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Intel Digs In for the Long Haul

"We live in the trenches out there. We fight. We try not to be killed, but sometimes we are. That's all."
-- Erich Maria Remarque, All Quiet on the Western Front

It looks as though Intel (Nasdaq: INTC  ) is digging a foxhole where it intends to stay until all goes quiet on the Western Front. The company presented an earnings report yesterday full of casualties -- revenues for the full year dropped 8.9% from 2005, all margins felt a serious squeeze, and annual net income plunged nearly 42%. But management said that gross margins should stay at today's levels, around 50% plus or minus the odd point, for all of 2007.

So Intel isn't planning to take its price war with AMD (NYSE: AMD  ) any deeper than it already has. But it's not letting up, either. We should expect product prices to continue to fall, the way they always do for high-tech equipment like microchips. Intel is expecting to make up for the rebates with process improvements and -- hopefully -- a stronger product mix with more high-end chips reaching consumers and businesses.

The process changes include moving all production lines off the old 90-nanometer technology this year, as well as starting up 45nm production lines in the second half of 2007. By late 2008, that new process should be the dominant Intel technology. That timeline puts the company about a year ahead of AMD when it comes to cutting-edge manufacturing technologies, which is a welcome change after several years of production missteps and inefficiencies that allowed AMD to take the performance lead for a while.

AMD and process partner IBM (NYSE: IBM  ) are stepping up their efforts to catch up with the resurgent Intel, but it won't happen tomorrow. The pure foundries, including Taiwan Semiconductor (NYSE: TSM  ) and Chartered Semiconductor (Nasdaq: CHRT  ) , are even further behind, as they are just entering the 65nm arena in force. That puts another hurdle in front of Intel's fabless competitors, like NVIDIA (Nasdaq: NVDA  ) and Atheros (Nasdaq: ATHR  ) .

I own shares in both Taiwan Semi and AMD, but I still welcome this turn of events. It's all good -- strong competition drives strong innovation. As a consumer, I'm better off when the chip market heats up to a boiling point, as the stress tends to prod great companies to even greater feats, while sending the weaklings home on a stretcher. Taiwan Semi and AMD have proved themselves many times before, and I expect both of them to man the ramparts for many years to come -- and in turn, they will challenge Intel to innovate or die.

Further Foolishness:

Intel is an Inside Value selection. Take a free 30-day trial to find out how and why the stock looks cheap today.

NVDIA is a Stock Advisor recommendation.

Fool contributor Anders Bylund is a TSM and AMD shareholder but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is always up for a fair fight.

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