Pat Gelsinger has pinned his professional legacy on restoring Intel (INTC.O) to its former glory in chip manufacturing, but this decision has left his successor with a 'heavy burden' that is not easily removed.
Gelsinger spent nearly four years focusing Intel's resources to transform its manufacturing business into a commercial foundry, despite the company's weak financial condition and bleak customer outlook. This transformation has left the company facing difficulties in unwinding these efforts in the future. Although the board initially supported the development of the foundry business into a commercial manufacturing business, exiting now could pose a threat to the significant investments made by the U.S. government.
Bernstein analyst Stacy Rasgon pointed out that divesting these factories would enter a political minefield, even though these factories currently feel like a 'heavy burden.'
Rasgon wrote in a client report on Monday: "Dismantling these factories will be fraught with difficulties regarding the product roadmap, outsourcing strategies, the chip bill, and political responses. It seems there are no easy answers, so anyone taking on this position will face a tough road ahead."
Bank of America analyst Vivek Arya also noted in a report on Monday that the chip bill funding Gelsinger fought for will prevent Intel from fully divesting its foundry business.
"Specifically, Intel must: (1) maintain at least 50.1% ownership of Intel foundry if the foundry business is spun off into a new legal entity, or (2) if the foundry business is a public company and Intel is not its largest shareholder, cannot sell more than 35% of the foundry shares to third parties." he wrote in the report.
It remains unclear who would be willing to acquire Intel's manufacturing plants. In recent months, as the financial condition of the foundry business deteriorated, Intel has reportedly met with investment banks to explore options, including divesting or selling loss-making businesses. However, Intel's decision in September was to operate the foundry business as an independent subsidiary with its own board. This decision may have been due to failed attempts to divest the business or assessments indicating a bleak outlook for such sales.
Currently, the foundry business is the biggest issue facing Intel's interim leadership and the future CEO who will officially take over from Gelsinger. To date, Intel has appointed two interim CEOs—Chief Financial Officer David Zinsner and Senior Product Executive Michelle Johnston Holthaus—but both seem to lack extensive experience in chip manufacturing.
Complicating matters further is the concern that the company’s foundry business performance may not meet expectations. Intel is transitioning to a new manufacturing process—18A—but has yet to ship any products from this process. The company is also struggling to attract major clients for its foundry business, with analysts projecting that this business will incur a $13.8 billion loss this year. Its largest deal is a multi-billion dollar partnership with Amazon.
At the same time, while Gelsinger focused on restoring the glory of the manufacturing business and commercializing it, Intel has barely participated in the AI boom, with revenues from PC and data center chips plummeting.
Rasgon wrote: "We might have initially expected Gelsinger to wait until the 18A process products were released (by then we could see its effects), but since he failed to do so, we have to question whether his departure indicates a negative impact on the health of the process roadmap."
Raymond James analyst Srini Pajjuri has similar concerns. "The key questions at this point are: (1) Is the manufacturing roadmap still on track? (2) Will the company separate its product and foundry businesses?" he wrote in a report.
Years ago, Intel lost its global leadership in manufacturing technology to TSMC (TSM.N). Some critics say Gelsinger spent too much time in the early part of his tenure seeking funding from the U.S. government, ultimately contributing to the CHIPS Act to revive U.S. semiconductor manufacturing.
Additionally, the new CEO must mend the relationship with TSMC. According to Reuters, while Gelsinger called for U.S. lawmakers to support more chip manufacturing, TSMC stopped offering deep discounts to Intel, which were originally used by Intel to produce its chips using TSMC's advanced processes.
As Intel's stock price rose 1.5%, well below the day's high, investors seemed to realize that there is currently no quick solution. The next CEO will face a daunting task of steering the company out of its predicament.
Article reposted from: Jin10 Data