Intel Plant Closures Mask Grave Chip Challenges - InformationWeek

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1/22/2009
11:52 AM
Alexander Wolfe
Alexander Wolfe
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Intel Plant Closures Mask Grave Chip Challenges

It's been a quadruple whammy week for the semiconductor industry, amid Intel's moves to close five factories and cut quad-core processor prices. AMD has likewise pared prices and also is facing another round of layoffs. Some may take these developments as signs of the economic apocalypse. Putting them into perspective, though, what they really show is that the chip industry always has been brutal; these days, it's simply more so.

It's been a quadruple whammy week for the semiconductor industry, amid Intel's moves to close five factories and cut quad-core processor prices. AMD has likewise pared prices and also is facing another round of layoffs. Some may take these developments as signs of the economic apocalypse. Putting them into perspective, though, what they really show is that the chip industry always has been brutal; these days, it's simply more so.Indeed, investors should take some solace in Intel's bad news. True, there are the aforementioned cuts, as well Intel's recent notice that its fourth-quarter revenue was down 23% year over year. As well, the chip giant is taking the unusual step of not offering Wall Street guidance on its next quarter.

So where's the comfort? Well, it's because Intel has historically run a very tight financial ship. That's the case now, where it's proactively (well, actively, anyway) engaging in a "reset" of revenue expectations, which will probably result in typical quarterly revenue in the $8-billion range tilting down toward the $7-billion level.

OK, good for investors, maybe, but bad for the industry as a whole? Yeah, OK, but if we're gonna reset worldwide capacity expectations, let's reset them.

The tougher trend to wrap one's expectations around is that we're now likely in the end stages of a decade-long reshaping of the semiconductor industry that's going to leave fewer players standing and less worldwide fab (chip manufacturing) capacity. (One cockeyed view of this is that it's the ultimate negative outcome to what 15 years ago was pitched as a good thing: the emergence of fabless chip vendors.)

Intel, of course, is going to be one of those big players standing, with both chips to sell and factories of its own to make them. (IBM also is on that list.)

Intel's main PC processor competitor, AMD, is an example of a company which is going through quite a bit more pain. It's being forced by economic pressures toward the new model of shedding its owned-and-operated manufacturing capacity. Here's how AMD describes why it's spinning off its fabs into a separately owned company: (This comes from AMD's recent 14A form, filed with the Securities and Exchange Commission.)

"The semiconductor industry is undergoing a profound transformation. Vertically integrated companies are abandoning plans to invest in new capacity and manufacturing technology while announcing plans to outsource a growing percentage of their wafer requirements. Captive volumes can no longer support the cost of building leading-edge capacity and process technology investments."

True, worldwide chip sales will be down this year, perhaps as much as 16%. And Taiwan Semiconductor (TSMC), one of the world's largest foundries, is forecasting its first loss since 1990. So things are bad, and I don't mean to be a Pollyanna. All I'm saying is, the chip industry always has been brutal and it's been overbuilt for a long time. So a reset now (when things are bad, anyway) is probably the best way to position the survivors to thrive once the economy rebounds.

What's your take? Let me know, by leaving a comment below or e-mailing me directly at [email protected].

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Alex Wolfe is editor-in-chief of InformationWeek.com.

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