Is Intel Corporation Changing for the Better?

Intel's acquisition of Panasonic Corp. as a chip-sourcing customer may just be a temporary shot in the arm.

Jul 14, 2014 at 12:00PM

Chip manufacturer Intel (NASDAQ:INTC) recently scored a big win by roping in Panasonic Corp. as the most recent customer to utilize its vastly developed 14-nanometer processor foundries. And that's certainly good news for a company that has failed to find many takers for its plans to open up its foundries to other customers and even potential competitors, in a bid to boost its future profitability.

However, Intel's strategy, which has largely been the result of its failure to gain a foothold in the mobile processor segment, continues to face a major roadblock in the form of Taiwan Semiconductor Manufacturing (NYSE:TSM) or TSMC, the planet's largest contract chipmaker with a roughly 50% market share. In fact, the last time Intel managed to secure a big customer win in the form of Altera Corp. for its chip making foundries was way back in February 2013.

And that inevitably puts a big question mark on the actual sustainability of Intel's efforts in this direction.

How good is TSMC?
While Intel is admittedly in a position where it can boast of having the latest 14-nanometer chip manufacturing technology, its customer portfolio is minuscule compared to that of TSMC. And we are not even considering the high probability of the latter acquiring Apple as a future customer, here. With TSMC already in the process of investing a massive $27 billion into technological upgradation and capacity expansion, the company expects both revenue and profits to go up by a minimum of 10% during the current year. While that definitely complicates the scenario even further for Intel, the very fact that it is largely perceived as a PC chip manufacturer is also something that could lessen its chances of making a significant impact on TSMC's profitability.

And then there's Qualcomm
On the other hand, Intel's own efforts to ramp up its chip manufacturing business for the smartphone processor market has been a near total failure till now, culminating in an embarrassing less-than-1% share of the global market for such products. Having witnessed a stunning $929 million operating loss in its newly restructured mobile and communications segment during the recent first quarter, Intel is simply not in a position to compete with the likes of Qualcomm (NASDAQ:QCOM) -- the undisputed leader with over 90% share of the global smartphone chip market. 

And while we have heard about the company's plans to launch its 14-nanometer Broxton processor for high-end mobile devices sometime during the later half of 2015, the entire market scenario is likely to undergo a major transformation by then, thanks to the steady emergence of a new category of wearable devices. At the same time, high-end smartphone sales are already reaching near-saturation levels in the world's developed markets, which signifies that processors like Intel's Broxton may be coming in a tad too late.

In fact, it is this very saturation in high-end smartphone sales that has forced Qualcomm to change gears and concentrate on manufacturing low-end chips for less expensive smartphones that are dominant in emerging markets such as China. While the company faces several headwinds in that market, including government interference and stiff local competition, Qualcomm's unparalleled expertise in the manufacture of 4G LTE enabled chips puts it in a strong position to reap any future gains. Intel, incidentally, is still struggling to market its first-generation products in this category.

New horizons to fight for
But then, that has not deterred Intel from clearly drawing the battle lines with Qualcomm in another newly emerging category known as the Internet of Things -- another name for a technology that connects a host of household devices with chips embedded in them. Having already reported a 32% year-over-year increase in revenue in this segment during its recent first quarter, Intel has now formed a rival group against Qualcomm's AllSeen Alliance that attempts to set standards for connecting such devices. Known as the Open Interconnect Consortium, Intel's newly formed group is already being backed by companies like Samsung Electronics and Broadcom, among others. With the Internet of Things likely to turn out into a $7.1 trillion market by the year 2020, according to research firm IDC, this may be the start of another epic battle between the two chipmaking stalwarts.

Foolish final thoughts
Having said that, Intel's current attempts to change direction and make it big as a contract chip manufacturer may not meet with much success in the long run. At the same time, the fact that the company is actually doing well as far as its core PC and server chipmaking businesses are concerned gives it the required time to reshape its strategies and align them as per the future developments in the broader tech industry.

While the overall scenario for Intel continues to remain unchanged, this company is definitely not out of the reckoning yet, and investors would do well to look forward to its upcoming quarterly announcement of results less than a week from now.

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Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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