Outsourcing Intel chip manufacturing: a sign of difficulties or the solution?


On Thursday night a CEO dumped Intel Bob Swan Bombshell: The company does not rule out the production of outsourced chips. In other words, Intel is considering giving up one of its biggest advantages, the fact that it manufactures the chips for itself. This is true even today, but at a relatively marginal rather than the most innovative technologies. Therefore, if such a decision is made – and it is not at all certain that it will happen – it will be an admission of Intel’s failure. A confession that she is no longer able to be at the forefront of technology.

The reason Swan is required for the outsourcing question is an announcement issued by Intel in parallel with the financial statements, about a 12-month delay in production with advanced technology of 7 nm. Intel’s financial statements were good – people moving to work and study remotely and making organizations more digital, increased cloud usage, and accordingly Intel’s revenue from server farm operations. Despite this, Intel shares plunged 16%.

Intel CEO Bob Swan said that “in a perfect world, our priorities were focused on leading products manufactured through our procedures so that we could enjoy the benefits of being a manufacturing plant, however our focus is on leading products. Therefore, as far as the need to test another party’s production technology is concerned, and we treat it as a contingency plan, we will be prepared to do so. ”

1. Is this statement surprising?

It’s hard to say that anyone in the high-tech industry was surprised by Intel’s announcement of the delay in production, in part because this is not the first time this has happened to it. The fact that Intel has missed the mobile market and is lagging behind Anvidia in the field of artificial intelligence has caused many people to eulogize it. These are talking about Intel as a declining company. Others think it’s too early to eulogize it, that Intel has reinvented itself over and over again, and that it is not unlikely that it will succeed in doing so once again. The CEO seems to understand this and is trying to change the DNA in the company, but the announcement from Thursday provides further confirmation of the depth of the problem the company is in.

However, the connection between the design of the chips and their production is a significant part of Intel’s DNA, and many find it hard to believe that this is indeed the company’s intention. Although Swan said in response to an analyst’s question, CEOs are very thoughtful in such conversations and hard to believe. And not in something that was pre-planned.

2. How will this affect the structure of the company?

The chip industry consists of companies that manufacture for themselves and companies that do not own their own factories (Fabless), but design the chips and manufacture them at companies whose job it is. The largest manufacturer in the world for other companies, is the Taiwanese TSMC. One of the advantages of Intel is that it manufactures most of the chips itself. This allows it to be flexible, determine how much it produces and when, without being dependent on another company, with its own priorities and interests. In principle, a company that manages to fill its own plants – and Intel manages to do so – is more profitable to produce on its own, because it allows it to control another step in the supply chain and thus be more profitable.

Until about a decade ago, Intel outperformed its competitors by at least one technology generation, but TSMC closed the gap, and today Intel also invests billions of dollars in building factories and developing advanced technologies, and also stays behind its competitors. Alternatively, it can be produced at TSMC, for example, using 7-nanometer technology. Especially if it fails to overtake the market. Swan added in the conversation that “the economic consequences of such an event, in which we move to another entity of our magnitude, relate to the question of how to match the average selling price to costs, and continue to provide leading products at an attractive average selling price while reducing the amount of capital we have to invest to upgrade An existing plant for new technology. ”

Another problem is that there are not enough factories in the global chip industry to accommodate Intel’s chip production. That’s why the American chip giant may sell its factories to other chipmakers. A third option, which needs to test its feasibility, is to develop another model in which Intel invests billions of dollars in building factories, in which the technology of TSMC or another company will be assimilated.

3. What will be the impact on Israel?

Intel currently produces chips in Israel with 10 nanometer technology (not only), and Intel’s CEO stated at the conference call that the company plans to increase their production volume. However, the question mark is regarding the new plant that Intel is currently building with an investment of NIS 40 billion and expected Employs about 1,000 people.It is estimated that the plant was supposed to include production at 7 nm, but the company never approved it.According to a source at Intel, the company continues to be committed to the investment program.Is it possible to trust it?

Intel has invested $ 22 billion in Israel over the years, and is the largest employer in Israeli high-tech. Every few years the company establishes a new factory, and Israel is always among the final candidates for the establishment of the innovative factory. Of course, this also costs Israel high and controversial grants, of which only the last grant amounted to NIS 4 billion.

The problem with Intel’s latest statement is not necessarily one factory or another, but what will happen to the company in the long run. Intel will not outsource production in existing plants, but only the new plants, from now on. This too as stated is in a big question mark. That is, even if Intel does not set up new plants in Israel and other countries, it will take time for the local high-tech industry to be significantly affected. Even in this case, there will still be a large development center in Israel. Is there anything to stress about what will happen in ten years? Not really. Not that the scenarios are necessarily positive, but that it is difficult to predict what the chip industry will look like in a decade, and that Intel’s position in the industry was questioned even before the last statement.

Intel states that “the company is committed to Israel, and continues to invest in it. Israel is one of Intel’s global manufacturing and development centers, with activities such as the manufacturing plant in Kiryat Gat, research and development centers in computing, communications and AI throughout Israel, and Mobilai’s management headquarters in Jerusalem. Intel Continues to invest in these activities. ”

4. Will the US agree to accept the loss of hegemony?

If Intel decides not to produce chips, it will have an impact on the balance of power in the entire chip industry. Nonetheless, it undermines American hegemony in an important technological field, something the US does not like at all. TSMC, the world’s largest chipmaker for other companies, is a Chinese-controlled company from Taiwan. However, the US would like to preserve The knowledge in the country, and she does not want American giants to develop dependence on companies that have interests in other countries, especially not in Asia.

That’s why the United States has been making efforts in recent months to encourage TSMC to set up factories in the United States, according to reports in the Wall Street Journal. It is not inconceivable that the US administration will put pressure on Intel to keep production inside the company, but even if Intel does decide to move it out, the administration may intervene and make efforts to keep production in factories within the country, as well as set further restrictions to prevent technological leakage.

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