Hoisted from Comments: Is Intel Going Down the Boeing Path?

We seldom write about individual companies unless they are close to our banking/finance wheelhouse and have some sort of larger significance, such as are a focus of systemic risk or illustrate larger trends.

We are hoisting a discussion from comments yesterday on the thesis that Intel is exhibiting many of the same pathologies as Boeing is and has a similarly Herculean task in fixing its production problems and salvaging its competitive position. Even worse, Intel lacks the advantage of being in a cozy duopoly in its main line of business.

Here is a quick summary of the Intel mess. That stock price plunge puts it at its lowest level in 50 years:

Intel is cooked

– 15,000+ to be laid off
– $INTC down 29% today
– Dividend suspended
– Foundry business hemorrhaging billions
– Broken Raptor Lake chips unfixable
– ARM taking over laptop market
– ARM taking over data center market
– Totally missed the AI hype train pic.twitter.com/QmqtaiwpM2

— Fireship (@fireship_dev) August 2, 2024

A more detailed overview from Vox:

Intel’s bad week really is more of a bad quarter: It started back in April, when the company revealed during an investor presentation that its chip manufacturing unit had, through a series of poor decisions, sustained $7 billion in losses in 2023, on top of a 31 percent decrease in revenue from 2022. Cost-cutting and other measures will save the company $10 billion in 2025, according to CEO Pat Gelsinger….

This is not the first time the company has had to implement cost-cutting measures — Intel did mass layoffs back in October 2022, after a brief, Covid-powered bump in the company’s fortunes.

“In February ’22, they put out revenue targets that — I mean, I use the phrase outlandish, they were ridiculously high,” Stacy Rasgon, senior analyst at Bernstein Research, told Vox. “They were sizing the company and sizing the investments to that COVID level of revenue,” based on the need for technology that allowed people to work from home or for kids to attend school remotely — a business that collapsed nearly as quickly as it arose.

But the current CEO, Pat Gelsinger, inherited a business that was coming off a decade of stumbles when he started in 2021. “He came into a situation that they were dire straits; they had no competitive product to really bring to market,” while Jensen Huang’s Nvidia dominated the curve on AI tech, Daniel Newman, CEO of the Futurum Group, told Vox.

Intel’s other recent big bet has been its foundry business — three facilities in the US and three overseas to manufacture semiconductor chips, with other facilities in Asia and Latin America for testing and assembly. But that’s gotten a bumpy start; for instance, Intel declined to invest in cost-effective extreme ultraviolet machines for its manufacturing facilities, then had to outsource 30 percent of the manufacturing to a rival company, TSMC.

In comments yesterday, readers painted Intel’s plight in darker colors.

Reader Keith started by linking to Timothy Prickett Morgan’s sober take. Representative snippets:

…when Pat Gelsinger, the prodigal and presumed savior of the company that he loved first and loves best, tells Wall Street that this is the most significant resurrection of Intel since it had to exit the memory business for the first time – we’re not talking about 3D XPoint and flash here, people, but DRAM back in 1985 – he ain’t kidding. This might qualify as a miracle when it is all said and done.

In fact, Gelsinger is seeking divine help:

hello I'm new to the stock market is it good when the intel ceo starts praying https://t.co/E4Tb5nzgTr

— DatNoFact ↗ (@datnofact.bsky.social) (@datnofact) August 4, 2024

More from Murphy:

Sometimes, such harsh actions work. IBM, which had its self-described “near death experience” back in the mid-1990s, had tens of billions of dollars of writeoffs – just absolutely unheard of, unimaginable, inconceivable for the original blue chip stock – and laid off 200,000 of its 400,000 workforce as it pivoted to software and services and trimmed its independent systems fiefdoms to get its own costs in line with revenues. IBM eventually got back to 400,000 employees, but the way, and has subsequently sold off a lot of systems and services businesses to focus on being a hybrid platform provider, with Red Hat at the center of that strategy. This is IBM’s fifth rebirth in its Herman Hollerith built punch card machines to do the 1890 census in 1890, which is the true kernel of the company we know as Big Blue.

….This rebirth of Intel is more like a company reminding itself of what it learned to do in the mid-1980s: design good chips and make good chips, and be paranoid enough to survive. …

Intel has even rougher road ahead, but it is, in fact, getting its foundry act together. It is getting its chip designs together and it will be relying less on Taiwan Semiconductor Manufacturing Co for the chiplets in its most advanced CPUs and bring them home to its fabs with its 18A, 14A, and 10A processes. It remains to be seen if others will use its foundry for the 14A and 10A processes, but Intel is clearly getting the third party tooling together from Cadence, Synopsys, Siemens, and Ansys together so they can, and we think it will get some business from chip makers looking for alternative etching and packaging. We think it will have a profitable foundry operation and that it will make good chips that people want to buy as well. But we also think the X86 market is going to decline as Arm rises at the hyperscale and cloud builders, and Intel not only knows this, but accepted this years ago and that is why it must have an open foundry business. If you can’t beat Arm CPUs, you have to make Arm CPUs.

Reader Pearl Rangefinder saw this view as altogether too optimistic:

I think he really, really under-counts just how screwed Intel is. Their entire business model is completely fucked because when Intel was at the top, they basically spent a decade with their thumbs up their asses burning $100 BILLION in share buybacks while their competitors caught up to them and left them in the dust. They are now left with basically zero competitive products in the core parts of their business – their GPUs are way behind Nvidia and AMD, their x86 processors are uncompetitive (and the ones that are suffer from crippling defects which they are so far refusing to recall or even stop sales of ), their datacentre business is a dead man walking, and the chip fabrication wing of the company is uncompetitve with TSMC, the Taiwanese chip fabbing giant that Intel used to be ten years ahead of technologically.

The worst is still to come. Intel’s fabs are so far behind that they have had to slowly switch to using TSMC to manufacture their latest processors. They already use TSMC’s fabs for the GPU part of their processors on the ‘Meteor Lake’ generation, and from rumors and news sources Intel’s upcoming processor families (‘Arrow Lake’ and ‘Lunar Lake’) will be entirely outsourced to TSMC. Intel’s entire business model was predicated on them leveraging their unrivaled in-house manufacturing expertise with their unrivaled processor design expertise, and having enough scale with sales to feed their chip fabrication plants. Scale is king in the fab business, so every dollar they send to TSMC is a dollar not being spent on their own fabrication plants. A vicious downward cycle.

Intel is like the Boeing of the tech world right now, probably even worse TBH. They need to pull multiple miracles in the various parts of their business to save themselves. Nothing over the past decade would suggest that their management is even remotely up to the task.

$100 billion is share repurchases over the last 10 years. Since 1990, the total is $152 billion.

steppenwolf fetchit replied:

What you describe sounds like voluntarily chosen self-Boeingization by the Intel leadership.

Am I wrong to understand it in that way?

Pearl Rangefinder responded:

Not at all, the similarities between the two are quite apt I think. The biggest similarity being how both companies incinerated massive amounts of cash in idiotic share buybacks, with management seemingly more focused on financial engineering than looking after their actual businesses. For Intel, it seems even more idiotic when one considers how capital intensive advanced chip foundries are nowadays (at least $10+ billion dollars; TSMC’s 2nm fab is supposedly going to cost them over $30 billion dollars to build!). On the chip design side, it takes years to get processors from the drawing board to production, so you need a lot of money to keep things afloat while you are designing the next generation of products. That also means if you have a less than stellar design, you could be bleeding money for years waiting for the successor product – this specifically is what happened to AMD when it launched its ‘Bulldozer’ micro-architecture in 2011, it nearly sank the company as it could never perform as well as Intel’s products did in those days. AMD started designing the successor ‘Zen’ architecture in 2012, and took four years to get Ryzen/Zen-1 out the door by 2016.

I don’t want to suggest that only share buybacks are the cause of all of Intel’s problems (and Boeing’s for that matter), because they definitely aren’t, but goddamn it, there is a good reason why stock buybacks used to be illegal. Only a sick society lets these finance parasites play these stock manipulation games at the firm’s expense, or survival.

Intel was a bloody cash cow too, their net profit margin could hit 30%+ in a good year, with revenues pushing $70 billion. That is absolutely bonkers for a hardware manufacturing company. Imagine screwing that up?

A savvy friend, before stock buybacks became pervasive, argued, “Why should I invest in a company if management isn’t investing in it?” But the stock repurchases had the effect of making it easier to engage in the slow-motion liquidation we first described in a 2005 article in the Conference Board Review, The Incredible Shrinking Corporation. It had become evident even then that American companies in aggregate were net savers, which was abnormal and a bad harbinger:

Companies typically invest in times like these, when profits are high and interest rates low. Yet a recent JP Morgan report notes that, since 2002, American companies have incurred an average net financial surplus of 1.7 per-
cent of GDP, which contrasts with an average deficit of 1.2 percent of GDP for the preceding forty years. While firms in aggregate have occasionally run a surplus, “. . . the recent level of saving by corporates is unprecedented. . . . It is important to stress that the present situation is in some sense unnatural. A more normal situation would be for the global corporate sector—in both the G6 and emerging economies—to be borrowing, and for households in the G6 economies to be saving more, ahead of the deterioration in demographics.”

This article elaborated on how short-termism, specifically the fixation on quarterly earnings, had become deeply entrenched, and was leading to all manner of dysfunctional behavior. Critically, managements were taking the view that it was lower risk and had much faster payoff to simply squeeze current businesses as hard as they could. Investing in growth not only took longer to produce results and was more hazardous, but nearly all “investments” hit the income statement near term (such as marketing plans, adding to office and/or factory space) which made them even more to be shunned. Shrinkage or low growth in existing business lines was often masked by acquisitions.

Nevertheless, changes in degree are changes in kind. The level of corporate negligence at work for Boeing and Intel needs a name. Any suggestions?