Semiconductor-giant Intel (INTC +2.61%) is headed in a new direction. Making its in-house manufacturing processes available to other chip designers is no longer a side gig for the company but a core strategy. Intel's foundry service will soon be a separate business segment for reporting purposes, and the bulk of its early revenue will come from producing the company's own processors.
What's happening
Speaking at an online investor presentation about Intel's internal foundry model on Wednesday morning, CFO David Zinsner outlined several changes to this business unit's future operations.
- The manufacturing group will be a reporting segment, starting in the first quarter of 2024.
- From front-end silicon wafer manufacturing to back-end chip packaging and testing, Intel will report its chip-building costs in a single unit and its services will be available to rivals and partners for a fee.
- This way, Intel's product development teams should see a more transparent and predictable budgeting process, and the split between design and manufacturing also opens up a promising new revenue stream.
The revamped organization should also help Intel avoid the classic mistake of adding new features or redesigning important chip sections at a late stage in the product-development process. These potentially risky and costly requests may have been easy to make in the past but will come with concrete costs in the new system.
"For example, the financial impact for decisions around capacity allocation shifts to manufacturing, while the impact of design attributes and extra step-in or late demand changes will directly impact the business units making those decisions," Zinsner said.
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Key Data Points
What Intel is aiming for
Intel expects the separate foundry model to lower the company's cost of revenue and boost the ongoing cost-cutting program. In the long run, the company is aiming for a sustainable gross margin of roughly 60% and operating margin near 40%. Last year's gross and operating margin stopped at 43% and 3.7%, respectively.
The immediate availability of guaranteed orders from Intel's own semiconductor development teams will start the new unit off as the second-largest chip foundry in the world behind longtime sector leader Taiwan Semiconductor Manufacturing and ahead of Samsung's chipmaking services.
Meanwhile, the arms-length separation between manufacturing and design should motivate the foundry to pursue a market-leading level of technical excellence akin to the process leadership Intel kept entirely to itself for decades. Otherwise, winning orders from outside chip designers becomes a challenge, and even Intel's own processor designers could look for better manufacturing services elsewhere.
Does this new strategy stand a chance of long-term success?
The strategic changes have solid long-term business benefits, but the company has to execute this shift with precision -- and the process starts in a challenging economic climate. The idea is sound in theory, but the real-world outcome could be different.
Intel's investors didn't seem overly impressed, as the stock price fell 6% on the news. Many are worried about the operating risks involved in any major redesign of a massive organization, and others aren't convinced that Intel's third-party foundry service will find any customers. The company didn't announce any new chipmaking deals in this webinar, and Intel's manufacturing upgrades have gone through some painful delays in recent years.
The success of this ambitious course change will heavily rely on Intel's ability to secure new clients for its foundry service. This, in turn, relies on demonstrating a return to sector-leading manufacturing technologies.
