Intel: A New Step in the Complex Turnaround

Intel, which has been grappling with its revival strategy for years, took a decisive step this week to master one of the most complex turnaround maneuvers in the history of the technology industry. The crux of Intel's strategy lies in CEO Pat Gelsinger’s decision to keep chip design and manufacturing under one roof, rather than splitting them into separate companies. The problem: Intel does not produce enough of its own PC and server chips to fully utilize its massive manufacturing facilities, known as "fabs," which are necessary to regain the lead in advanced chip manufacturing. Therefore, Intel must convince other companies, including competitors, to also manufacture their chips in these facilities. One advantage for Intel in this situation is the geopolitical risk in Taiwan, where leading chip manufacturer TSMC is based. This could lead other companies to consider Intel as an alternative source for chip manufacturing. However, it would be a challenge to compete with TSMC—even for the best-financed and most specialized manufacturing company, let alone for a company like Intel that is in the midst of a critical restructuring process. If Gelsinger can leverage the foundry business to restore Intel's integrated business model, it could entice undesirable ambitions from competitors who became customers. To demonstrate that the company is adequately focused on manufacturing, Intel has already separated the finances of its manufacturing division. This week, Gelsinger went a step further and announced that this division would be formed as an independent legal subsidiary with an autonomous board. This profound restructuring aims to clarify the corporate structure and could make it easier to split the company at a later stage. Some might see this as an attempt to prompt investors to value the manufacturing business as an independent company, thereby increasing Intel's overall worth. However, Wall Street’s reaction remained tepid. Nevertheless, this step could offer operational advantages. A separate governance structure could provide Intel's competitors with greater confidence in releasing their designs for manufacturing, without fearing that their intellectual property rights would be compromised, according to Daniel Newman, CEO of the U.S. chip analysis firm The Futurum Group. Additionally, a formal internal separation could facilitate financing. Large foundry customers could be potential investors looking to invest in Intel's capital needs without directly investing in the entire company. However, restructuring alone is not enough. Intel must also make tangible progress in the manufacturing domain and develop better chip designs. Once, the close linkage between manufacturing and design was Intel's strength. Today, both business sectors resemble fighters who have to keep each other afloat. Under Gelsinger, Intel has caught up on many backlogs in process technology. Without these advancements, a revival would have been unthinkable. What remains to be proven is that these processes can be successfully transformed into superior products and attract enough foundry customers. The coming months will be crucial. A new server chip, codenamed Granite Rapids, will demonstrate whether Intel can compete against rival AMD. In the PC chip segment, the new Lunar Lake chip will play a key role as Intel tries to defend market share against Qualcomm, despite a significant part of this chip being outsourced to TSMC, affecting margins. Timely product releases and positive reviews could begin to restore confidence on Wall Street. Yet, Intel still faces two challenging years ahead before margins show substantial improvements, even in the most optimistic scenario.