Gelsinger must take the long view to re-engineer Intel: Page 2 of 3

January 14, 2021 // By Peter Clarke
Gelsinger must take the long view to re-engineer Intel
Has Intel finally got it right with its appointment of Pat Gelsinger as CEO after a series of mis-steps? Gelsinger is a veteran with 30 years experience at Intel, but he must change a high roller culture that the company can no longer afford.

Because in semiconductors time-lines are measured in decades and often require consistent application of strategy over periods that are longer than the time executives and directors occupy their comfortable chairs. In Gelsinger's time as CTO under Otellini he always struck me as much more of marketer than a traditional CTO. Intel liked to roll him out to speak but he would rarely talk about technical detail for a company that was increasingly pitching to consumers rather than engineers.

So what is the problem that Gelsinger has to begin to address?

In essence Gelsinger must decide whether to double-down on manufacturing because that allows Intel to make maximum margin on products, or to exit manufacturing and save the eye-watering R&D and capital expenditure and accept sharing the margin with foundries. Some may feel that the appointment of Gelsinger, an executive with an engineering background, means that decision has been taken in favor of maintaining chip manufacturing. But hold hard.

In 2008 long-time x86 rival Advanced Micro Devices took the decision to spin off its manufacturing operations to form Globalfoundries Inc. In recent years AMD has reaped the benefit of that decision, gaining market share as Intel struggles. AMD's Lisu Su has an engineering background but she is leading a successful fabless chip company.

In 2020 the hedge fund Third Point took a $1 billion position in Intel because of its financial underperformance and then at the end of the year CEO Dan Loeb wrote a highly critical letter to Intel's chairman complaining that the company had lost its lead in manufacturing, while overpaying executives and called for the divestment of failed acquisitions.

The whirlwind that Intel is now reaping was sown years ago. Certainly, Intel has paid some of its CEOs multimillions of dollars a year across multiple forms of compensation, which might seem an unnecessarily large amount of money for anyone to be paid. But Third Point is pointing out the obvious and offering no specific strategy; only calling for an independent advisor to be appointed to help Intel consider its strategic options.

From a financial perspective that is only likely to lead in one direction; towards the further separation of manufacturing and design and the possible divestment of chip manufacturing; following in the footsteps of AMD. But Third Point is trying to have its cake and eat it. It complains that Intel has lost ground to Apple-TSMC and the fabless-foundry axis the pair represent, and then calls for strategic solutions.

And there is also a geopolitical perspective to this. The US government appears ready to subsidize on-shore manufacturing and will be keen to keep a domestic champion in the chip technology race.

Intel's problems were created when it was so successful in the x86 processor space it could not only command a high price for its processors but could dictate to Taiwanese motherboard makers and computer companies the design, features, price and introduction timetable of computers made with those motherboards.

At the same time Intel got into the habit of overpaying in many walks of life when it could afford to do so because its semiconductor manufacturing leadership was like the proverbial license to print money. Meanwhile it made several failed attempts to get into other markets, including foundry.

Through its Intel Capital wing, Intel has also been a main contributor in creating a booming startup culture. While the billions of dollars of investments that Intel has made may have benefitted society, it is not clear how much they have benefitted Intel shareholders.

Intel has overpaid to acquire businesses to try and leverage it into new sectors and then seen the promise squandered. Now it is no longer a technology leader and some – Apple being the perfect example – no longer require its product and services, it has to change its culture.

Next: There is a tide . . .

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