By Asa Fitch
Intel Corp., more than any other company, represents the
historical silicon in "Silicon Valley." It has held its reign not
only by designing compelling new circuitry but also by etching it
into silicon at its own factories.
It was orthodoxy inside Intel. To thrive, it had to remain the
maker of its flagship chips that are the brains of computers --
long after many rivals had outsourced manufacturing and stuck to
design.
So on July 23, when Chief Executive Bob Swan on an earnings call
said Intel would consider outsourcing the manufacture of some of
its most advanced chips, it was a milestone in the story of
America's losing its manufacturing primacy.
Intel's plants had stumbled for the second time in a row in
making the circuitry that underlies a new generation of chips
called central processing units, or CPUs, each with tinier
transistors than the one before. It had needed to scrap much of
what its factories had made during trial runs and push back the
promised delivery time frame. Intel would now reconsider how to
make its chips that hit the market in the year 2023 and later, Mr.
Swan said.
The company might end up outsourcing them, might keep making
them in-house, or might use a new approach of processing a chip
partly itself and farming out certain other processes on the chip,
Mr. Swan said. Intel saw the decision, he said, "as a sign of
strength, not as a sign of weakness, that gives us much more
flexibility to make the decisions on where is the most effective
way to build our products."
The Santa Clara, Calif., company's concession that it has hit
the factory wall -- that the circuitry has gotten so small it may
not be able to economically build some of the most important chips
itself -- reverberates beyond Silicon Valley.
"Intel's inability to solve this problem," said David Yoffie, an
Intel director for 29 years until 2018, "is something that the
country is going to feel as a loss."
Intel declined to make Mr. Swan available for an interview,
citing his earlier pledge to give an update on the strategy in the
coming months.
The chip maker remains America's largest by revenue, and its
latest stumbles might not threaten its sales for years, given the
industry's yearslong development cycles. It has said it expects to
report record sales and near-record earnings per share for 2020,
boosted by a pandemic-era surge in technology spending.
In the past, manufacturing problems have delayed the launch of
new generations of CPUs and other advanced chips. While Intel is
already behind on its initial schedule for cutting-edge chips set
for production in about two years' time, the company is trying to
avoid any further delays even if that means outsourcing production
of critical chips.
Intel must decide in the coming months where to produce those
chips, Mr. Swan said on an October earnings call. Intel has already
decided to turn over production of parts of a new so-called
graphics-processing unit -- a powerful chip used in data centers --
to a contract manufacturer, he revealed in July.
"It's much more of a company turning itself inside out a little
bit to go engage the outside world," said Navin Shenoy, who
oversees some of Intel's most important projects, including those
involving chips for servers and artificial-intelligence
calculations. The shift, he said, has involved "lots of
debate."
Intel's stock has fallen since Mr. Swan's announcement, closing
at $45.68 on Thursday, down 24% from July 23. The S&P
Semiconductor Select Industry Index climbed 23% in the period.
Moore's Law
Large chunks of American business have farmed out the
manufacture of products they design. Better to put resources into
the creative tasks you do best, the argument goes, and let someone
else risk the capital it takes to specialize in making things,
often where labor costs are low. Companies from garment makers to
Apple Inc. have consigned production to contract manufacturers
abroad.
Intel was different.
Founded in 1968, it became a paragon of American technology
leadership by designing and building the engines inside generations
of personal computers and other devices. Co-founder Gordon Moore
literally wrote the law that has powered one of the greatest
economic advancements in world history.
Moore's Law, which describes how engineers will find ways to
shrink circuits at a predictable pace year after year, has given
the world the powerful, inexpensive chips that underpin Google
searches, Facebook pages, smartphone apps, streaming video --
everything the world considers a technological given.
Intel's orthodoxy played off that law: Its chip engineers could
create better circuitry if they worked directly with manufacturing
engineers to match new chips to new production equipment. That
would be harder with an outside manufacturer.
The company's 2020 strategy shift recalls another crisis at
Intel. In 1985, it abandoned the huge market for so-called
random-access memory, chips that store data. It was a major player
in the technology and felt it needed to stay in the business to be
competitive. But as Moore's Law made memory chips cheaper and
cheaper, Intel couldn't keep up with huge Japanese rivals that
poured capital into ever-newer factories. The chips had become
commodities.
Intel's departure from that memory market was cited at the time
as evidence America was losing its technological edge. Instead, for
Intel the move ushered in an era of prosperity. It focused
resources on its strong suit -- designing CPUs, which commanded
higher profits in part because their circuitry was protected by
Intel's intellectual-property rights.
Combined with Microsoft Corp.'s Windows operating system,
Intel's chips formed the "Wintel" duopoly that ruled the world for
years -- giving the companies such dominance they became targets of
federal antitrust regulators.
Intel lost some Silicon Valley luster in the 21st century as new
internet giants emerged, but it remained a powerful force in the
market to supply processors that help drive the new giants'
offerings. Intel's chips power most of the world's PCs and are in
nearly all server computers in data centers that process companies'
data and that Microsoft, Alphabet Inc.'s Google and Amazon.com Inc.
use in their cloud-computing operations.
The company now has 10 major manufacturing sites, four of them
in the U.S.
Rival strategies
Other chip makers have embraced a divorce from manufacturing.
Advanced Micro Devices Inc., a longtime Intel competitor in the
processor market, spun off its factories about a decade ago. Nvidia
Corp., which specializes in graphics-processing chips, has always
relied on outside manufacturers and overtook Intel this year as the
largest U.S. chip company by market value.
Among the advantages: Chip companies don't have to sink capital
into factories and don't have to worry about running under capacity
in their own factories when demand flags. When a contract
manufacturer has problems, chips designed to be built by others
tend to be easier to shift to other producers in the global
chip-production "ecosystem," as the industry calls it, which has
gravitated to standardized design and manufacturing approaches.
Intel does outsource some manufacturing -- the amount totals
about 20% of its production today -- when demand for fast-growing
new products such as chips inside cars outstrips Intel's capacity,
according to the company. The company also often lets chip makers
it acquires continue to use external manufacturers.
But it always made CPUs in-house. A confidence pervades Intel's
engineering and management culture that it can overcome the
challenges of keeping up with Moore's Law in factories, according
to current and former Intel employees.
By 2018, competitive pressure was growing. Chip giants like
Taiwan Semiconductor Manufacturing Co. and South Korea's Samsung
Electronics Co. had caught up with Intel in the number of
transistors their factories could fit on a square millimeter of
silicon. They make chips under contract for some Intel competitors,
including AMD and Nvidia, so their factories are, in essence,
competing with Intel's plants.
Intel sought to cope by inventing new types of transistors that
performed better without getting smaller and by inventing new ways
of knitting chips together that gave them a performance
advantage.
Modern chip factories can cost tens of billions of dollars to
set up and involve machines capable of imprinting circuits only
several atoms wide. The chip industry continually migrates to
smaller circuitry and to new factory equipment that can produce it.
In 2015, the most-advanced chips in production had 14-nanometer
transistors, a measurement loosely referring to their size and
equaling about one 10-thousandth the width of an average human
hair.
In 2018, the industry had moved toward smaller, 10-nanometer
chips. Intel's then-CEO Brian Krzanich gambled the company could do
something unprecedented with that generation: cram 2.7 times as
many transistors into the same space as before. Typically, the
industry about doubled transistor density with each step forward,
and success could have vaulted Intel ahead.
The move, Mr. Krzanich told analysts and shareholders in 2018,
turned out to be overly bold. To get there, he said, engineers took
risks in the development process that caused problems that were
difficult to overcome.
As a result, Intel hit repeated manufacturing snags and product
delays, which, along with surging demand for chips, contributed to
a shortage of its CPUs that crimped sales across the global
personal-computer industry. One problem was physics. As transistors
shrank, electricity started to behave in unexpected ways, requiring
new combinations of materials and chip designs -- a growing hurdle
for all chip makers.
Mr. Krzanich, who was forced out at Intel in 2018 for unrelated
issues -- having what the company described as a consensual
relationship with an employee -- didn't respond to requests for
comment. Mr. Swan, then interim CEO, apologized to customers
because of manufacturing delays that reverberated through the
industry.
Intel has since ironed out difficulties with its 10-nanometer
chips, but the company is continuing to deal with the aftermath of
the repeated delays. Overcoming production problems was complicated
by the tight linkage between Intel's chip design and manufacturing
operations that had evolved over decades. Because Intel optimized
designs for its own chip-making tools, it couldn't easily turn to
outside manufacturers for help to catch up. That made it hard to
swiftly recover from missteps.
Increased flexibility
Intel was taking technical steps to shift toward increasing its
manufacturing flexibility. Meanwhile, engineers joined Intel from
chip makers that relied on outsourcing and wanted to accelerate
that shift. To them, constraining chip design because of the
idiosyncrasies of the in-house factories made no sense, said an
engineer familiar with Intel, even though they also saw the
advantages that came with Intel's keeping its own factories.
Intel's acquisition of NetSpeed Systems Inc. and the arrival of
NetSpeed CEO Sundari Mitra helped accelerate chip-design
standardization that let chip architects more easily take advantage
of any manufacturing process, whether internal or external, the
company said.
By 2019, Intel engineers and executives were debating how to
manufacture future 10-nanometer CPU chips that had been held up
because of earlier engineering delays. The debates were sometimes
fierce, with some engineers urging management to consider letting
someone else fabricate the chips if in-house facilities couldn't,
and some executives arguing that the factories could fix their
problems.
Chief Engineer Venkata "Murthy" Renduchintala told analysts in
May 2019 that Intel had learned lessons from earlier stumbles and
that its 10-nanometer chips were on track. Intel's next generation
-- 7-nanometer CPUs -- were on track to start production in 2021,
he told them.
That didn't happen. The manufacture of the next generation of
CPUs is now a year behind initial plans, which will delay the
arrival of products on the market by six months, Intel said. Intel
shook up its technical team and announced Mr. Renduchintala's
departure. He declined to comment. Intel declined to comment on the
departure, citing a statement at the time that he left amid a
management shake-up aimed at improving the company's
chip-technology execution.
Mr. Swan in the July call told analysts: "We're going to be
pretty pragmatic about if and when we should be making stuff inside
or making outside."
The company's new approach, Mr. Swan said, would be to make
market-leading chips on schedule. Intel's factories would be the
preferred manufacturing option, but, if needed, production could be
outsourced. Intel still plans to invest heavily in its own
factories and future cutting-edge transistor technology, Mr. Swan
has said.
As part of its move toward more outsourcing, Intel is adopting
for some chips what it calls "disaggregation" -- a process that
lets it make a single chip using manufacturing processes in
different places. Intel might start a chip in one in-house factory
and then move it to another, or might start making a chip at an
Intel plant and then ship it to an outside manufacturer to add
elements Intel doesn't produce as well. The company said it is
beginning that type of mixed manufacturing, but on a limited basis
with chips including a coming graphics-processing unit.
"As you move to this disaggregated design or modular design
approach," Intel's Mr. Shenoy said, "we can take various pieces of
a chip and choose different foundries."
Mr. Swan said during the October analysts call that Intel would
decide by early next year how to handle chips in 2023 and 2024.
If Intel had embraced the new design approach sooner, it would
have spared itself problems with the 10-nanometer chips, said Raja
Koduri, Intel's chief chip architect, in an August virtual
presentation. Now it will be late 2022 or 2023 until its design
flexibility will be in use in a wide range of chips, he told The
Wall Street Journal that month.
Outsourcing poses risks, said François Piednoël, a former Intel
engineer who left in 2017 after two decades, because it involves
changes in the chip-design process that sacrifice performance. Mr.
Piednoël, an Intel shareholder, is pushing for more chip-design
expertise on Intel's board. The board includes just one
semiconductor expert, although it does include people whose current
or former employers have been major semiconductor consumers.
Mr. Piednoël ruffled feathers in August and September with
YouTube videos that cast doubt on Intel's chip-design choices and
critiqued its corporate culture, which he says has veered away from
the combative yet collaborative ethos set under its longtime CEO,
the late Andy Grove.
Intel still sees having chip factories as an advantage over
rivals that must rely on others, said Intel's Mr. Shenoy. "Having
advanced technology manufacturing in the United States," he said,
"is a super important competitive advantage that is not lost on
us."
Write to Asa Fitch at asa.fitch@wsj.com
(END) Dow Jones Newswires
November 06, 2020 16:26 ET (21:26 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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