Intel Corp (INTC)

[RobertG]

Does Barrett's Resignation Signal New Business Model At Intel?
http://www.electronicsweekly.com/blogs/david-manners-semiconductor-blog/2009/01/does-barretts-resignation-sign.html

Craig Barrett's resignation as Chairman of Intel was not done in the normal Intel way. When Gordon Moore handed the CEO role to Andy Grove, Moore retained the position of Chairman. When Grove handed over the CEO role to Barrett, Grove became Chairman and Moore became Emeritus Chairman. When Barrett handed over the CEO job to Otellini, Barrett became Chairman. Not so this time.

This time it's been different. Barrett is leaving as Chairman but the CEO is staying the same and the Chairman's boardroom duties will be performed by a non-exec on the board who will have no executive responsibilities.

It looks as if, instead of waiting for the normal orderly succession, Barrett has decided that it's time to go. Now why should he want to go? Having survived 35 years in the fearsomely confrontational Intel culture, he would not leave over a small thing.

But there's one issue he might leave over: Intel's strategy as a manufacturer. Intel has always been a leader in process engineering. Barrett came from the manufacturing side of Intel, and re-vitalised the companies' fabs during his time as CEO with his 'copy exactly' strategy.

If there was to be any change proposed in Intel's manufacturing strategy, Barrett might decide he doesn't want to stay around to preside over it.

And why should there be a change? Simply because Intel must be seeing the yawning pit of commoditisation opening in front of it.

For over two decades the price of desk-top PCs stayed high as Intel and Microsoft persuaded their customers they constantly needed more processing power. But a few years ago the price of desk-top PCs started to erode.

Intel switched its attention to lap-tops where prices were still high. But there prices have also started to erode, while the Intel Atom processor has enabled a new class of $400 lap-tops.

That class of lap-top, sometimes called netbooks, is expected to see prices tumble as the likes of Qualcomm and Freescale get into the market with ARM-based processors this year. Freescale is aiming at a system price point of $200 and a components BOM of $20.

To compete with that sort of pricing, it is already being speculated that Intel will have to out-source its Atoms if it is going to manufacture them cost effectively.

As netbooks expand their market they are then expected to erode prices across the entire lap-top spectrum so the price of processors in all lap-tops will fall.

So what does this mean for Intel? Quite clearly, it means lower margins. And lower margins means that the company will have to start economizing on its process engineering R&D and its capital equipment purchasing and its new fab-building.

Intel will hate it, but a share price fall of 34% over the past year and nearly 60% over the last five years, to a little over $13 today, means that Intel has to do something drastic to satisfy it shareholders.

By contrast, during Grove's tenure as CEO the Intel share price multiplied in value 25 times.

Now, having failed, despite many attempts. to diversify out of processor PCs, Intel has not got many options but to cut its cost base.

Intel's biggest cost is its wafer fabs and the R&D which sustains them. If the decision has been made to out-source processors, then it is understandable why Craig Barrett might decide it's time to go.

To an extent the process of outsourcing has already started. Process R&D is now being shared with IMEC of Belgium, Intel's PC chip-sets are being manufactured by TSMC of Taiwan, and two wafer fabs were closed last week, one of which was the fab at Intel's HQ in Santa Clara.

Not to have a fab in the company's birthplace state of California is a powerful symbol of how times are a'changing at Intel.

While the plans of AMD to out-source all its manufacturing to a separate, Arabian-backed company - with no doubt attractive prospects for reducing AMD's manufacturing costs - may have given Intel pause for thought.