By Ted Greenwald
Intel Corp.'s next chief executive will take over the Silicon Valley chip giant just as it is falling behind in the expensive race to shrink the circuitry on silicon chips, analysts say.
Intel's continuing problems manufacturing its next generation of chips are opening the door for rivals to threaten its near-monopoly in the personal-computer and server markets.
Intel is looking for a successor to Brian Krzanich, who resigned last week for violating company policy by having a relationship with a co-worker, which The Wall Street Journal on Friday reported began before he became CEO.
Intel under Mr. Krzanich's watch has repeatedly missed its schedule for shipping significant quantities of its next-generation chips. The effort has been mired in manufacturing troubles, with too few chips coming off production lines working properly, the company said in April.
Taiwan Semiconductor Manufacturing Co., which fabricates chips for Intel's chief rivals, is expected to ship new chips this year that technical and financial analysts say will bear tiny transistors of a size comparable to the next-generation chips Intel has delayed into 2019. Smaller transistors allow chip makers to pack circuitry more densely, making for more powerful chips that potentially are also smaller and use less electricity.
That would mark the first time in Intel's five-decade history that another manufacturer has beaten it to the broader market with comparable chip-making technology, several analysts said. TSMC has said it expects 20% of its revenue to come from its own next generation in the fourth quarter.
The delays left some Intel engineers unhappy with Mr. Krzanich's leadership, a person familiar with the situation said. The problems not only delayed the manufacturing upgrade but they also could force Intel to scrap new products based on it, the person said.
Every day, "we have to start thinking about, does this part fall off the road map?" the person said.
"Our continued strong performance is the result of very competitive products," Intel said, noting its ability to optimize its current manufacturing process and improve its designs and assembly techniques. "We intend to lead in all of these areas as we expand into new opportunities."
In April, Mr. Krzanich acknowledged manufacturing problems, telling analysts the company was delivering its next-generation chips but in low volume. He said the company understands the problem and is working to fix it, and that further improvements in its current products will keep it competitive in the meantime.
Along with TSMC's new manufacturing capability, Intel faces a resurgent Advanced Micro Devices Inc. and improved processor designs from Qualcomm Inc. and others, according to Handel Jones, who monitors the chip supply chain as head of the tech consultancy International Business Strategies Inc.
Those forces could cut Intel's pricing power by 10 to 15 percentage points, and its market share by as much as five points, if the company doesn't get its next-generation manufacturing process up to speed in the next 12 months or so, Mr. Jones estimated. By 2020 to 2021, Intel would be "looking at a $5 billion to $10 billion hit to revenue for each year of further delay," he said.
Intel has stared down such challenges before. AMD entered the server-chip market in the early 2000s and by 2006 had captured around a quarter of server processors sold, according to Mercury Research. Last year, Intel held a 99% share of the most popular type of chips used in servers and a 91% share of the processors found in PCs.
Intel recently posted revenue and profits that set a record for its first quarter. When announcing Mr. Krzanich's departure, Intel released a second-quarter financial forecast that topped analysts' expectations.
Still, delays in developing the next generation of chips add to already-huge investments for Intel. Producing chips with finer circuitry requires billions of dollars for new factories and equipment each time companies shift to a new generation.
Intel declined to say how much it is spending on its new manufacturing process, but executives recently said the cost contributed to a four-percentage-point decline in first-quarter operating margin in its PC division, to 30%. Overall, Intel has said it expected capital spending this year to swell by 23% to $14.5 billion, with more than two-thirds devoted to making processors. That follows spending increases of 22% last year and 31% in 2016.
Intel's cost for developing a new manufacturing process likely comes to as much as $5 billion, said Jim McGregor of the semiconductor consultancy Tirias Research. That doesn't include factories costing $6 billion to $10 billion each, depending on whether they are built from scratch, he said.
Each new chip generation is named by numbers of nanometers -- billionths of a meter -- that don't correspond to actual measurements but nod to the minuscule size of the transistors the chips carry. The lower the number, the higher the density of transistors and the more powerful the chip can be.
Intel has been on a long journey to so-called 10-nanometer chips from 14-nanometer, which became widely available in 2014. Intel in 2015 pledged its new chips would be widely available in the second half of 2017. It later revised the timeline to the second half of 2018, and then until sometime in 2019.
Intel has attributed the delay in its 10-nanometer technology to difficulty eliminating defects. TSMC, in a quirk of marketing, calls its equivalent process 7-nanometer.
Mr. Krzanich in April said improvement in yields of the new chips was "slower than we anticipated" but insisted "we absolutely have product and process leadership."
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
June 24, 2018 09:26 ET (13:26 GMT)
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