Intel used to dominate the U.S. chip industry. Now it’s struggling to stay relevant

Intel’s
long-awaited
turnaround
looks
farther
away
than
ever
after
the
company
reported

dismal
first-quarter
earnings.
Investors
pushed
the
shares
down
9%
on
Friday
to
their
lowest
level
of
the
year.

Although
Intel’s
revenue
is
no
longer
shrinking
and
the
company
remains
the
biggest
maker
of
processors
that
power
PCs
and
laptops,
sales
in
the
first
quarter
trailed
estimates.
Intel
also
gave
a
soft
forecast
for
the
second
quarter,
suggesting
weak
demand.

It
was
a
tough
showing
for
CEO
Pat
Gelsinger,
who’s
early
in
his
fourth
year
at
the
helm.

But
Intel’s
problems
are
decades
in
the
making.

Before
Gelsinger
returned
to
the
company
in
2021,
the
company,
once
synonymous
with “Silicon
Valley,”
had
lost
its
edge
in
semiconductor
manufacturing
to
overseas
rivals
like


Taiwan
Semiconductor
Manufacturing
Co.
Now,
in
a
high-risk
quest,
it’s
spending
billions
per
quarter
to
regain
ground.

“Job
number
one
was
to
accelerate
our
efforts
to
close
the
technology
gap
that
was
created
by
over
a
decade
of
underinvestment,”
Gelsinger
told
investors
on
Thursday.
He
said
the
company
is
still
on
track
to
catch
up
by
2026.

Investors
remain
skeptical.
Intel
is
the
worst-performing
tech
stock
in
the
S&P
500
this
year,
down
37%.
Meanwhile,
the
two
best-performing
stocks
in
the
index
are
chipmaker


Nvidia
and


Super
Micro
Computer,
which
has
been
boosted
by
surging
demand
for
Nvidia-based
artificial
intelligence
servers.

Intel,
long
the
most
valuable
U.S.
chipmaker,
is
now
one-sixteenth
the
size
of
Nvidia
by
market
cap.
It’s
also
smaller
than


Qualcomm,


Broadcom,


Texas
Instruments,
and


AMD.
For
decades,
it
was
the
largest
semiconductor
company
in
the
world
by
sales,
but
suffered

seven
straight
quarters
of
revenue
declines
recently,
and
was
passed
by
Nvidia
last
year.

Gelsinger
is
betting
on
a
risky
business
model
change.
Not
only
will
Intel
make
its
own
branded
processors,
but
it
will
act
as
a
factory
for
other
chip
companies
that
outsource
their
manufacturing
—
a
group
of
companies
that
includes
Nvidia,


Apple,
and
Qualcomm.
Its
success
acquiring
customers
will
depend
on
Intel
regaining “process
leadership,”
as
the
company
calls
it.

Other
semiconductor
companies
would
like
an
alternative
to
TSMC
so
they
don’t
have
to
rely
on
a
single
supplier.
U.S.
political
leaders
including
President
Biden
call
Intel
an
American
chip
champion
and
say
the
company
is
strategically
an
important
part
of
the
U.S.
processor
supply
chain.

“Intel
is
a
big,
iconic
semiconductor
company
which
has
been
the
leader
for
many
years,”
said
Nicholas
Brathwaite,
managing
partner
at
Celesta
Capital,
which
invests
in
semiconductor
companies. “And
I
think
it’s
a
company
that
is
worth
trying
to
save,
and
they
have
to
come
back
to
competitiveness.”

But
the
chipmaker
isn’t
doing
itself
any
favors.

“I
think
everyone
has
been
hearing
them
say
the
next
quarter
will
be
better
for
two,
three
years
now,”
said
Counterpoint
analyst
Akshara
Bassi.

Intel
has
fumbled
the
ball
for
years.
It
missed
the
mobile
chip
boom
with
the
unveiling
of
the
iPhone
in
2007.
It’s
also
been
largely
on
the
sidelines
of
the
AI
craze
while
companies
like


Meta,


Microsoft
and


Google
order
as
many
Nvidia
chips
as
they
can.

Here’s
how
Intel
ended
up
where
it
is
today.

The
iPhone
could
have
had
an
Intel
chip
inside.
When
Apple
developed
the
first
iPhone,
then-CEO

Steve
Jobs
visited
former
Intel
CEO
Paul
Otellini,
according
to
Walter
Isaacson’s
2011
biography “Steve
Jobs.”

They
discussed
whether
Intel
should
power
the
iPhone,
which
had
not
been
released
yet,
Jobs
and
Otellini
told
Isaacson.
When
the
iPhone
was
first
revealed,
it
was
marketed
as
a
phone
that
ran
the
Apple
Mac
operating
system.
It
would’ve
made
sense
to
use
Intel
chips,
which
ran
on
the
best
desktops
at
the
time,
including
Apple’s
Macs.

Jobs
said
that
Apple
passed
on
Intel’s
chips
because
the
company
was “slow”
and
Apple
didn’t
want
the
same
chips
to
be
sold
to
its
competitors.
Otellini
said
that
while
the
tie-up
would
have
made
sense,
the
two
companies
couldn’t
agree
on
a
price
or
who
owned
the
intellectual
property,
according
to
Isaacson.

The
deal
never
happened.
Instead,
Apple
went
with
Samsung
chips
when
the
iPhone
launched
in
2007.
Apple
bought
PA
Semi
in
2008
and
introduced
its
first
homegrown
iPhone
chip
in
2010.

Within
five
years,
Apple
started
shipping
hundreds
of
millions
of
iPhones.
Overall
smartphone
shipments
—
including
Android
phones
designed
to
compete
with
Apple
—
surpassed
PC
shipments
in
2010.

Nearly
every
modern
smartphone
uses
an


Arm-based
chip
instead
of
Intel’s
x86
technology
which
was
created
for
PCs
in
1981
and
is
still
in
use.

Arm
chips
built
by
Apple
and
Qualcomm
consume
less
power
than
Intel’s
processors,
making
them
more
desirable
for
small
devices
like
smartphones
that
run
on
batteries.

Arm-based
chips
quickly
improved
due
to
the
enormous
manufacturing
volumes
and
the
demands
of
an
industry
that
needs
new
chips
every
year
with
faster
performance
and
fresh
features.
Apple
started
placing
huge
orders
with
TSMC
to
build
its
iPhone
chips,
starting
with
the
A8
in
2014.
The
tech
giant’s
orders
provided
the
cash
to
annually
upgrade
the
manufacturing
equipment
at
TSMC,
which
eventually
surpassed
Intel.

By
the
end
of
the
decade,
some
benchmarks
had
the
fastest
phone
processors
rivaling
Intel’s
PC
chips
for
some
tasks
while
consuming
far
less
power.
Around
2017,
mobile
chips
from
Apple
and
Qualcomm
started
adding
AI
parts
to
their
chips
called
neural
processing
units,
another
advancement
over
Intel’s
PC
processors.
The
first
Intel-based
laptop
with
an
NPU
shipped
late
last
year.

Intel
has
since
lost
share
in
its
core
PC
chip
business
to
chips
that
grew
out
of
the
mobile
revolution.

Apple
stopped
using
Intel
in
its
PCs
in
2020.
Macs
now
use
Arm-based
chips,
and
some
of
the
first
mainstream
Windows
laptops
with
Arm-based
chips
are
coming
out
later
this
year.
Low-cost
laptops
running
Google
ChromeOS
are
increasingly
using
Arm,
too.

“Intel
lost
a
big
chunk
of
their
market
share
because
of
Apple,
which
is
about
10%
of
the
market,”
Gartner
analyst
Mikako
Kitagawa
said.

Intel
made
efforts
to
break
into
smartphones.
It
released
an
x86-based
mobile
chip
called
Atom
that
was
used
in
the
2012
Asus
Zenphone.
But
it
never
sold
well
and
the
product
line
was
dead
by
2015.

Intel’s
mobile
stumble
set
the
stage
for
a
lost
decade.

Processors
get
faster
with
more
transistors.
Each
one
allows
them
to
do
more
calculations.
The
original
Intel
microprocessor
from
1971,

the
4004,
had
about
2,000
transistors.
Now
Intel’s
chips
have
billions
of
transistors.

Semiconductor
companies
fit
more
transistors
on
chips
by
shrinking
them.
The
size
of
the
transistor
represents
the “process
node.”
Smaller
numbers
are
better.

The
original
4004
used
a
10-micrometer
process.
Now,
TSMC’s
best
chips
use
a
3-nanometer
process.
Intel
is
currently
at
7-nanometers.
Nanometers
are
1,000
times
smaller
than
micrometers.

Engineers,
especially
at
Intel,
took
pride
in
regularly
delivering
smaller
transistors.
Brathwaite,
who
worked
at
Intel
in
the
1980s,
said
Intel’s
process
engineers
were
the
company’s “crown
jewels.”
People
in
the
technology
industry
relied
on “Moore’s
Law,”
coined
by
Intel
co-founder
Gordon
Moore,
that
said
the
amount
of
computing
power
would
double
and
become
cheaper
at
predictable
intervals,
roughly
every
two
years.

Moore’s
Law
meant
that
Intel’s
software
partners,
like
Microsoft,
could
count
on
the
next
generation
of
PCs
or
servers
being
more
powerful
than
the
current
generation.

The
expectation
of
continuous
improvement
at
Intel
was
so
strong
that
it
even
had
a
nickname: “tick-tock
development.”
Every
two
years,
Intel
would
release
a
chip
on
a
new
process
(tick)
and
in
the
subsequent
year,
it
would
refine
its
design
and
technology
(tock).

In
2015,
under
CEO
Brian
Krzanich,
it
became
clear
that
Intel’s
10nm
process
was
delayed,
and
that
the
company
would
continue
shipping
its
most
important
PC
and
server
processors
using
its
14nm
process
for
longer
than
the
normal
two
years.
The
tick-tock
process
had
added
an
extra
tock
by
the
time
the
14nm
chips
shipped
in
2017.
Intel
officials
today
say
that
the
issue
was
underinvestment,
specifically
on
EUV
lithography
machines
made
by
ASML,
which
TSMC
enthusiastically
embraced.

The
delays
compounded
at
Intel.
The
company
missed
its
deadlines
for
the
next
process,
7nm
—
eventually
revealing
the
issue
in
a
bullet
point
in
the
small
print
in
a
2020
earnings
release,
causing
the
stock
to
plunge,
and
clearing
the
way
for
Gelsinger,
a
former
Intel
engineer,
to
take
over.

While
Intel
was
struggling
to
keep
its
legendary
pace,
Advanced
Micro
Devices,
Intel’s
historic
rival
for
server
and
PC
chips,
took
advantage.

AMD
is
a “fabless”
chip
designer.
It
designs
its
chips
in
California,
and
has
TSMC
or
GlobalFoundries
manufacture
them.
TSMC
didn’t
have
the
same
issues
with
10nm
or
7nm,
and
that
meant
that
AMD’s
chips
were
competitive
or
better
than
Intel’s
in
the
latter
half
of
the
decade,
especially
for
certain
tasks.

AMD,
which
barely
had
market
share
in
server
CPUs
a
decade
ago,
started
taking
Intel’s
business
in
that
area.
AMD
made
over
20%
of
server
CPUs
sold
in
2022,
and
shipments
grew
62%
that
year,
according
to
an
estimate
from

Counterpoint
Research
last
year.
AMD

surpassed
Intel’s
market
cap
the
same
year.

Graphics
processor
units,
or
GPUs,
were
originally
designed
to
play
sophisticated
computer
games.
But
computer
scientists
knew
they
were
also
ideal
for
running
the
kind
of
parallel
calculations
that
AI
algorithms
require.

The
broader
business
community
caught
on
after
OpenAI
released
ChatGPT
in
2022,
helping
Nvidia
triple
sales
over
the
past
year.
Companies
are
spending
money
on
pricey
servers
again.

AI-oriented
GPU-based
servers
sometimes
pair
as
many
as
eight
Nvidia
GPUs
to

one
Intel
CPU.
In
older
servers,
the
Intel
CPU
was
almost
always
the
most
expensive
and
important
part.
In
a
GPU-based
server,
it’s
Nvidia’s
chips.

Nvidia
recently
announced
a
version
of
its
latest “Blackwell”
GPU
that
cuts
Intel
out
entirely.
Two
Nvidia
B100
GPUs
are
paired
with
one
Arm-based
processor.

Almost
all
Nvidia
GPUs
used
for
AI
are
made
by
TSMC
in
Taiwan,
using
leading-edge
techniques
to
produce
the
most
advanced
chip.

Intel
doesn’t
have
a
GPU
competitor
to
Nvidia’s
AI
accelerators,
but
it
has
an
AI
chip
called
Gaudi
3.
Intel
started
focusing
on
AI
for
servers
in
2018
when
it
bought
Habana
Labs,
whose
technology
became
the
basis
for
the
Gaudi
chips.
The
chip
is
manufactured
on
a
5nm
process,
which
Intel
doesn’t
have,
so
the
company
relies
on
an
external
foundry.

Intel
says
it
expects
$500
million
in
Gaudi
3
sales
this
year,
mostly
in
the
second
half.
For
comparison,
AMD
expects
about
$3.5
billion
in
annual
AI
chip
revenue.
Meanwhile,
analysts
polled
by
FactSet
expect
Nvidia’s
data
center
business
—
its
AI
GPUs
—
to
account
for
$57
billion
in
sales
during
the
second
half
of
the
year.

Still,
Intel
sees
an
opportunity
and
has
recently
been
talking
up
a
different
AI
story
—
that
it
could
eventually
be
the
American
producer
of
AI
chips,
maybe
even
for
Nvidia.

The
U.S.
government
is
subsidizing
a
massive
Intel
fab
outside
of
Columbus,
Ohio,
as
part
of
$8.5
billion
in
loans
and
grants
toward
U.S.
chipmaking.
Gelsinger
said
last
month
that
the
plant
will
offer
leading-edge
manufacturing
when
it
comes
online
in
2028,
and
will
make
AI
chips
—
perhaps
those
of
Intel’s
rivals,
Gelsinger

said
on
a
call
with
reporters
in
March.

Intel
has
faced
its
old
failures
since
Gelsinger
took
the
helm
in
2021,
and
is
actively
trying
to
catch
up
to
TSMC
through
a
process
that
Intel
calls “four
nodes
in
five
years.”

It
hasn’t
been
easy.
Gelsinger
referred
to
its
goal
to
regain
leadership
as
a “death
march”
in
2022.

Now,
the
march
is
starting
to
reach
its
destination,
and
Intel
said
on
Thursday
that
it’s
still
on
track
to
catch
up
by
2026.
At
that
point,
TSMC
will
be
shipping
2nm
chips.
Intel
said
it
will
begin
producing
its “18A”
process,
equivalent
to
2nm,
by
2025.

It
hasn’t
been
cheap,
either.
Intel
reported
a
$2.5
billion
operating
loss
in
its
foundry
division
on
$4.4
billion
in
mostly
internal
sales.
The
sums
represent
the
vast
investments
Intel
is
making
in
facilities
and
tools
to
make
more
advanced
chips.

“Setup
costs
are
high
and
that’s
why
there’s
so
much
cash
burn,”
said
Bassi,
the
Counterpoint
analyst. “Running
a
foundry
is
a
capital-intensive
business.
That’s
why
most
of
the
competitors
are
fabless,
they
are
more
than
happy
to
outsource
it
to
TSMC.”

Intel
last
month
reported
a
$7
billion
operating
loss
in
its
foundry in
2023.

“We
have
a
lot
of
these
investments
to
catch
up
flowing
through
the
P&L,”
Gelsinger
told
CNBC’s
Jon
Fortt
on
Thursday. “But
basically,
what
we
expect
in ’24
is
the
trough.”

Not
many
companies
have
officially
signed
up
to
use
Intel’s
fabs.
Microsoft
has
said
it
will
use
them
to
manufacture
its
server
chips.
Intel
says
it’s
already
booked
$15
billion
in
contracts
with
external
companies
for
the
service.

Intel
will
help
its
own
business
and
enable
better
performance
in
its
products
if
it
regains
the
lead
in
making
the
smallest
transistors.
If
that
happens,
Intel
will
be
back,
as
Gelsinger
is
fond
of
saying.

On
Thursday,
Gelsinger
said
demand
was
high
for
this
year’s
forthcoming
server
chips
using
Intel
3,
or
its
3nm
process,
and
that
it
could
win
customers
who
had
defected
to
competitors.

“We’re
rebuilding
customer
trust,”
the
CEO
said
on
Thursday. “They’re
looking
at
us
now
saying ‘Oh,
Intel
is
back.'”