advanced process technology. With Intel far behind rivals in making chips for smartphones and tablets, many on Wall Street have urged the company to expand its contract manufacturing business, which currently contributes little to its overall revenue, and to open its factories to high-volume clients making mobile chips.“We’re going to go much further. If we can utilize our silicon to provide the best computing, we’ll do that,” Krzanich told analysts. “People who can use our leading edge and build computing capabilities that are better than anyone else’s, those are good candidates for our foundry service.”

At his first annual investor day since taking over as chief executive in May, Krzanich said the slumping personal computer industry, Intel’s core market, was showing signs of bottoming out.

“Our view is that it’s declining but it’s beginning to show signs of stabilization,” he said.

Krzanich said that during his six-month tenure as CEO, Intel had improved its chip offerings for tablet makers and he pledged to quadruple the number of tablets with Intel chips in 2014.

Tablets with Intel chips would range in price from less than $100 to more than $400, he said, adding he recently gave every Intel board member a $149 Android tablet made with an Intel chip to demonstrate the progress the company was making in mobile.

Intel is the world’s top chipmaker and it dominates the PC industry, but it was slow to adapt its processors for smartphones and tablets, markets now dominated by rivals like Qualcomm and Samsung Electronics.

Intel shareholders and its board are betting that Krzanich, a veteran from Intel’s cutting-edge manufacturing operation who replaced retiring CEO Paul Otellini, will be able to steer the company back on track.

“When we began our search for the CEO a year ago … I was embarrassed that we had lost our way,” Intel Chairman Andy Bryant said at the event.

NEW CHIPS

Intel also unveiled two upcoming mobile chips from its Atom line designed to easily interchange features to create different versions of the component.

A high-end version of the new chip, code named Broxton, and is due out in mid-2015.

Krzanich pointed to SoFIA, a low-end version, as an example of Intel’s new pragmatism and willingness to change how it does business. He said that in the interest of speed, SoFIA would initially be manufactured outside of Intel, with the goal of bringing it to market next year.

Intel will later move production of SoFIA chips to its own cutting-edge 14 nanometer manufacturing lines, Krzanich said.

Manufacturing chips on behalf of other companies is a major departure for Intel, which for decades had based its business on using its factory prowess to offer its own PC chips that were superior to rival products.

As PC sales shrink and with Intel’s fabrication plants operating at less than full capacity, Krzanich sees an opportunity to fill idle production lines while earning new revenue. He appears much more willing than his predecessor, Otellini, to open Intel’s factories to a wide range of companies, including potential competitors.

“Wow,” Raymond James analyst Hans Mosesmann wrote in a note to clients. “It’s very refreshing to see Intel make this move and could have important implications for the industry.”

Intel could end up manufacturing components on behalf of rivals like graphics chipmaker Nvidia or even dominant mobile chipmaker Qualcomm, Mosesmann wrote.

Those companies currently rely on Taiwanese contract chip manufacturer Taiwan Semiconductor Manufacturing Co, or TSMC.

Otellini agreed early this year for Intel to manufacture programmable chips on behalf of Altera, a Silicon Valley neighbor it does not compete with.

That deal, seen as allowing Intel to eventually take on larger customers, spurred speculation that Intel could do a much bigger deal to make iPhone or iPad chips for Apple, which currently depends on Samsung to manufacture its chips.

Intel Expanding Use of Factories for Other Chipmakers

Intel Corp. (INTC) is providing increased access to its manufacturing plants for other chipmakers, taking advantage of advanced production capabilities and seeking to boost its revenue sources as it faces greater competition.

The world’s largest maker of semiconductors, which has traditionally only made its own chips, is expanding its foundry business, or manufacturing chips to order for other companies, Chief Executive Officer Brian Krzanich said today at an investor meeting in Santa Clara, California.

Intel, which said at the meeting that sales next year will be little changed from 2013 levels, will focus more on providing what customers want rather than trying to push its own designs, said Krzanich, who became the company’s sixth CEO in May when he succeeded Paul Otellini. Krzanich, 53, is a former factory manager who ran part of a network of plants that Intel says are the most advanced in the semiconductor industry.

“We’d become insular,” Krzanich said. “We’d become focused on what was our best product rather than where the market was moving.”

Otellini had said Intel’s plants were closed to competitors. Earlier this year, Krzanich said he would consider changing that stance, and today he confirmed the company’s willingness to make chips for companies that are beating Intel in mobile phones.

“We’re needing some kind of signal or sign that mobile is happening and they’re getting some kind of presence there,” said Betsy Van Hees, an analyst at Wedbush Securities in San Francisco. She has the equivalent of a hold rating on the stock. “The mobile business is an ugly business. It’s very tough.”

Financial Outlook

Intel said revenue will be approximately the same in 2014. Analysts were projecting on average sales of $53.7 billion next year, up from $52.6 billion in 2013, according to estimates compiled by Bloomberg. Gross margin, the percentage of sales remaining after deducting the production costs, will be in the middle of its target range of between 55 percent and 65 percent, in line with analysts’ estimates, Chief Financial Officer Stacy Smith said.

Intel predicts the PC market, measured by units, to be down in the ‘low single-digit’ percent, Smith said. While spending on new plants and equipment in 2014 will be little changed from 2013 at around $11 billion, investments aimed at enabling customers to convert to Intel chips in tablets will hurt total profitability, he said.

‘Ultra Fast’

Intel Vice President Hermann Eul, who heads the company’s mobile division, today said Intel will focus on developing parts for a smaller number of phonemakers with large sales volumes. The company isn’t giving up on mobile, he said.

“Of course, we would like to do better,” Eul said at the meeting. “This market is going ultra fast, and the competition is not standing still while we catch up.”

The smartphone market will pass 1 billion units this year, growing 40 percent from 2012, according to researcher IDC. Personal-computer shipments are projected to drop 9.7 percent worldwide this year, IDC said in August.

Intel, based in Santa Clara, has yet to garner 1 percent of the handset processor market. Krzanich has said the company needs to speed up the delivery of new products for mobile devices. He addressed the tablet market today and said the company plans to have chips in sub-$100 devices next year and ship more than 40 million tablet chips.

The PC decline has led some analysts to question Intel’s plan to spend $10.8 billion on new plants and equipment this year, calling for a reduction in next year’s budget.

The semiconductor maker expects the rate of decline in PC shipments to slow as demand improves at corporations and in some developed markets, said Kirk Skaugen, the general manager of Intel’s PC business.

Intel shares rose 2.7 percent to $25.23 at the close in New York, leaving them up 22 percent this year.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

SATURDAY, NOVEMBER 23, 2013

It’s Too Soon to Bet on Intel’s New Strategy

By TIERNAN RAY | MORE ARTICLES BY AUTHOR

In a break with his predecessors, Intel CEO Brian Krzanich wants to open its fabrication operations to competitors.

Intel returned to its roots last week—or perhaps retrenched, depending on your point of view. The new direction could help the chip giant’s shares, which, up 16%, have trailed the market this year as the company slogs through a disintegrating personal-computer industry.

I would, however, advise investors not to dive into Intel (ticker: INTC) until at least the beginning of the new year, while we wait for answers to some nagging questions.

Newly installed Chief Executive Brian Krzanich, who took the helm in May from Paul Otellini, told analysts gathered at the company’s headquarters in Santa Clara, Calif., last Thursday that Intel would do better in mobile devices than it has so far, including smartphones and tablets. It will do so through a renewed focus on Intel’s traditional strength—the most formidable manufacturing operation in the entire semiconductor field.

It was a sharp departure from the expansive attitudes of Otellini and his predecessor, Craig Barrett, who both steered Intel into new markets. Otellini made Intel a force in server computing, and under Barrett, the company vastly expanded the then-nascent Wi-Fi wireless networking standard in laptops. Both CEOs were outward-looking, expanding what it meant for Intel to be a chip company. Not so for Krzanich, a 31-year Intel veteran who spent a substantial amount of that time overseeing its factories. In his hands, the playbook appears to be back to basics, emphasizing how Intel makes chips better than anyone else in the world.

The era of Otellini concluded with a secret project to sell TV set-top boxes, a subscription service I profiled in these pages last summer (“Coming Soon: Intel’s Must-See TV,”June 24). Word from Reuters last week was that Krzanich is moving to sell the unit, possibly to Verizon Communications (VZ) or another service provider.

A source familiar with the set-top box effort, called OnCue, says Intel was close to sealing deals with content providers, but Krzanich simply doesn’t want to fund the service. “He wants to focus squarely on the business of selling chips, without these distractions,” says the source.

And so the Krzanich age begins by cleaning house, returning to basics. And that means killing some sacred cows.

Intel has always had a manufacturing lead on competitors such as Taiwan Semiconductor Manufacturing (TSM), which produces silicon for chip designers, including Qualcomm (QCOM), that don’t have their own factories. But Otellini prioritized Intel’s most cutting-edge manufacturing for desktop and laptop chips, Intel’s bread and butter.

Now, Krzanich is speeding up the effort to throw manufacturing resources at its chips for mobile devices, dubbed Atom, which have long been second-class citizens.

Intel’s head of manufacturing, William Holt, talked about how Intel is cramming more transistors into each semiconductor at a faster pace than is Taiwan Semi. That can result in chips that are upward of 35% more compact than the competition’s, which means they can be cheaper, given that chip prices increase directly with the size of the semiconductor. Cheaper Atom chips, delivered in a timely fashion, give Intel a greater chance of meeting the demand for lower-priced processors for tablets and smartphones, which cannot support Intel’s traditionally rich chip prices.

The other big point made by Intel is that where it doesn’t sell its own chips, it will fabricate chips for competitors for a fee. Again, Otellini had long held tight reins over Intel’s factories, being reluctant to dedicate precious manufacturing to someone else’s parts. In contrast, Krzanich asserted, “If it’s somebody else compute, we want it to do best with Intel,” meaning the company would worry about getting the business, not about strategic issues of possibly empowering competitors. “We’ll open the foundry to any company capable of utilizing our leading-edge silicon.”

As Blayne Curtis of Barclays remarked in a note on Friday, the biggest shift at the meeting was “a greater willingness to partner with any company that might benefit from Intel’s best-in-class process technology.”

Both the aggressive posture in Atom chips and the commitment to making a buck making chips for others represent welcome “pragmatism,” as Krzanich called it.

But, as I said, there are questions.

ALTHOUGH INTEL SAYS ITS CHIPS can be less costly through size reductions, there is no guarantee that having the best chips at a reasonable price will win Intel business in tablets and smartphones. Its competitors, Qualcomm, Nvidia (NVDA),Broadcom (BRCM), and Taiwan’s MediaTek

(2454.Taiwan), have been racking up gains in mobile devices at Intel’s expense, in some cases because of their willingness to sacrifice profit to low-ball Intel on prices.

And in many cases, the chips those companies sell for tablets and phones are increasingly customized parts, not the general-purpose computing engines Intel has long sold. As Qualcomm’s chief operating officer, Steve Mollenkopf, remarked to me in a recent interview, the Qualcomm chip that powers Amazon.com‘s (AMZN) Kindle Fire HDX tablet brings numerous features specific to tablets that come from integrating special circuitry into an otherwise basic microprocessor. They include things such as circuitry for tuning the glass display to make it more readable in direct sunlight.

The general term for such specialization in the chip world is integration, meaning the combination of varying functions in a single chip to do a particular job. Intel, long a maker of general-purpose computing power, has not proved it can deliver such integration.

As for selling its manufacturing services to others, it’s not clear to whom exactly Intel will sell. It doesn’t seem to make sense to directly arm competitors such as Qualcomm with stellar manufacturing.

It has long been rumored that Intel might manufacture chips for Apple (AAPL), which designs its own processors for the iPhone and iPad. That would certainly be a coup. But a source with knowledge of talks between the two told me Apple has declined Intel’s offer for the foreseeable future because Intel’s price is too high.

Bottom line: The new attitude at Intel has yet to add up to growth and profit. Intel forecast revenue to be flat next year with this year, something that sent its shares down 5% on Friday to close at $23.87. So far, the brilliant new initiatives are not offsetting the projected decline in PC revenue.

As we cruise into the Consumer Electronics Show in January, and the Mobile World Congress in Barcelona in February, we may start to get a better idea whether Intel is really racking up new business, and new foundry customers, and whether it will really add to the bottom line.

A Healthy Dose of Humility for Intel

DAN GALLAGHER

Nov. 24, 2013 12:12 p.m. ET

Intel INTC -5.39%Intel Corp.U.S.: Nasdaq^$23.87  -1.36 -5.39%Nov. 22, 2013 4:00 pm Volume (Delayed 15m) : 76.74MAFTER HOURS^$23.86  -0.01 -0.04%Nov. 22, 2013 7:59 pm Volume (Delayed 15m): 1.17MP/E Ratio12.56Market Cap$118.66 BillionDividend Yield3.77%Rev. per Employee$498,5812625242310a12p2p4p6p11/24/13 Intel Looks Beyond Traditional…11/24/13 A Healthy Dose of Humility for…11/21/13 Intel Explains Rare Moore’s La…More quote details and news » is opening up, and not a minute too soon.

Battered by nearly two years of declining personal-computer sales, Intel must find new growth markets to keep its expensive chip-fabrication facilities, or “fabs,” running at full capacity. The PC business accounts for about two-thirds of its revenue.

Intel has resisted using its cutting-edge manufacturing abilities to produce chips based on designs by other companies. In January, then-Chief Executive Paul Otellini told analysts that “we don’t see ourselves as a general purpose foundry” and noted that the company would consider only such deals that had a “strategic” element.

But new CEO Brian Krzanich struck a much more open tone last week, telling analysts that Intel’s fabs would be open “to any company able to utilize our leading-edge silicon.”

It is uncertain whether Intel would really welcome close rivals such as Qualcomm. QCOM +1.74%Still, it certainly raises the possibility of landing a big-name client like Apple, AAPL -0.26% which outsources manufacturing of its chips.

Intel’s past reluctance has, in effect, limited its ability to capitalize fully on one of its competitive advantages. Ed Snyder of Charter Equity estimates Intel has a two-year lead in “process technology” used in chip fabrication. But this advantage could erode. Many analysts believe Moore’s Law, the theory that computing power roughly doubles every two years, is nearing its physical limits. Indeed, Intel recently delayed implementation of next-generation processing technology by a quarter due to production issues.

Opening its fabs won’t provide a big near-term boost for Intel. The stock slipped Friday after it warned late Thursday of flat revenue next year. But considering the dim outlook for PC sales, Intel is right to change its closed-shop approach.