How Intel financialized and lost leadership in semiconductor fabrication

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

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.

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.

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.

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.

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.

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.

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”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.”

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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:

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”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.”

>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.