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Is This Why Intel Corp.'s Chip Manufacturing Tech Is Late?

By Ashraf Eassa - Oct 27, 2017 at 11:23AM

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This Fool debunks a popular myth about Intel's business.

It's no secret that chip giant Intel's (INTC 0.32%) upcoming 10-nanometer chip manufacturing technology has seen significant delays. 

The technology, which was supposed to go into mass production by the end of 2015 to support product releases in 2016, is now set to go into production later this year with shipments ramping up during the first half of 2018, according to Intel. 

These delays not only held back Intel's contract chip manufacturing ambitions, but it also led to delays in Intel's products, which hurt Intel's competitiveness in the marketplace

An Intel desktop processor.

Image source: Intel.

Naturally, this state of affairs invites discussion among industry enthusiasts and investors alike. One person tweeted out the following regarding decisions by Intel's CEO Brian Krzanich (BK): 

In response, another user said this: 

That answer isn't quite correct. Here's why. 

Financials 101

It's true that Intel has a significant amount of debt, especially as it has needed to borrow to fund two major acquisitions. However, having a lot of debt doesn't mean that a company doesn't have the ability to invest. 

A company's ability to invest in future technologies and products is largely a function of its revenue, its gross profit margin percentage, and its desired profitability targets. 

Putting this into more concrete terms, last year Intel generated $59.4 billion in net revenue and enjoyed a 60.9% gross profit margin percentage. This means that Intel sold $59.4 billion worth of stuff that cost $24.73 billion to produce, leaving it with nearly $36.2 billion in gross profit. 

Unfortunately for Intel, gross profit doesn't tell the whole story. Those sales wouldn't happen if Intel didn't pay people to develop those products, nor would those sales continue into the future if it didn't keep paying people to develop those products. 

On top of that, just making products doesn't mean that they'll sell. A lot of work (and money) goes into marketing these products to both end users and to partners.

Last year, Intel's research and development spending (in other words, costs associated with making new products and technologies) came in at $12.74 billion, and its marketing, general, and administrative costs were $8.39 billion. Deducting those two values from the gross profit number I mentioned earlier gives operating income, which came in at $12.87 billion. After taxes and other factors, Intel's net income for the year was $10.32 billion. 

Tying it all back to chip manufacturing tech

Notice that in the discussion above, Intel's debt load didn't come up. The fact of the matter is that Intel generates so much net profit that a debt load of $28 billion is quite manageable, especially as Intel's financial health and creditworthiness allows it to borrow money at low rates. The debt load isn't the problem. 

If Intel wanted to increase its spending on chip manufacturing technology, it could do it. That increase could come at the expense of net income, or Intel could cut spending in less essential areas to divert resources to chip manufacturing technology. 

On top of that, I'm not convinced that Intel isn't spending a lot on chip manufacturing technology development. For some perspective, Intel's main manufacturing competitor -- Taiwan Semiconductor Manufacturing Company (NYSE: TSM) -- spends less than $3 billion annually on research and development. 

TSM Research and Development Expense (TTM) Chart

TSM Research and Development Expense (TTM) data by YCharts.

In 2012, Intel said that it spent more than $2 billion per year on chip manufacturing technology development, a figure that has no doubt risen substantially since then. So, I don't think Intel's issues necessarily stem from spending too little. 

Instead, it seems more likely that Intel's chip technology development organization isn't making the best use of the substantial resources that it is given, pointing to potential issues with the leadership of that organization. 

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