Intel Looks to Pull Itself Out of Economic Hole

Intel forecasting economic uncertainty but still investing heavily in new chip manufacturing processes.

Intel is facing the same economic headwind that is buffeting most IT vendors. The chip maker's fourth-quarter revenue and profits fell 23% and a whopping 90%, respectively. And last month, Intel said it planned to close four manufacturing facilities and cut as many as 6,000 jobs .

Things aren't likely to get better anytime soon. Intel hasn't disclosed revenue projections for the current quarter, citing "economic uncertainty and limited visibility." Meanwhile, market research firm IDC last week forecast that shipments of microprocessors will decline by about 15% this year.

But the economic woes aren't stopping Intel from moving forward with a plan to spend $7 billion to refurbish three U.S. plants so they can produce chips using a new 32-nanometer manufacturing process. The planned investment, due to be made over the next two years, was detailed by Intel CEO Paul Otellini during a speech in Washington last Tuesday.

Later that day, Intel officials said at a press conference in San Francisco that the company will accelerate the shipment of the first chips with 32nm circuitry.

A pair of dual-core laptop and desktop processors built under the new manufacturing process are now scheduled to be released to PC makers in the fourth quarter. Those chips, code-named Westmere, will take the place of processors that were slated to be based on Intel's existing 45nm technology.

Jack Gold, an analyst at J.Gold Associates LLC, said the 32nm chips could give users a reason to upgrade their PCs, even if the economy is still in recession when the processors become available in systems.

Gold noted that for what will likely be about the same overall cost, users should get a substantial performance boost from the new chip technology, which Intel claims will result in faster, smaller and more energy-efficient processors.

There are other good reasons for Intel to push ahead with its plan to build up the 32nm manufacturing capabilities despite current economic conditions and the steep price tag.

Forrester Research Inc. analyst Frank Gillett said Intel's road map for making the move to 32nm circuitry was set long ago. Not moving ahead with the plan could blunt the company's hard-earned technology edge over rival Advanced Micro Devices and expose Intel to competitive risks, Gillett said.

In addition, business spending on technology might be rebounding by the time the new chips appear in systems. "It would be hard to argue that [Intel] shouldn't be making this investment," Gillett said.

Shane Rau, an analyst at IDC, agreed that the shift to 32nm technology should help stimulate demand for Intel's chips, potentially enabling the company to increase its market-share lead over AMD and other rivals.

Considering that IDC is predicting a decline in worldwide microprocessor shipments this year, gaining market share could be even more important to Intel from a business standpoint than it normally would be.

IDC said the drop-off began in the fourth quarter of 2008, with shipments falling 11.4% year over year and 17% from the third-quarter level. "After hinting at a decline last September, the market fell off a cliff in October and November," Rau said.

The plants that Intel will revamp for 32nm production are located in Oregon, Arizona and New Mexico. The company theoretically could have moved manufacturing of the new chips to a lower-wage country, and Otellini said foreign nations offered Intel hundreds of millions of dollars in financial incentives to do so.

But chip plants "are not driven by labor costs," Otellini said, adding that taking advantage of the existing U.S. facilities and their workforces will enable Intel to ramp up production of the chips more quickly.

"One of Intel's tremendous strengths is process control" in manufacturing, said Gartner Inc. analyst Leslie Fiering. And, she added, transferring those quality-assurance capabilities overseas would cost the company huge amounts of time and money.

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