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Analysts look for new strategy from Intel in Q3 earnings call

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Analysts look for new strategy from Intel in Q3 earnings call

Intel Corp.'s strategic problems are unlikely to derail its sales momentum amid the pandemic, but analysts say its long-term outlook is in jeopardy unless executives are able to articulate a stronger competitive strategy.

The company shocked the industry in July when it reported that manufacturing problems continued to weigh on its ability to produce new chip designs at the smaller sizes that its competitors — namely, contract chip designer Taiwan Semiconductor Manufacturing Co. Ltd. — were already selling. As Intel prepares to release quarterly earnings after the market closes on Oct. 22, executives have said little to indicate how the company will respond to calls for change in its strategy, including suggestions that it close down or sell off its network of leading-edge chip fabrication plants.

Intel long dominated the semiconductor business with its ability to release chips with leading-edge capabilities and then improve manufacturing to produce the same design at a smaller, more powerful size. With TSMC jumping ahead of Intel on a 7-nanometer chip and preparing a 5-nm design, TSMC customers such as Advanced Micro Devices Inc. and NVIDIA Corp. are looking to move in on Intel's turf. Meanwhile, analysts have speculated that Intel's design-and-build approach had become too expensive to remain competitive.

However, Intel has not lost its dominant share in the market for data-center processors, and it is unlikely to do so anytime soon, according to Stacy Rasgon, managing director and senior analyst at Sanford C. Bernstein & Co. LLC.

In the second quarter, Intel's Data Center Group reported revenue of $7.12 billion, up 43% year over year. The third quarter is likely to be just as strong, Rasgon said.

SNL Image

Inside an Intel manufacturing facility
Source: Intel

"The problem is, I don't know what this company looks like in three or four years," the analyst said.

The perception of a leadership vacuum at the top of the semiconductor market changes the competitive dynamic of the whole computer industry, said Brian Matas, vice president of market research at semiconductor analyst firm IC Insights.

Until recently, Intel maintained its leadership by delivering a new leading-edge chip design every two years and then creating a manufacturing process that allowed it to shrink that design to a smaller, more powerful size two years later. Other leading semiconductor companies focus on advanced design but hire contract chip fabricators such as TSMC to manufacture the chips. That puts any company with manufacturing capability less advanced than TSMC's at a disadvantage.

In its second-quarter earnings report in July, Intel said it plans to expand its use of TSMC to plug its own gaps in production.

There is no evidence that the only practical approach to chipmaking is to specialize in the design and leave chip manufacturing to specialists, said Linley Gwennap, president and principal analyst at The Linley Group. However, the complexity and the cost of manufacturing leading-edge chips effectively doubles at every step down in process size, he noted.

The rapid growth of demand for artificial intelligence applications changes computing requirements in ways that might make it difficult for one player to be as dominant as Intel, which historically used a single approach to chip design to dominate everything from high-performance computing to low-end desktops, said Paul Teich, the principal analyst at market-research firm Liftr Insights.

The advent of massive data-center operators such as Amazon Web Services Inc., which design their own servers and are beginning to offer chips optimized for their own cloud platforms, complicates the competitive picture even more, Teich said.

Intel has given no indication it is thinking seriously about scrapping its leading-edge, global network of chip fabrication plants, or that it would sell off its Data Center Group, as some analysts have suggested. It remains one of the few companies able to manufacture complex chip designs in high volume, Gwennap said.

Intel has tried to restructure its strategic roadmap to focus on the products it can already make into a strategy. What remains unclear is whether the industry will continue to go in the direction that Intel wants to lead it, Rasgon said.