This is a story of being entrusted with a mission in times of crisis, but having ambitious goals that are difficult to achieve.
On December 2nd local time, semiconductor giant Intel announced the retirement of its CEO Pat Kissinger and his resignation from the board of directors, effective from December 1st. The company is looking for a new CEO to replace Kissinger. During the transition period, Executive Vice President and CFO David Zinsner and Product Owner Michelle Johnston Holthaus will serve as interim co CEOs.
Last month, in response to the news of Intel's possible acquisition, 63 year old Kissinger also stated that he is still full of "energy and enthusiasm" and has the support of the board of directors, hoping to maintain the integrity of the company. However, according to multiple media outlets citing informed sources, the conflict between the two sides reached its peak at last week's board meeting.
The board of directors believes that Kissinger failed to lead Intel to reverse its backwardness in the chip market and has given the option of voluntary retirement or dismissal. Obviously, Kissinger chose to leave voluntarily. He showed no interest in the board's request to stay and assist his successor, which prompted the board to decide to end his term over the weekend.
Today is certainly a mixed bag for me, as Intel has almost been a part of my career, "Kissinger said in a company announcement." For all of us, this has been a challenging year as we have made difficult but necessary decisions to adapt Intel to the current market dynamics
The Return and Departure of a Veteran
Veteran Kissinger's career experience at Intel spans over 30 years. In 1979, 18-year-old Kissinger joined Intel as a quality control technician after graduating from technical school. Afterwards, he rose all the way to become the youngest Senior Vice President and the first Chief Technology Officer in Intel's history, leading the design of multiple important microprocessors such as the 80486, consolidating Intel's leadership position in the field of personal computer chips.
In 2009, Kissinger chose to leave Intel and worked for storage device manufacturer EMC and cloud computing company VMware. Under his leadership, VMware successfully completed its transformation and achieved nearly triple growth in annual revenue within eight years. However, during this period, the situation of its former employer Intel was not ideal, as multiple strong businesses faced fierce competition from rivals such as Apple, Qualcomm, Nvidia, AMD, and began to lose their original technological advantages.
So, when Kissinger, who had a background in technology, announced his return to Intel as CEO in 2021, the market had high expectations for how he would rebuild the path of revival. Boosted by the news of his appointment, the stock price rose by over 7% on that day.
However, nearly four years later, Kissinger had to face the bleak reality of the present. Since the beginning of this year, Intel's stock price has fallen nearly 50%, with its market value shrinking to $103.2 billion, and it was even removed from the Dow Jones Index in November. In sharp contrast, old rivals such as Nvidia and AMD have all taken advantage of the wave of generative AI. Nvidia's market value has risen to $3.36 trillion, more than thirty times that of Intel, and its stock price has risen by 188% this year. Under the leadership of CEO Su Zifeng, AMD, known as the "second in ten thousand years," has seen its market value soar to twice that of Intel, showing a trend of catching up with Nvidia.
The dissatisfaction of Intel investors and the board of directors towards Kissinger is not unfounded. In August of this year, Chen Liwu, a senior figure in the semiconductor industry, chose to resign from his position on the Intel board of directors. Reuters reported that its disagreement with Kissinger was one of the reasons, and Chen Liwu was disappointed with Intel's redundancy issues, risk avoidance culture, and outdated AI strategy.
After the announcement of Kissinger's retirement, the market first showed a positive reaction. On December 2nd local time, Intel's stock price rose by 6% at one point, but then fell slightly, closing down 0.5% at $23.93 per share.
Returning to the pinnacle of the 'OEM dream'
Compared to other chip manufacturers, Intel's uniqueness lies in its OEM business. It not only engages in chip design, but also has manufacturing capabilities, and is not completely outsourced to wafer foundries such as TSMC and Samsung. But in the past few years, Intel's relatively backward manufacturing business has further exacerbated its decline.
Faced with the market's call for Intel to reduce its manufacturing business and focus on chip design, Kissinger, who was in charge of the company for the first time, quickly made a decision: to persist in developing its manufacturing business and regain the leadership position taken away by competitors such as TSMC.
In March 2021, Kissinger officially announced Intel's "IDM2.0" strategy. He ambitiously proposed a series of measures, including investing $20 billion to build two new wafer fabs in Arizona, USA, and establishing a separate Intel foundry services division, aiming to create world-class Intel foundry services and become the main supplier of foundry capacity in Europe and America. According to Kissinger's five-year roadmap, Intel will return to its peak by 2025 with advanced technologies such as the 18A.
But Kissinger's beautiful vision was quickly hit hard by internal and external troubles. After the epidemic, the market demand for PCs began to decline, leading to an oversupply of chips and a sharp drop in Intel's PC chip revenue. In terms of data centers and AI business, companies such as NVIDIA and AMD continue to seize market share, and even giant clients like Google and Amazon are actively developing self-developed chips.
As for the 18A (1.8nm) process node that Intel has high hopes for, the prospects are still unclear. Since September, some media have reported that Intel's most advanced manufacturing processes such as 18A and 16A are far behind TSMC. Some customers have found after testing that 30% of TSMC's cutting-edge 2-nanometer chips are defect free, while less than 10% of Intel's 18A chips are defect free. The testing conclusion drawn by semiconductor giant Broadcom is that the 18A manufacturing process is not yet suitable for mass production.
Investment bank Goldman Sachs analyst Toshiya Hari bluntly stated that while TSMC continues to provide good service to customers, customers have little incentive to bet on Intel's manufacturing processes. If you care about performance today, tomorrow, next year, or the next few years, you won't bet on Intel
Intel's decline is directly reflected in its consecutive poor financial reports. In the third quarter financial report released in October, Intel's revenue for the quarter decreased by 6% year-on-year to $13.3 billion, with a loss of $16.6 billion, setting a new historical high. The revenue from OEM business was 4.35 billion US dollars, a year-on-year decrease of 8%, still dominated by internal customers.
In the previous two quarters, Kissinger announced a series of cost reduction and restructuring plans. Including the layoff of 15000 employees by the end of the year, accounting for 15% of the total number of employees, it is the largest single layoff in Intel's history. Intel plans to suspend dividends in the fourth quarter, marking the first time in 32 years that dividends have been suspended. To reduce expenses, Intel has also postponed plans to build factories in Germany.
Where does Intel go from here?
Since taking office as CEO of Intel, Kissinger has always shown a resolute fighting spirit in promoting the OEM business. But after the dismal performance in the second quarter sparked widespread negative public opinion, Kissinger finally relented in an internal letter to employees, stating that he would spin off the chip foundry business Intel Foundry and establish it as an independent subsidiary internally. In the future, the foundry business and Intel product financial reports will also be separated. The sudden retirement of Kissinger has added more uncertainty to the crisis ridden OEM business.
Bloomberg Intelligence analysts pointed out in their analysis report that leadership changes have increased the possibility of Intel divesting its business. Kissinger strongly opposes splitting the company, but the lengthy and costly transformation process has tested the patience of shareholders and may force Intel to reconsider.
But if Intel intends to completely split its chip manufacturing business, it may be constrained by the US government. The high subsidies from the government were a crucial part of Kissinger's plan to revive Intel. At the end of November, the US Department of Commerce announced that it would provide $7.86 billion in direct funding to Intel through the Chip and Science Act to advance Intel's semiconductor manufacturing projects in multiple locations across the United States, including Arizona and New Mexico. Although this amount is lower than the previously discussed $8.5 billion, officials emphasized that it has nothing to do with Intel's difficulties this year, and it is also the largest direct subsidy in the US related plan.
Intel disclosed in a securities filing the government's restrictions on subsidies, including requirements for control over the chip manufacturing sector. According to Reuters, the government requires Intel to hold at least 50.1% of the shares when the chip foundry business is separated as a private holding company. If Intel's OEM becomes a listed company and Intel is not its largest shareholder, the shareholding ratio of each individual shareholder shall not exceed 35%. Meanwhile, any change in control may require Intel to seek permission from the US Department of Commerce.
In addition to the uncertain prospects of its contract manufacturing business, Intel also needs to face the ongoing disadvantage of significantly falling behind in the field of artificial intelligence. As early as 2005, Intel had the opportunity to acquire the then small Nvidia for $20 billion, but the board ultimately rejected the proposal. Nowadays, Nvidia has become the biggest beneficiary of this AI wave with its high-performance GPU chips, occupying over 80% of the AI chip market share.
Although Intel has also launched the Gaudi series of AI chips, it is still in the early stages of competition. Kissinger once admitted that his competitors are far ahead in the AI competition, and considering Intel's other challenges, he will not participate in the competition in the short term.
Regardless of who is chosen to replace Kissinger, it can be certain that the next CEO will continue to face difficult challenges and lead this veteran chip giant out of the mud. Although we have made significant progress in restoring manufacturing competitiveness and building our ability to become a world-class contract manufacturer, we know there is still a lot of work to be done and we are committed to restoring investor confidence. As board members, the first thing we know is that we must put our product team at the center of everything we do, "said Frank Yeary, independent chairman and interim executive chairman of Intel's board of directors, in a company statement