Intel (INTC) is facing strong competition from Advanced Micro Devices (AMD), as the latter has overtaken the former in the process technology node space. The two are close to a price war. Despite the competition, both are seeing strong PC demand as businesses replace their old computers with Windows 10 computers. In the last few months, Intel has increased its 14 nm (nanometer) manufacturing capacity, which started to ease its year-long CPU supply shortage. Its notebook platform volumes rose 15% sequentially in the second quarter.
As we enter the holiday season, the demand for PCs is growing. DigiTimes reported that rising PC demand is creating a CPU supply shortage even after Intel expanded its 14 nm capacity. Let’s see how this supply shortage will impact Intel and the PC supply chain.
Prioritization impacts lower-end CPUs
An Intel spokesperson, in response to AnandTech, said, “We continue to prioritize available output toward the newest generation Intel Core i5, i7 and i9 products that support our customers’ high-growth segments.” As per this statement, Intel will give priority to its latest tenth-generation CPUs. Its tenth-generation products comprise its 14 nm Comet Lake and 10 nm Ice Lake Core notebook processors.
PCGamesN noted that within the tenth-generation CPUs, 10 nm Ice Lake CPUs will not be affected by the shortage. Speaking of prioritization of 14 nm products, Intel will give first preference to high-margin CPUs. This means mid- and low-end i3 and i5 CPUs might face a shortage. The manufacturing of embedded chips might also take a back seat.
Even within high-end CPUs, Intel will give preference to server and notebook processors and then desktop processors. It gave a similar preference in last year’s fourth quarter, when its desktop platform volumes fell 7% sequentially and 8% YoY (year-over-year). Its notebook and server platform volumes rose 1% and 9%, respectively, YoY but fell 10% and 3% sequentially.
Intel’s server and desktop CPU volumes have been falling sequentially since the fourth quarter of 2018 as the company has transitioned to 10 nm node. This transition required it to idle some of its manufacturing capacity, which reduced supply at a time when PC demand was picking up. However, the company completed the 10 nm transition and expanded 14 nm capacity this year. This fourth quarter, we might see smaller declines in volumes.
Impact on Intel’s earnings
The fourth quarter is seasonally strong for Intel. In the period, its revenue usually grows in the mid-single digits. However, things were different last year as a CPU supply shortage limited its growth potential. In the fourth quarter of 2018, Intel’s overall revenue fell 3% sequentially, with its IoT (Internet-of-Things) revenue down 11%. This is because of the supply shortage of low-margin embedded chips. Its Client Compute revenue fell 4.2% sequentially as volume declines more than offset its average selling price growth.
This year’s fourth quarter might be slightly better than last year’s, but its IoT revenue will take a hit because of its CPU supply shortage. Intel increased its full-year revenue guidance in the second quarter from $69 billion to $69.5 billion.
Intel’s CPU supply shortage to impact PC supply chain
Intel commands more than an 80% share in the PC CPU market. Hence, a supply shortage at Intel impacts PC OEMs (original equipment manufacturer) and other PC component suppliers. In the fourth quarter of 2018, global PC shipments fell 4.3% YoY because of Intel’s CPU supply shortage, according to Gartner. Many PC OEMs delayed the launch of new models.
Micron’s revenue fell 6% sequentially in the November 2018 quarter partly because of Intel’s CPU supply shortage. This year could see a similar result, but the intensity of the impact will be lower than last year. Yesterday, Micron reported its fiscal 2019 fourth-quarter earnings results for the period that ended on August 29. It reported a 2% sequential rise in revenue. Memory demand in the PC market improved as the CPU supply shortage eased slightly.