Intel is grappling with an operational crisis as its IDM 2.0 transformation plan has yet to yield results, casting doubt on when its foundry business might finally become profitable. This raises the question of whether Intel should consider abandoning its IDM model and separating its product design and manufacturing divisions—a move with both potential advantages and drawbacks. Industry leaders, including former board members, are offering advice in hopes of helping Intel find a viable path forward. However, the conflicting nature of their advice highlights the complexity of the company's dilemma.
In mid-September, Intel announced plans to spin off its foundry business into an independent subsidiary. External observers are keenly watching whether this subsidiary will eventually be fully split off, similar to when AMD transitioned to a pure chip design company in 2008 by divesting its manufacturing business. AMD's manufacturing division later became GlobalFoundries (GF), now one of the top five foundries globally.
The debate over whether Intel should split its product design from its manufacturing operations is intense within the industry. If these two businesses remain intertwined, it may be challenging for the foundry business to gain the trust of potential clients, who are often competitors with Intel's product design business.
However, if Intel decides to spin off its foundry operations and hand them over to another company, it could lead to highly sensitive political issues. Following the enactment of the CHIPS Act, the US government is investing heavily in domestic semiconductor manufacturing, with Intel positioned as the biggest beneficiary. Thus, there will be rigorous scrutiny by the government regarding how effectively these funds are utilized.
Moreover, splitting such a large, multinational corporation is inherently complex.
Differing opinions
Industry experts have shared their perspectives on this matter. For instance, David Yoffie, Reed Hundt, Charlene Barshefsky, and James Plummer—all former Intel board members—recently collaborated on an article for Fortune, arguing that many observers, including themselves, have long contended that Intel must separate its design and manufacturing divisions. They assert that operating the foundry business under the current corporate structure leaves little possibility for success.
However, just days later, former Intel CEO and chairman Craig Barrett also published an article in Fortune, presenting a starkly different viewpoint. He noted that Intel's previous success as a leading semiconductor company was due to its dedication to maintaining technological leadership while continually advancing Moore's Law.
Therefore, Barrett believes that rather than wasting energy on a split, Intel should focus on reclaiming its dominant position in wafer manufacturing to attract orders from design houses. If Intel can regain its manufacturing technology lead, even competitors of Intel's chip design business would recognize that not using Intel's foundry services would place them at a disadvantage.
Despite that, given Intel's ongoing operational struggles and plummeting market value, whether it still has the margin to balance both design and manufacturing is a critical question that Barrett's argument must address. Sam Palmisano, former CEO of IBM, previously discussed this issue in an interview with Bloomberg.
Palmisano noted that engaging in design requires deep technical R&D capabilities while engaging in manufacturing demands continuous advancements in process miniaturization and substantial funds. It is evident that delving into both areas simultaneously poses significant challenges from both technological and operational standpoints.
Palmisano also mentioned that most investors in today's public markets are not particularly enthusiastic about "patient capital" strategies. Patient capital refers to investments focused on long-term goals rather than short-term gains, with a higher tolerance for risk.
Since taking office in 2021, Intel CEO Pat Gelsinger has been vigorously pushing the IDM 2.0 transformation plan, which includes expanding wafer fabs worldwide and advancing five process technology nodes over four years, aiming to enter the Angstrom Era, and more.
However, following Intel's second-quarter 2024 earnings report released in early August, the company's market value saw a dramatic decline, indicating that investors are not willing to wait such a long time for the transformation plan to have tangible returns. This situation aligns with Palmisano's observation that patient capital is currently out of favor in the investment landscape.
Tapping external help for IDM operations
The investment community can no longer tolerate Intel's slow-paced execution of the IDM 2.0 plan. With Intel already entrenched in losses, it is unlikely that the company possesses ample funds to sustain both design and manufacturing efforts. Therefore, if Intel intends to stick with the IDM approach, it will need to seek a strong partner.
Recent reports showed that Intel has approached Samsung Electronics to explore the possibility of forming a "foundry alliance." Considering Intel's previous statements about surpassing Samsung to become the world's second-largest foundry operator by 2030, its willingness to seek collaboration indicates that even Intel has recognized that the current situation cannot be prolonged any further.
