A semiconductor manufacturer lost $40 billion in market value in a single day as the market reacted harshly to the company’s published results and forecasts. IT-World sought to understand the problems at Intel.
On August 1, 2024, Intel released reports that were poorly received by the market. The semiconductor giant’s sales fell by 1% compared to the previous year, and the company posted a net loss of $1.6 billion, compared to a profit of $1.5 billion in the same period of 2023. “Our expenses are too high, and our margins are too low,” wrote CEO Pat Gelsinger in a message to employees. As a result, Intel plans to cut 15,000 jobs and suspend dividend payments, which the company had been consistently paying since 1992. Following the publication of these results, Intel’s stock price dropped by nearly 30%.
Pat Gelsinger, who took over as CEO in February 2021, has been trying to restore Intel’s former glory, with the Biden administration seeing the company as a national leader in the effort to bring semiconductor manufacturing back to the U.S. However, the latest results show that Intel is still lagging significantly behind competitors like Nvidia and TSMC. For many years, Intel was the leader in the global semiconductor market, dominating the PC market in the 1990s and early 2000s through an alliance with Microsoft. But a series of mistakes led to the loss of leadership. Focusing on PCs, Intel missed the boom in demand for chips for mobile phones. While competitors transitioned to a “fabless” model, outsourcing production to factories like Taiwan’s TSMC, Intel stubbornly continued to manufacture its own chips.
In the mid-2010s, repeated production errors delayed the launch of processors, leading to a loss of market share to AMD, an American chip developer. And that’s not all: Intel is almost absent from the rapidly growing AI chip market, where Nvidia dominates.
Recognizing the scale of the problem, Gelsinger, shortly after taking office, split design and manufacturing into two separate businesses, allowing the product division to choose the best factories and Intel’s factories to work with other chip developers. Gelsinger’s goal is to make Intel the second-largest chip manufacturer in the world by 2030, second only to TSMC.
However, Intel faces the challenge of restoring its position on two fronts: as a “fabless” chip designer, competing with Nvidia and AMD, and as a manufacturer, competing with TSMC. The first task seems particularly difficult. Intel lags significantly in designing AI chips. This year, the company expects to sell only $500 million worth of Gaudi AI chips, while Nvidia sells $20 billion worth of AI chips every quarter.
Success in the AI chip market depends not only on the chips themselves. Nvidia sells networking equipment that connects hundreds or thousands of processors and offers the CUDA platform, which allows customers to customize the chips. Insufficient investment in AI puts Intel in a tough spot. The situation is slightly better in manufacturing. Intel plans to spend $100 billion over the next five years to build new factories and expand existing ones in America. To fund its ambitions, the company is attracting additional sources of capital. In August 2022, Brookfield agreed to invest up to 49% of the cost of a new $30 billion factory in America. In June this year, Apollo invested $11 billion for a stake in Intel’s factory in Ireland. Intel also received $8.5 billion in grants and up to $11 billion in loans from the U.S. government.
However, despite all efforts, revenues from manufacturing remain low, and demand for core products is weak. Intel will need to continue seeking new sources of capital or rely on additional subsidies. The company and the government face a challenging road ahead.