Hedge Fund Urges Intel to Go Fabless – A Foolish Request

Hedge Fund Urges Intel to Go Fabless - A Foolish Request

Hedge Fund Urges Intel to Go Fabless – A Foolish Request

The New York-based hedge fund Third Point has urged Intel to explore alternatives to its current structure, suggesting that the CPU giant sells off its recent acquisitions and considers spinning off its manufacturing arm into a separate company.

For context, these suggestions come when Intel’s manufacturing capabilities, which were previously the company’s core competency, have fallen behind their rivals. Intel is also starting to lose market share within the CPU market, both to AMD and custom ARM processors from Apple, Amazon and Google. 

Intel’s manufacturing woes started with 14nm, a manufacturing node which suffered early delays and now stands at the core of Intel’s manufacturing capabilities. With their newer 10nm node, Intel has suffered from delay after delay, so much so that we still don’t have mainstream desktop 10nm CPUs in 2020, even though the node was supposed to be ready in 2017. Intel’s next-generation 7nm node has also been delayed, painting a bleak future for Intel. 

As it stands, going fabless isn’t an option for Intel. For starters, no 3rd party foundry has the manufacturing capacity to absorb Intel’s order volumes. Secondly, redesigning Intel’s processor designs for 3rd part nodes is not a simple task. Even if Intel decided to spin off its fabs, they would still need those fabs to produce the bulk of their processors. In short, going fabless won’t fix any of Intel’s problems, especially when the company already plans to utilise 3rd party nodes for some future products. 

Hedge Fund Urges Intel to Go Fabless - A Foolish Request 
Spinning off Intel’s foundries would kill them… 

As it stands, Intel fabs are operating at their full capacity and only produce Intel products. Aside from being the core reason why Intel can maintain such high margins on their products, Intel’s fabrication facilities allow them to scale their manufacturing capabilities to meet the demands of their customers. Intel does not need to rely on TSMC’s spare fab space for orders, and neither do they need to pay a third party to manufacture their products for them. This level of control has been critical to Intel’s success over the past decade. 

If Intel spun off their fabs, this company would need to overhaul their processes to appeal to non-Intel customers. This would be an expensive overhaul, and it does nothing to address the delayed releases of this company’s leading-edge lithography nodes. Given the differences between Intel’s manufacturing processes and their competitors, Intel would also have trouble selling their fabs to their competitors, as this would also require significant overhauls. 

While some will call such a spin-off the right move for Intel, it will likely destroy America’s world-class semiconductor manufacturing capabilities, and lower margins for future Intel products by forcing them to rely on 3rd parties. There is no guarantee that a separated Intel foundry would be a success, as is evidenced by the AMD/GlobalFoundries spin-off. 

Don’t get us wrong, Intel will need to explore other options if their internal manufacturing arm continues to produce poor results and delayed nodes. That said, there is no reason why Intel cannot fix their leading-edge nodes with the right management. 
 

Hedge Fund Urges Intel to Go Fabless - A Foolish Request  

What does Intel need to do? 

The short answer to this question is “who knows?”. Intel’s troubles run deep, and the solution to Intel’s recent woes lies with the company’s engineering, not their financials. Intel is big enough and rich enough to get past their current issues, but only if they focus on engineering and not on their financials. What Intel needs are strong products, not a rapid sell-off of core assets. 

A lot of things are going to change at Intel over the next few years, and it remains to be seen what these changes will be and how they will impact the company. Either way, change is coming, and it will make of break Intel. We can expect to hear more about Intel’s plans during their next quarterly financials call. 

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