How Intel financialized and lost leadership in semiconductor fabrication

https://www.nakedcapitalism.com/2021/07/how-intel-financialized-and-lost-leadership-in-semiconductor-fabrication.html

by daralthus • 5 years ago

79 59 5 years ago

nakedcapitalism.com

kumarvvr2• 5 years ago

I think we are in an era where being a monopoly is a net negative for companies.

That a monopoly like Intel has been toppled so fast, so easily and so efficiently is astounding.

How long did its monopoly last? 2 decades?

In the future, I would presume that the longer a company is in a monopolistic setting, the less valuable it becomes.

lotsofpulp2• 5 years ago

I see it as the exact opposite. Intel is being toppled because it was not the only place one could get what they needed, especially Apple.

On the other hand, vertical monopolies are huge right now, since technology and automation allow you to gobble up adjacent businesses and squeeze out the margin at very little cost. You see this in many other business lines, even healthcare.

The question is how defensible is your monopoly?

dralley• 5 years ago

Intel being a vertical monopoly is a large part of their downfall. Once the manufacturing side stumbled the entire company was impacted.

greydius• 5 years ago

Being a monopoly is never an inherent disadvantage. The only threats to a monopoly are government intervention and poor management.

jkhdigital• 5 years ago

I think the point is that monopoly power seems to breed poor management so consistently that it ultimately becomes a curse.

OrvalWintermute• 5 years ago

Monopolies may also thrive or die on their own inherent ability (or inability) to implement creative destruction, to obsolete their own products with a new, better line of widgets, or a changed business model.

ip262• 5 years ago

In your thesis, why is being a monopoly a net negative? Are you arguing the pole position inevitably leads to complacency in core products, or something else?

kumarvvr2• 5 years ago

Exactly. When you are a monopoly power, especially in our times and coming decades, there is a high probability that innovation will stagnate and the focus and management will shift to extracting cash from the company's customers.

My contention is that the monopolies of the past had a long life. The monopolies of the future, will not be so fortunate and there will be someone else who will innovate better and creep up.

This shift, in my view, is because the industrial production base of the world, has become fragmented enough and optimized enough, that the capital and effort to innovate have come down.

blihp• 5 years ago

It generally has been a net negative over a sufficiently long time horizon in the tech industry. Intel is slowly being eaten alive from all directions but is currently so dominant in their markets (from a business standpoint) that it's difficult for many to imagine a world where they aren't the leader, at least from a revenue/profitability standpoint.

azinman2• 5 years ago

One word: mobile.

notabee• 5 years ago

I think it has always been this way. Organizations lose coherance and agility the bigger and older they get, whether they're corporations, governments, or any other organization. Some manage to last much longer than others, though.

kurthr5• 5 years ago

I have a hard time taking seriously a semiconductor fab/technology discussion that refers to SEC as a manufacturer. SLSI is the silicon design and wafer fab company. It may incorporate IP from SEC, and certainly SEC are it's largest (and prefered) customer, but it has a separate CEO and is much tighter with other parts of the chaebol (SDC for example got their leadership from SLSI). Not knowing this implies a lack of knowledge of Samsung's business structure and operation.

The problem is that, if I believe that label, then I have to assume all the sales/investment $ numbers are completely off. SLSI is very big (RAM/Flash/Display/Exynos), but their revenues are tiny compared to SEC which sells hundreds of millions of ~$1k phones. SEC is more of an OEM like Apple, than a chip maker like Intel, much less a foundry like TSMC.

xadhominemx4• 5 years ago

Sorry man you are just wrong about this.

SLSI is an operating division within Samsung Electronics. There are certain Samsung chaebol companies in the electronics industry that are not operating divisions of SEC - eg SEMCO and SDI - but SDC and SLSI most certainly are.

In addition, Samsung RAM and NAND Flash operations do not fall within SLSI. Both the memory division and SLSI fall under the semiconductor division of the device solutions division (which also includes SDC).

Hard to imagine how you can write such a smug comment while being completely wrong, but I guess that’s HN for you.

kurthr5• 5 years ago

Interesting, it's an operating division with its own CEO? I've never heard of that before, but it could well be the case. Certainly, the corporate structure of Samsung is highly complex. I can say from personal experience that working between the foundry side and the electronics side is challenging because their interests are often not well aligned.

It's apples to oranges in any case. Comparing revenues of an OEM, to a fabful CPU manufacturer, to a foundry is just weird and makes little sense. I don't know what point you were trying to make.

twoodfin2• 5 years ago

This reads like a just-so story. Apple has engaged in the same dividend & buyback game, and has also made their executives wealthier than Crassus, but no one would argue that they've lost their leadership position. In fact, you could easily argue that their relative position has improved significantly since Tim Cook's Apple started aggressively paring down the growth of their cash position that had reached near absurd levels under Jobs.

Intel made strategic errors, namely not being willing to sacrifice some control and short-term margins to dominate the mobile space.

intelinsider3• 5 years ago

I work for Intel, so here is a first-hand data point: I have worked for a number of large organizations in my career, including the U.S. government and several large companies, but Intel is the hands-down champion of dysfunctional bureaucracy. Case in point: last week I took a week off. When I came back, I discovered that my remote access had been disabled. It turns out that my contract happened to be up for renewal during the week I was off and someone entered an incorrect date, so I was effectively fired while I was away but I was not notified, nor was anyone in my chain of command. This happened on Monday, and today is Friday, and they still have not managed to get me reinstated. And that is just the most recent in a long list of similar incidents.

So yes, Intel's market failures cannot be attributed entirely to financialization. They have screwed up in many, many ways.

morpheos1372• 5 years ago

How many other people do you imagine this sequence of events happened to over the past two weeks? To me it looks like you doxed yourself while also desparaging your former employer. So maybe you will remain fired?

realmod• 5 years ago

If I were you, I'd change or delete this comment. You've mentioned specific details which would make it very easy to identify you. And disparaging your company when you are already in a precarious situation is not ideal.

straw_hat• 5 years ago

Short INTC 56, 60, 65

Stop loss on all three lots at 70

steveBK123• 5 years ago

Exactly. Missing mobile means they missed the area of the market with the most explosive growth in the last 10+ years. Likewise they never got into GPUs which have also had a lot of growth between crypto, data science/ML, and of course gaming.

Intel may have had enough $$ for R&D.. but competitors raking in margins in the ARM/GPU side of the world probably had more, and were more successful in iterating their product line more rapidly.

TMWNN2• 5 years ago

Likewise they never got into GPUs which have also had a lot of growth between crypto, data science/ML, and of course gaming.

Not for lack of trying. The new Intel GPU line is the third or fourth attempt to break into that market.

tolbish• 5 years ago

Apple spends more on buybacks than on R&D like Intel has done recently?

twoodfin2• 5 years ago

Apple is notorious for being selective about what they classify as true R&D, but it’s not even close:

$18.75 billion in 2020 on R&D [1]

$77 billion on buybacks in the last four quarters [2]

[1] https://www.statista.com/statistics/273006/apple-expenses-fo...

[2] https://www.barrons.com/articles/tech-giants-have-ramped-up-...

jmpman• 5 years ago

Intel had a big layoff about 5 years ago. That layoff seems to align with when their process stumbled. Maybe they broke their development pipeline when they purged some “worthless” PhDs. Certainly that layoff would have been to reduce R&D expenses, catering to Wall Street’s need for short term profit.

As much as I’d like to think the above situation is the cause, it’s more likely that a process VP made an incorrect technical decision, and out of ego, stuck with it, and wasn’t challenged. Eventually they got too far down that path to change without significant financial impact, and just double downed.

htrp• 5 years ago

You mean the process VP who made the decision was promoted to the head of the business unit?

SkyMarshal2• 5 years ago

The first half of the article gives a summary history of the rise of pure foundries like TSMC (vs IDMs like Intel), then the article gets to its main thesis about halfway through:

——

”Innovation requires a social condition we call financial commitment to sustain technological transformation and market access until the generation of a higher-quality, lower-cost product can result in financial returns.[19] The foundation of financial commitment is retained earnings. In the case of Intel, as shown in Table 1 above, in recent years the company has made substantial allocations to P&E and R&D, even as it has distributed almost all its profits to shareholders.[20] But Intel has been able to tap other cash flows to make, simultaneously, large-scale productive investments and shareholder payouts. For the decade, 2011-2020, these other cash flows included depreciation charges of $87b., long-term debt issues of $45b., and stock sales (mainly to employees in stock-based compensation plans) of $12b.

Given the availability of these sources of funds, the vast sums that Intel has wasted on buybacks have not thus far imposed a cash constraint on its investments in semiconductor fabrication. Rather, it has been a deficiency in organizational learning—the essence of the innovation process—that has hampered Intel’s implementation of process technology. The generation of high levels of productivity from P&E and R&D expenditures requires, as a second social condition of innovative enterprise, organizational integration, working in combination with financial commitment. Organizational integration mobilizes the skills and efforts of large numbers of people in a hierarchical and functional division of labor into the collective and cumulative learning processes required to transform technologies to generate a higher-quality product and, then, access markets to attain economies of scale.

The root of Intel’s failure in organizational integration lies in the financialized character of a third social condition of innovative enterprise, strategic control. Accepting stock yield as the measure of enterprise performance, in recent years Intel’s senior executives who exercise strategic control have lacked both the incentive and, increasingly we would argue, the ability, to implement innovative investment strategies through organizational integration.”

——

The remainder of the essay discusses legal stock price manipulation via buybacks, how the SEC’s Rule 10b-18 exempts buybacks from being considered illegal stock price manipulation, how hedge funds pressure Intel (and public companies in general) to do this, and the problem of focusing on value extraction instead of innovation. The final two paragraphs contain a prescription for fixing the problem:

——

”The 19 publicly listed corporate members of the U.S. Semiconductor Industry Association that signed a letter to President Biden in February,[25] asking the government for financial support for their industry, did buybacks of $540b. (2020 dollars) from 2001 through 2020, with IBM, Intel, Qualcomm, and TI accounting for 84% of these repurchases. In 2016-2020 alone, these 19 companies squandered $148b. (nominal) on buybacks—almost three times the $50b. in financial aid that the Biden administration has offered the SIA.

Our policy recommendation for the Biden administration is simple: As a condition for giving the U.S. semiconductor industry $50 billion in infrastructure assistance, put a ban on SIA members doing stock buybacks as open-market repurchases. That legislation can then be a first step in Congress rescinding the Securities and Exchange Commission’s Rule 10b-18—corporate America’s license to loot.[26] With a critically important company like Intel focused on innovation rather than financialization, the United States can get back to the business of building a world-class semiconductor-fabrication industry – one that leads rather than lags advances in technology.”

rossdavidh• 5 years ago

While a focus on financials can certainly undermine a technology company, the reality is that Intel's R&D has not been held back by a lack of cash. Intel has, and has always had, plenty of cash, even after stock buybacks. Intel's problem is not a financial one, it is a technological one. They have failed to make production-worthy processes at the smallest nodes, 10nm or below. This does not appear to be for a lack of cash to be able to do so.

Now, it is certainly the case that a company _can_ lose its technology edge due to allocating its money incorrectly. But whatever the source of Intel's problems in R&D, it is not a lack of money to spend on it, whether due to stock buybacks or anything else.

SkyMarshal2• 5 years ago

That's exactly what the article actually says, that stock buybacks have not (yet) hindered Intel's ability to invest in R&D, and the problems are elsewhere:

"Given the availability of these sources of funds, the vast sums that Intel has wasted on buybacks have not thus far imposed a cash constraint on its investments in semiconductor fabrication. Rather, it has been a deficiency in organizational learning—the essence of the innovation process—that has hampered Intel’s implementation of process technology.

The generation of high levels of productivity from P&E and R&D expenditures requires, as a second social condition of innovative enterprise, organizational integration, working in combination with financial commitment.

Organizational integration mobilizes the skills and efforts of large numbers of people in a hierarchical and functional division of labor into the collective and cumulative learning processes required to transform technologies to generate a higher-quality product and, then, access markets to attain economies of scale."

...

"Accepting stock yield as the measure of enterprise performance, in recent years Intel’s senior executives who exercise strategic control have lacked both the incentive and, increasingly we would argue, the ability, to implement innovative investment strategies through organizational integration.”

[1] https://news.ycombinator.com/item?id=27783913

lacksconfidence• 5 years ago

Regarding the closing lines, focusing so specifically on stock buybacks is looking in the wrong place. Intel's goal was to give the money to the shareholders. Currently the most tax advantaged way to do that is with stock buybacks. If you pass some law that prevents buybacks they will just give the money to the shareholders in the next most tax advantaged way.

The only hope seems to be as they've done, hire on a CEO more concerned with innovtion than stock price. At least I hope this is what they've done.

kevinventullo• 5 years ago

Not exactly. If a large part of an employee’s compensation is in shares (which I assume is true for anyone sufficiently high on the org chart), and moreover the employee tends to sell the shares as soon as they are received, then dividends actually hurt the employee’s bottom line by reducing the share price, whereas buybacks help the employee’s bottom line for the same reason. This is what the author means when they say dividends help shareholders while buybacks help sharesellers.

ksec• 5 years ago

I dont think the author knows Intel or the Industry much. It is like reading a Financial analyst on Intel and Engineering.

Moreover, later this year, TSMC will commence production of intel’s Core i3 processors, inside advanced laptops, at 5nm.[12]

I will believe it when I see it. Right now it is just rumours. It would make more sense if it was i5 or i7. But why would you want expensive 5nm on your low end Core i3 product? The product line is not under threat from AMD's 5nm APU either ( those comes later in the 5nm cycle )

At some point, Intel could even find itself trailing SMIC, especially if China responds to U.S. trade restrictions by developing a semiconductor equipment supply chain that is not dependent on U.S. vendors.

Seriously? SMIC?

Yet even if Intel should achieve 7nm on a significant scale in 2021, it will fall further behind TSMC and SEC as this decade unfolds.

Depending on TSMC's 3nm density ( which is no longer on GAAFET ) , and Intel 7nm ( Which I have no idea if they have changed or used other iteration ), the original estimate / projection suggest both node are similar in density. ( Dont ask about the "nm" naming thing we should all know this by now )

The Asian companies have governance structures that vaccinate them from an economic virus known as “maximizing shareholder value” (MSV).

That is the same as current Apple as well. But MSV or Stock buyback aren't the main reason for Intel's failure. It was Vision and Management. ( And ex-Chairman Andy Bryant )

with the sudden appointment of Gelsinger as CEO this past winter, Intel sent out a weak signal that it recognizes that it has the disease.

Well yes that is why Pat is trying to fix it. If you think Pat is going to continue the same scale of buy back and financial engineering, then seriously, you dont know Pat, Andy Grove, or Intel in the 80s and 90s. If there is only one person who knows the meaning of only paranoid survives, it might very well be Pat Gelsinger.

Intel's refusal to admit its 10nm problem, its capacity planning that hurt its 14nm product line, failure to communicate this with its Custom Foundry partners, still not delivered its GPU, McAfee, 5G.. I could go on and on. Intel's downfall started when they kicked out Pat Gelsinger in 2009. Paul Otellini - MBA, - Brian Krzanich - MBA. Funny enough it was Bob Swan, another MBA from outside Intel who really knew the problem Intel was facing. But he didn't have the technical know-how to make a major change in company direction.

Sorry if this is long, as I have been banging on about every single point above ( many on HN ) for more than a decade.

PhantomGremlin• 5 years ago

McAfee

Yeah, this is one of the worst purchases: "Intel recently spent $7.6 billion to buy cyber security company McAfee, hoping to build its security technology directly onto silicon chips"

Another analyst quipped about that purchase: “Intel might as well have bought Whole Foods”

https://www.reuters.com/article/us-dealtalk-intel/intel-mobi...

And yet, the person at Intel who led the Whole Foods (oops I mean McAfee) purchase was promoted, not fired.

When companies get too big they start flailing around. That's what happened to Intel.

davidjytang• 5 years ago

Production of Intel’s Core i3 chips will begin later this year on its 5nm process, followed by the production of mid-range and high-end CPUs being produced for Intel by TSMC on a 3nm process in the second half of 2022.

[Source](https://www.allaboutcircuits.com/news/intel-set-to-outsource...)

It mad sense to me for Intel to move i3 first to 5nm and then i5/i7 to 3nm. But I agree, like you said, it is rumor for now.

TMWNN2• 5 years ago

Intel has failed, or at least failed to distinguish itself, in every single market it has entered since IBM chose the 8088 forty years ago: Every non-x86 instructional set CPU, flash memory, antivirus (still perhaps the most mystifying move in Intel history), servers/motherboards, and GPUs come to mind. The most successful non-x86 business for Intel is ... Ethernet cards? Meanwhile, it's embarrassed itself with discrete GPUs at least three separate times. A few years ago buying Nvidia would have been a savvy move; now it can no longer do so, and it's not impossible to imagine Nvidia buying Intel in the future.

Even within the one market Intel does dominate, what saved the company 15 years ago amid Itanic and Pentium 4 was 1) AMD Thunderbird being just as inefficient as Pentium 4 and, more importantly, 2) an Intel Israel skunk works project to improve on the Pentium 3. There is no such out-of-the-blue miracle this time.

How Intel financialized and lost leadership in semiconductor fabrication

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