Track Hyper | Is there a missing piece in Intel's IDM 2.0 strategy?

Author: Zhou Yuan / Wall Street News

Intel CEO Pat Gelsinger has had to re-examine the IDM 2.0 strategy he proposed at the beginning of his tenure in 2021, in order to understand the actual significance of rebuilding Intel's path to revival.

A recent event has cast a shadow over the prospects of revitalizing Intel's most important strategy for Gelsinger. If it does materialize, the question of whether Gelsinger can continue to stay at Intel will also become an unknown.

On August 30th, there were market rumors that Intel is considering divesting its foundry business (IFS: Intel Foundry Services) and canceling factory projects. On September 1st, Wall Street News confirmed from the supply chain that this news does exist, but Wall Street News did not receive confirmation from Intel China officials regarding this news.

Intel Foundry Services (IFS) is mainly responsible for providing chip manufacturing and packaging services to customers in the United States, Europe, and other regions to meet global semiconductor demand. Additionally, IFS will provide customers with various IP technology services such as x86, Arm, RISC-V, in addition to wafer manufacturing and packaging services, aiming to build a global design and manufacturing foundry.

IFS is an important part of Gelsinger's IDM 2.0 strategy launched after he became Intel CEO in February 2021. The other two parts include most products being manufactured internally and expanding the capacity of Intel's third-party foundries.

"Intel's departments are bloated and slow to respond to market changes. Gelsinger underestimated the difficulty of the foundry business when launching this plan (referring to IDM 2.0)," a former Intel engineering technician told Wall Street News.

In fact, Gelsinger did admit to underestimating the difficulty of the foundry business.

At a Deutsche Bank conference on August 29th, Gelsinger said, "Entering contract manufacturing (i.e., foundry) is more challenging than expected. I underestimated the heavy workload beyond producing high-quality (silicon) wafers. Establishing a foundry business requires increased design assistance and services expected by other potential customers."

It seems that Intel's top leader lacks insight into industry demands, as Gelsinger said, "Other chip companies seem willing to continue working with Asian manufacturers rather than sending their products to our factories in the United States. I have to say, this is surprising and disappointing."

It is hard to imagine how Gelsinger's judgment of the market and demand could have been so misguided. In fact, Gelsinger's appointment as Intel CEO aligns with Intel's tradition of maintaining absolute market dominance throughout history—having a technical expert serve as the company's top leader.

Pat Gelsinger, a Stanford University graduate with a master's degree in electrical engineering and computer science (mentored by Dr. John Hennessy, known as the "Godfather of Silicon Valley"). Gelsinger joined Intel immediately after graduating and was the company's first Chief Technology Officer (CTO).

The cost of Gelsinger's misjudgment of the difficulty of the foundry business is that Intel has paid approximately $17.5 billion. Gelsinger proposed the IDM 2.0 strategy just one month after becoming Intel CEO in February 2021 This strategic transformation completely overhauled the original IDM strategy, mainly including Intel optimizing internal factory networks, expanding third-party manufacturing capacity, and building key themes such as Intel Foundry Services (IFS).

Subsequently, Intel began massive factory construction, accompanied by staggering capital expenditures. However, due to the massive investment in IFS and insufficient revenue, IFS has been continuously losing money since 2022, even dragging down the performance of the core business.

In 2022, IFS incurred a loss of $5.2 billion, followed by a $7 billion loss in 2023. In the first half of 2024, IFS continued to incur losses, amounting to a high of $5.33 billion. In other words, since the implementation of the IDM 2.0 strategy (January 2022 to June 2024), the total accumulated losses of IFS amount to approximately $17.5 billion.

Regarding the continuous losses of IFS, Intel CFO David Zinsner believes that: first, over 85% of Intel's wafers still use nodes before the introduction of EUV lithography, leading to a cost structure lacking competitiveness; second, Intel is accelerating the transition of wafers for Intel 4 and Intel 3 processes from Oregon factories to Ireland factories, resulting in higher manufacturing costs in the short term.

The current issue is that Intel, as a former powerhouse, actually has insufficient cash reserves to cover its debts, making it even more difficult to bear the rapid consumption of funds by IFS, the super cash-eating beast.

As of June 30, 2024, how much cash reserves does Intel have? The answer is $11.29 billion (current liabilities of $32 billion). This amount of money is not enough for Intel's IFS department to continue burning for another two years. In addition, Intel has stated externally that Intel IFS will not be profitable until 2030.

The massive costs of Intel IFS have already begun to impact Intel's core business gross margin levels. According to Intel's second-quarter 2024 financial report, in the second quarter of this year, Intel's gross margin was 35.4%, a decrease of 5.6 percentage points from the previous quarter, far below the market's expected 42.1%.

Regarding the significant decline in the company's gross margin, Intel's financial report explains: influenced by the increase in AI PC products, the transition of wafer factories, and other non-core business expenses.

When launching the IDM 2.0 strategy, Intel had a hidden core idea: Intel wanted to build a manufacturing network based in the United States and Europe to reduce the industry's dependence on Asia.

Currently, it seems that Intel's CEO's ideal was ambitious, but the harsh reality far exceeds his initial imagination.

The current question is, if there is no IFS, will the revitalization of Intel through the IDM 2.0 strategy be compromised?

In reality, Intel's issues go far beyond the failure of the IFS business, including technological lag between generations, response strategies to damage to the core business, and a lack of foresight, judgment, action, and actual market effects from the management led by the CEO