Intel’s spending on new technology
In the previous part of the series, we saw that Intel (INTC) had been on the top of process technology in the past. However, the slowing pace of Moore’s law for Intel has given competitors time to close the technology gap. Intel also develops microprocessors. Both these developments are expensive. In a year, the company spends around $20 billion on new technology, which includes $10 billion–$12 billion on R&D (research and development) and $9 billion–$10 billion on building advanced fabrication facilities (or fabs).
What does Intel prefer: fab or fabless?
A factory has its own overhead costs, so it’s highly beneficial for a company when its factories operate at an optimal level. Idle capacity adds on to the cost without delivering any returns. As factory overheads are very high in semiconductor fabs, many companies such as Qualcomm (QCOM) and Advanced Micro Devices (AMD) became fabless and outsourced manufacturing to third-party foundries like Taiwan-based (EWT) TSMC (TSM).
However, Intel still manufactures its chips in its own fabs and also rents these fabs to other semiconductor companies to manufacture its chips. This helps Intel cover its overhead costs. Owning a fab enables Intel to control the end-to-end process of building semiconductors from design, manufacturing, assembly, testing, and packaging. However, it uses third-party foundries to manufacture communications and connectivity products such as its Atom x3 processor for mobile phones.
While fabs bring their own benefits, there are several risks associated with them. Intel incurs the huge cost of building the fabs. As the company has a global presence, the company is also exposed to global economic, legal, and political scenarios. Amid the current volatile times, Intel is looking to close some of its manufacturing operations, which may result in massive layoffs and a huge restructuring bill.
We saw previously that Intel has a large capital requirement to build and maintain its fabs. R&D is also a crucial part of Intel’s business, as its future depends on replacement cycles, or replacing older technology with new technology.
If the company fails to release new products on time, it may fall behind competitors and lose its market share. While ensuring the timely release of new products, Intel also has to ensure better performance than competitors. The company faced a similar risk with its SoFIA chipsets designed for mobile phones. We’ll discuss this at length in a later part of the series.
The company has adopted various strategies to diversify its capital needs and continue to grow without giving up on R&D. We’ll look at these strategies in the next part of the series.