The Chip Business Is Booming. Why Isn’t Intel?

Summary

The Chip Business Is Booming. Why Isn’t Intel?

Episode Release Date: December 16, 2024

Introduction

In this episode of The Journal by The Wall Street Journal and Gimlet, Jessica Mendoza and Asa Fitch delve into the contrasting fortunes within the booming semiconductor industry, focusing on why Intel, once a titan in the chip business, has struggled while competitors like Nvidia and TSMC have flourished.

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1. The Rise and Dominance of Intel

The podcast opens with Jessica Mendoza introducing the significance of semiconductor chips, referring to Asa Fitch as "Mr. Chips" for his expertise in the subject [00:05]. Fitch elaborates on the pivotal role chips have played in the evolution of technology, from personal computers in the '80s and '90s to the smartphone revolution, cloud computing, and the advent of artificial intelligence (AI) [00:24–01:03]. This sets the stage for understanding Intel’s historical dominance in the industry.

• Notable Quote:

  "Just think about, you know, the 80s and the 90s... every time that society has advanced, the answer has been, we need some more chips for that."
  – Asa Fitch [00:33]

Intel was the backbone of the personal computing era, designing and manufacturing CPUs that powered major computer makers like Dell, IBM, and Apple [03:11–03:34]. The iconic "Intel Inside" campaign solidified its presence in the consumer market, making Intel synonymous with computing power [03:47–04:01].

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2. Industry Shifts and Competition

Despite Intel’s early success, the company began to show signs of stagnation. Asa Fitch attributes this to Intel’s "hubris" and rigidity, common pitfalls for large corporations [01:50–02:11]. As the semiconductor industry evolved, competitors like Nvidia and TSMC capitalized on emerging trends by specializing in specific aspects of chip production—design for Nvidia and manufacturing for TSMC—while Intel maintained its integrated approach of designing and manufacturing chips in-house [04:15–05:55].

• Notable Quote:

  "If you're a dominant player and you're just raking in the money, it's a little bit easier to not be serious about shaking things up."
  – Asa Fitch [04:15]

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3. Intel's Struggles and Decline

Intel’s stock plummeted over 50% in the year leading up to the episode, accompanied by massive layoffs and its removal from the Dow Jones Industrial Average, replaced by Nvidia [01:03–01:47]. The company struggled to keep pace with advancements in chip technology, particularly in packing more transistors into silicon wafers—a critical factor in chip performance [05:32–06:02]. By 2019, Intel’s challenges were evident internally, signaling the end of its "glory days" and setting the stage for a major leadership change [06:02–07:27].

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4. The Attempted Turnaround under Pat Gelsinger

In 2021, Intel appointed Pat Gelsinger as CEO in a bid to reverse its fortunes. Gelsinger, a long-time Intel insider, proposed a bold strategy to diversify Intel’s operations by initiating a contract chip-making business to compete directly with TSMC [09:00–10:05]. This plan involved significant investments, projected to exceed $100 billion, aimed at expanding Intel’s manufacturing capabilities and attracting external clients [10:33–11:10].

• Notable Quote:

  "Pat Gelsinger is Intel's man with a plan. That's next."
  – Jessica Mendoza [07:51]

However, Intel faced substantial challenges in executing this strategy. The rigid corporate culture hindered the customer-centric approach required for a successful contract manufacturing business, and the company struggled to secure major clients like Apple and Nvidia [12:25–12:59].

• Notable Quote:

  "Contract chip making is really a customer service business. For intel, they hadn't really been like that."
  – Asa Fitch [12:36]

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5. The AI Boom and Its Impact on Intel

The emergence of generative AI, exemplified by ChatGPT, significantly increased demand for GPUs—Nvidia’s specialty [13:11–14:21]. While Nvidia capitalized on this surge, Intel's focus on CPUs left it vulnerable as AI-driven applications required the high-performance GPUs that Intel was not prioritizing [13:39–14:21]. This shift compounded Intel’s financial woes, as the company struggled to attract investment for its ambitious turnaround plan [14:21–14:56].

• Notable Quote:

  "When the AI boom really took hold, everything was going to AI chips and significantly less amount of money was going to Intel's chips."
  – Asa Fitch [13:39]

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6. Gelsinger's Departure and Intel's Future

Facing mounting financial pressures, Intel resorted to drastic cost-cutting measures, including layoffs and suspending dividends [14:56–15:48]. Despite these efforts, Intel’s stock plummeted by 60%, sales dropped, and it reported its largest quarterly loss in history [15:11–15:48]. In a surprising turn, Pat Gelsinger was ousted as CEO, effectively marking the end of his turnaround attempt [15:48–16:02].

• Notable Quote:

  "Pat said at the time it was a bet the company move."
  – Asa Fitch [11:37]

In response to Gelsinger’s departure, Intel maintained its commitment to the contract chip-making strategy under new leadership, indicating that the company may continue to pursue the path he charted [16:45–17:34].

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7. Lessons and Cautionary Tales

Asa Fitch reflects on Intel's journey, suggesting that the company's difficulties may serve as a cautionary tale for other large, storied American corporations. The challenges Intel faced highlight the importance of agility and adaptability in rapidly evolving industries [17:34–18:36]. Fitch posits that Intel's inability to pivot swiftly could have doomed its turnaround efforts, underscoring the broader lesson that even established leaders must continuously innovate and adapt to sustain their dominance.

• Notable Quote:

  "What intel has needed in the past years has been agility."
  – Asa Fitch [18:36]

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Conclusion

The episode of The Journal intricately examines the rise and fall of Intel within the vibrant semiconductor industry. Through detailed analysis and expert insights, Mendoza and Fitch paint a compelling picture of how industry shifts, strategic missteps, and external technological advancements can profoundly impact even the most established companies. Intel’s story serves as a powerful reminder of the necessity for continuous innovation and adaptability in the face of evolving market dynamics.

Transcript

[Jessica Mendoza]

My colleague, Asa Fitch covers a product that's often invisible to the naked eye but critical to almost everything we do. You should know that some of us on the team kind of refer to you a little bit as Mr. Chips. We know that when there's a chip story, we know who to call.

[Asa Fitch]

I'll take it. That's a good nickname. I like it.

[Jessica Mendoza]

Chips, those tiny, intricate slices of silicon. Asa calls them the engines of modern life. Life.

[Asa Fitch]

Just think about, you know, the 80s and the 90s. There were PCs and they had chips, and then there was the smartphone revolution. And then everybody's carrying smartphone with chips in the smartphone. And you had cloud computing, you know, these massive data centers, and they had chips. And of course, now you have AI, and AI sort of runs on chips. So every time that society has advanced, the answer has been, we need some more chips for that.

[Jessica Mendoza]

That's been a boon for the companies that make chips, companies like TSMC or Taiwan Semiconductor Manufacturing Co. And Samsung. The chip maker Nvidia is currently one of the most valuable companies in the world, worth over $3 trillion. But there's one company that's conspicuously missing from that list of the storied American chipmaker Intel. Intel stock has fallen over 50% this year. It's laid off thousands of employees. And last month, it was bumped from the Dow Jones Industrial Average and replaced by Nvidia. Intel's been in the Dow for 25 years.

[Asa Fitch]

What a knock for Intel.

[Jessica Mendoza]

Why is intel struggling so much?

[Asa Fitch]

It's a long story. You could argue it's a tale of hubris, of excessive confidence. It's a tale of rigidity and a lack of flexibility that often large corporations have to contend with.

[Jessica Mendoza]

Welcome to the Journal. Our show about money, business and power. I'm Jessica Mendoza. It's Monday, December 16th. Coming up on the show, how intel lost its edge.

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[Jessica Mendoza]

From the 1980s through the early 2000s, intel was everywhere.

[Asa Fitch]

The company became this dominant force with the rise of the personal computer. Everybody needed a computer in their house. Eventually, laptops came along as well. Most of them, almost all of them, had intel chips inside of Them.

[Jessica Mendoza]

Intel both designed and manufactured its chips called CPUs, and it sold them to computer makers like Dell, IBM, and Apple. Pretty much every major computer maker in that era used intel chips.

[Asa Fitch]

There was that famous marketing campaign, of course, intel inside.

[Jessica Mendoza]

It's like the sticker on the bottom corner of your laptop or your computer or something would say, yeah, intel inside in blue.

[Asa Fitch]

Right? Exactly. And it was a bonanza for a long time.

[Jessica Mendoza]

And then, perhaps because of that success, Asus says Intel started to slip.

[Asa Fitch]

If you're a dominant player and you're just raking in the money, it's a little bit easier to not be serious about shaking things up. And it goes to the sort of the quote unquote, innovator's dilemma, essentially, where a company becomes a powerful player in one area and then struggles to dominate or make a name for itself in another area.

[Jessica Mendoza]

One important area that intel missed out on was the mobile phone boom in the 2000 and tens. Phones, of course, also need chips. But by the time intel started making chips for phones in a serious way, other companies already dominated. And mobile wasn't the only trend that passed. Intel buy. Asus says it also missed out on a pretty big shift in how chips are made. Remember, intel had always designed and manufactured its own chips, but increasingly, companies specialized. Some companies just designed chips. Nvidia is one of these. Other companies just manufactured chips, like the Taiwanese company tsmc. So, for example, Nvidia designed chips and then hired TSMC to make them.

[Asa Fitch]

And TSMC had become extremely successful in this. In this world, was building a growing business around it. Intel, of course, saw that happening. But intel decided to stick to its guns and not to kind of bifurcate itself in the same way the industry is going. They said, essentially, no, we don't want to do that.

[Jessica Mendoza]

Instead of specializing, intel dug in and slipped further behind.

[Asa Fitch]

You know, the company tries to make the most advanced chips in the world. What that means is when you have a chip, it's a piece of silicon. And upon that silicon, they etch billions upon billions of transistors. And so you might ask, okay, well, what makes one chip better than another? The answer is basically, you're able to pack more transistors in that small space. That's very important in the chip world. It's like the most important thing. Yeah, if you can have a lot of transistors, it means you can do a lot of stuff. I mean, you can produce the best AI chips in the world. You can produce the fastest calculating CPUs in the world. Your computer that you're on now can run faster, a lot faster, if it has more transistors. It's like having a bigger brain. So intel kind of lost its way in that, in that race and just started to fall behind these contract chip makers like TSMC in making the most advanced chips. By 2019, things were not going well for the company. That was very clear. There was a sense within the company that intel had already sort of lost its glory. Its glory days were over, and the mission was to kind of bring it back. And that's the context into which Pat Gelsinger arrives.

[Jessica Mendoza]

Pat Gelsinger, Intel's man with a plan. That's next.

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[Jessica Mendoza]

Who is Pat Gelsinger?

[Asa Fitch]

So Pat Gelsinger is Intel's first chief Technology officer, first cto. He's a guy who's sort of born and bred Intel.

[Jessica Mendoza]

Pat Gelsinger grew up in rural Pennsylvania. He was a farm boy with an associate's degree from a local technical college. But as Gelsinger explained in an oral history, at age 18, his life changed. Intel came recruiting and invited him out to company headquarters for an interview.

[Asa Fitch]

So, you know, here I am, 18 years old, I've never been on an airplane, and I'm being given a free trip to California.

[Jessica Mendoza]

According to one intel interviewer, Gelsinger was.

[Asa Fitch]

Quote, smart, aggressive, arrogant. He'll fit right in.

[Jessica Mendoza]

Gelsinger would spend the next three decades of his career at Intel.

[Asa Fitch]

You know, when you talk about intel inside that marketing campaign in the 90s, those chips that were going, those computers were in large part you know, thanks to Pat Gelsinger. You know, he did a lot in helping design Those things.

[Jessica Mendoza]

Gelsinger eventually left the company, but in 2021, intel convinced him to come back as CEO to help turn things around. Gelsinger's plan to do that was bold and risky. Intel would keep designing and making its chips like it always had, but it would also start manufacturing chips for outside customers. It would directly take on chip manufacturers like tsmc.

[Asa Fitch]

They were going to go full steam ahead, create this contract chip making business within intel and use that to fill up its factories and do more manufacturing basically and make more money. And as part of that, intel was going to expand its factory footprint, just build more factories.

[Jessica Mendoza]

Those factories don't come cheap, by the way. Gelsinger's plan was projected to cost over $100 billion in coming years. Even with outside investment and government money from the Chips act, it would be a hefty bill.

[Asa Fitch]

The problem in the chip industry is that you have to make decisions today about what you're going to need several years from now, even five, ten years from now. Gelsinger had to essentially predict many years in advance what the demand might be for these chips and build those factories accordingly.

[Jessica Mendoza]

Yeah, you're betting, you're betting.

[Asa Fitch]

It's fundamentally a bet.

[Jessica Mendoza]

So for intel, given where it was at that time, was it kind of a make or break bet?

[Asa Fitch]

It was, I mean, it was absolutely in. Pat said at the time it was a bet the company move.

[Jessica Mendoza]

And how did that bet go?

[Asa Fitch]

You know, intel tried to attract customers for its contract chip banking business and it had trouble. I mean, the big, the big customers for the contract chip making business are Apple, Nvidia, of course, you know, Qualcomm, there's, there's some others. But intel had this internal goal that they were going to be the second largest contract chip maker in the world by 2030. And, you know, it's almost 2025. And the, the amount of major customers that intel was getting in the door was just, you know, it wasn't huge.

[Jessica Mendoza]

Chip designers were hesitant to jump manufacturers, especially since intel didn't have a history as a contract chip maker. And intel also had a culture issue.

[Asa Fitch]

Contract chip making is really a customer service business. You know, if your customer wants something, you bend over backwards to make it happen for them.

[Jessica Mendoza]

Right?

[Asa Fitch]

For intel, they hadn't really been like that. I mean, their customer had been just Intel. They didn't really have that experience. Like dealing with those kinds of customers meant that it was just a little bit more difficult to get that business started.

[Jessica Mendoza]

All of this would have been challenging enough even if the chip industry had stayed relatively stable. But just a year into Gelsinger's massive turnaround effort, one viral product changed everything.

[Asa Fitch]

Basically, it's ChatGPT. ChatGPT came along, and that leads to a flurry of interest and investment in generative AI and people developing these big AI models. And that in turn leads to huge investments in chips that are needed to build these kinds of models. And those chips are made almost entirely by Nvidia.

[Jessica Mendoza]

Intel made its name with CPUs, but Nvidia has always specialized in designing a different kind of chip called a GPU. It stands for Graphics Processing Unit. GPUs were originally designed to handle the complex graphics in video games. But over the past decade or so, AI researchers discovered another use for them as the brains of AI. If you want to train or run an AI model, you need a lot of GPUs. And Nvidia had a huge head start on everyone, including Intel. After ChatGPT came out, demand for Nvidia's chips exploded and it's kept up ever since.

[Asa Fitch]

So that was a huge, huge challenge for Intel. When the AI boom really took hold, everything was going to AI chips and significantly less amount of money was going to Intel's chips. So there was just dramatic shift that really hurt intel financially at a time when the company really just needed money to build these huge factories that cost billions upon billions of dollars and execute this turnaround plan that Pat had concocted. So it really could not have come at a worse time for Intel.

[Jessica Mendoza]

Intel was burning through cash to get its chip making business off the ground. And with the AI boom cutting into its sales, it was cash the company increasingly didn't have. So Gelsinger and his team economized. Intel laid off thousands of staff and suspended its dividend. It cut billions of dollars in costs. But the fundamental picture didn't change Since Gelsinger took the helm. Intel's Stock has lost 60% of its value, its sales have plummeted, and in October, the company posted the biggest quarterly loss in its history. Then last week, intel just moments ago announcing that CEO Pat Gelsinger retired effective yesterday. Pat Gelsinger is retiring from the Santa Clara company. He stepped down from the board of directors effective immediately. According to someone familiar with what happened.

[Asa Fitch]

It was, it was retirement, but the circumstances were that the board gave him the option to retire or be removed. And, and he chose to retire.

[Jessica Mendoza]

And what was the reaction in your world to that news?

[Asa Fitch]

You know, many people were surprised by Gelsinger being ousted because, you know, this is a very ambitious turnaround plan. The company had already invested a lot of resources in making the turnaround work. Intel has been on successive rounds of cuts, cost cutting for the past couple of years at this point. They've done layoffs, they've cut costs wherever they can, and all of that has been in service of making this plan work. And so there's a lot of surprise actually that at this juncture Gelsinger would be ousted. But I think the board just sort of lost confidence in Pat and the plan and the way that the speed at which it was going and the results from it.

[Jessica Mendoza]

In a statement, Gelsinger said that leading intel has been, quote, the honor of my lifetime. He called his departure bittersweet. An intel spokesman said the changes the company had made over the past few years had revitalized its chip technology and laid the groundwork for the company's future. ASA says that intel may ultimately stick with Gelsinger's turnaround strategy. Just under a new chief executive. Last week, the company's interim CEOs said Intel is still highly invested in building out a contract chip making business. Looking at sort of Intel's journey here, when we think about other sort of storied American companies that might be watching, what would you say is the cautionary tale here?

[Asa Fitch]

It's hard to know how this period of the company's history will come to be seen, but it may be that it's seen as, you know, no CEO could have turned around intel, but if somebody could have, it would have been Pat Gelsinger and this would have been the plan. It just didn't work out. And, you know, maybe the history shows that in the final analysis that if intel were to be set or right again, it would have had to have happened a long time before Pat Gelsinger took over as CEO. When you get that big, it's harder to, you know, as Lou Gerstner wrote in his book about IBM, make elephants dance, if you will. You know, make large companies do agile things is hard. And what intel has needed in the past years has been agility.

[Jessica Mendoza]

That's all for today. Monday, December 16 the Journal is a co production of Spotify and the Wall Street Journal. Additional reporting in this episode by Ben Cohen. Thanks for listening. See you tomorrow.