Following Intel's recent second quarter 2023 earnings report, analyst Jack Gold takes a closer look at Intel's IDM 2.0 strategy...
Intel Reinvents its Chip Making Operations
Intel recently restructured its chip manufacturing and foundry business to make it a standalone business unit within the larger Intel corporate organization as part of its IDM 2.0 strategy. Instead of the various product design groups being “taxed” every year for a share of the cost to maintain the operation, manufacturing will now be its own P&L and will need to compete for business as if it were an external supplier. It’s expected that this change will save as much as $3B this year and continue to generate savings to Intel’s bottom line going forward. This is a major change to how Intel builds chips and we think it’s an important move that’s overdue.
Making chip manufacturing an independent P&L will have major ramifications (and advantages) for both Intel chip production as well as for the various Intel chip design groups. It will ultimately enable it to better compete for external foundry business, as the P&L will enable a much more nimble and accurate pricing model in order to be more competitive. Intel ultimately wants to be the number two foundry business in the world (behind No. 1 TSMC), and this is a big step in that direction by emphasizing necessary investments to become a chip fabrication entity at leading edge process nodes.
Intel Product Flexibility
Currently much of the manufacturing budget has been through allocations of expenses to various business units. The new model removes this allocation and enables each business unit to be more flexible. With the manufacturing tax eliminated, business groups will be free to use the best source to get their chips built, including outside of Intel if that is the best approach. It also means that each business unit will have much more control over its budgets and overhead costs, potentially enabling more price flexibility and improved margins. Finally, this new flexibility by the product groups will force Intel manufacturing to stay competitive or eventually lose design wins to others.
Benefits to Chip Making
For its part, manufacturing no longer assured of the product group tax will now be required to act like a non-captive manufacturer and compete for business, both internally and externally. This also frees them to take on projects, or not, based on business requirements and evaluations. This enables a more flexible mix of internal and external foundry customer products as it optimizes production and profitability over required captive manufacturing of any internal Intel part. And for the first time, its business margins will be measured to assure it’s on a par with other non-captive industry suppliers, with a goal of achieving increased gross margins more aligned to segment leaders – something that has been slipping at Intel for some time. Such measurements give Intel management a much more accurate measure of the health and success of the business.
As a standalone business unit, the focus will now shift to making sure they have best practices and technologies in place, since if they don’t, Intel manufacturing becomes non-competitive and doesn’t get new business. That means eliminating slipping schedules and/or shipment delays, as paying customers don’t appreciate such complications. And it means making investment decisions that are compatible with running manufacturing as a business unit. This will be good for keeping manufacturing’s “feet to the fire” – something that has been less than optimal over the past few years.
Bottom Line: This is not about making the manufacturing group independent so Intel can spin them out, as some might speculate. Rather, we see this as more of a forced efficiency through competition approach that will be beneficial to all groups at Intel and external customers for foundry services. There is still good reason for Intel to maintain an in-house manufacturing capacity, so long as it remains competitive and not a burden on the product groups. By unlocking the product groups from their requirements to primarily use Intel manufacturing, even though as much as 20%-25% of Intel chip products are already built outside, it should produce a much better adherence to defined schedules with fewer slips in production and improved delivery to customers. And with Intel products being first to use new process nodes and techniques, it will ensure that Intel Foundry customers have a more successful experience on a fully “debugged” production system. All in all, we believe this is a much better outcome for both Intel internally, as well as the many customers it services with its own components and in its foundry business.
Jack Gold is president and principal analyst at J. Gold Associates, LLC.