Times Change at Intel — What It Means for Manufacturing

As the world's largest semiconductor manufacturer and high-tech industry bellwether, the state of affairs at Intel is critical to the semiconductor manufacturing ecosystem and semiconductor industry at large. Following a company-wide review that was completed in August, Intel is now in the midst of downsizing across the entire organization as CEO Paul Otellini seeks to improve efficiency and refocus the company.

A focus on core competencies

Although Intel's Technology and Manufacturing Group is facing some downsizing, the current impact is minimal. Along with Intel's microprocessors and related products, the company's R&D and manufacturing are key core competencies. Just as Intel's microprocessors are critical to its product competitiveness, leading-edge manufacturing technology and capacity are critical to its profitability. This was very apparent in 2005 when Intel faced increased competition and product shortages resulting from limited capacity for chipsets.

Intel continues to build and ramp new manufacturing capacity on the latest process technology. The chipmaker is currently upgrading its fourth fab, D1C in Oregon, to accommodate 65 nm process technology for microprocessor manufacturing, adding to the existing capacity at Fab D1D in Oregon, Fab 12 in Arizona, and 24-2 in Ireland. Intel is also building two new fabs — Fab 28 in Israel and Fab 32 in Arizona — for capacity at the next process nodes beginning in 2008. Fab 32 will be dedicated to microprocessor manufacturing, while Fab 28 is used for flash and other logic devices.

While building new capacity, Intel is also rapidly moving other products, such as core-logic chipsets, to the n-1 process technology, which is currently 90 nm. The transition to a newer process technology increases product competitiveness and reduces costs, but the current transition is also critical for much needed capacity. Intel has had great success with its line of core-logic chipsets and other platform-related products, but this success caused problems in 2005, when capacity was constrained. With the processors using the latest technology and 300 mm wafers, the capacity for the processors outstripped Intel's capacity for the supporting products that were using 130 nm technology, much of which was on 200 mm wafers. As the microprocessors move to the 65 nm node, Intel is rapidly moving the supporting products to the 90 nm process on 300 mm wafers. The result is roughly a 4× increase in capacity per square foot of cleanroom space. The company has indicated that it can now produce a core-logic chipset for each processor it produces, overcoming a critical limitation in meeting demand. The need for capacity for these and other platform components is likely to drive fab expansions in the future.

Uncertain market conditions

Despite the importance of manufacturing to Intel's competitiveness and the small impact from the current downsizing, future manufacturing plans face an uncertain future because of market conditions. The semiconductor industry continues to post impressive results, like $20.1B in July, a 12% increase over 2005 figures, but all indications are that demand is slowing.

Intel is also in the midst of digging out of a hole as the company ramps production of a completely revamped processor lineup after losing market share for more than a year. But recaptured market share will likely not be apparent until at least mid-2007.

Intel also attempted to stem the tide of lost market share by drastically lowering prices on older microprocessors. At 52% in 2Q06, gross margins remain at enviable levels, but as Intel's product mix shifts to include non-processor products, its margins will also decrease. In the long term, it may be difficult for Intel or any semiconductor vendor to maintain such high margins, but the trend should be a gradual decline.

What it means for industry

In terms of capacity, Intel seems well positioned with capacity to meet demand. Even if the market does slow and Intel just maintains market share, reductions in existing capacity should not be required.

Although Intel has not announced complete manufacturing plans at the 45 nm process node for microprocessors, the expectation is for at least three of the current fabs to migrate to the new node in conjunction with the new fab. But with the market tilting toward slower growth, Intel is likely to limit this number to two fabs in the late 2007 and early 2008 timeframe, with the potential for a third in late 2008. Since Intel's 45 nm process has a high reuse of the equipment from the 65 nm process, the need for new equipment will be limited mostly to the newly constructed fabs. With Intel typically being the largest purchaser of new semiconductor manufacturing equipment, this signals a trend of lower equipment demand over the next 18 months or more, but not at the extreme levels experienced during the last market downturn.