Money Matters - Simplified

Setting the Record Straight on Intel

Yesterday, when I deduced that Intel (Nasdaq: INTC) might end up fab-less,
I must have hit a nerve. One of Intel's PR guys emailed me a terse "Not
even close"; another Tweeted the same basic message to a few hundred of
his closest friends; and then the phone rang to really set the record

Why Intel loves manufacturing

spokesman Chuck Mulloy cordially pointed out that his company is
investing billions of dollars into manufacturing at the moment.
Worldwide, there are 15 Intel chip-making plants, or "fabs." The
company is spending $7 billion to establish the 32-nanometer production
technology at fabs in Oregon, Arizona, and New Mexico – Intel’s largest
capital investment ever in a single manufacturing technology.

And don't forget, dear Fool, that this relentless process improvement is one of Intel's biggest advantages versus competitor Advanced Micro Devices (NYSE: AMD).
Intel tends to have the more advanced manufacturing technology at any
given time. Hence, Intel's chips run cooler and faster than AMD's and
are also cheaper to make, until AMD's manufacturing tech catches up.
And by then, Intel is generally ready to take the next step.
Intel is already planning and researching the 22 nm and 16 nm process
nodes, future-proofing the company for years to come.

With all of these very material factors in mind, Intel would be
crazy to spin off its manufacturing operations today, Chuck said. And I
wholeheartedly agree.

Yes, but:

Perhaps my previous article
wasn't entirely clear on the time frame I was talking about. Intel
clearly won't go fab-less this year or next, or even by 2012. But at
some point, the manufacturing process will cease to be a material
advantage. You can't make electrical leads any thinner than a single
atom across, for example. And for every new generation, the upgrades
become more expensive. According to market research company iSuppli,
that 16 nm process could be the last upgrade we'll ever see under
current manufacturing processes, simply because the manufacturing
equipment beyond that point would be so expensive that "the value of
their lifetime productivity can never justify it." We should hit that
limit by 2015 or so.

So if Intel ever splits in two, it will be with that ultimate production technology in hand and fully matured. If your investment horizon
is shorter than, say, 10 years, it won't matter at all. And like I
said, Intel may simply be setting itself up to "pump unheard-of
resources into Bryant's [manufacturing] division" over the next few
years. That would be Intel's official position on the matter, anyhow.

The chip giant doth protest too much

don't be surprised if Intel changes its tune in a few years when the
economic impossibility of pushing any further becomes all too real. And
don't forget that there are precedents to the divide-and-conquer
strategy way older than AMD's recent moves. For example, Tyco (NYSE: TYC) has partitioned into appropriate bite sizes years before splitting up into Tyco, Covidien (NYSE: COV), and Tyco Electronics (NYSE: TEL). And splitting up doesn't necessarily mean goodbye: EMC (NYSE: EMC) may have allowed VMware (NYSE: VMW) to leave the nest,
but the company still owns 84% of its former virtualization division. A
bifurcated Intel could still keep manufacturing on a tight leash, in
other words.


© 2009 UCLICK, L.L.C