A couple weeks ago Reuters put out a story about Sony’s search for a new chip to power the next generation of Playstation gaming consoles. The bidding came down to AMD + TSMC and Intel Product and Foundry. While AMD was the incumbent, Intel seems to have come out as the preferred supplier, until Sony and Intel could not agree on pricing for the chip. AMD reportedly won the business, or Intel lost it over a few dollars per chip.
The story came out in the midst of a flurry of higher profile Intel news (and here), but this one has stuck with us because we think it highlights Intel’s most serious problem – it still carries a culture left over from the days when it dominated the industry. At some deep level the company has not adapted to its current fight-for-its-life status.
Intel needs to be fighting tooth-and-claw for every piece of business it can win. Maybe the Sony business offered poor margins, and at 100 million units over a few years, it would not fill any fabs. But it is business – for both Product and Foundry, and Foundry in particular does not have much of that at this point.
We do not know how the negotiations played out exactly, but we imagine the finance team ran their analysis and saw that the project was a break-even prospect. In normal times, the financial analysis alone should be enough to kill the deal, but these are obviously not normal times. Intel has deep credibility problems both with the Street and its customers. While we sympathize with Intel’s need to conserve cash, having a customer like Sony would have paid for itself in market cap.
We think a big part of the problem is that Intel’s financial models do not seem to have been updated to factor in intangibles like credibility, desperation and survival. This story reminded us of the woes of US automakers. In the 1970’s and ’80’s those companies were confronted with changing consumer tastes as fuel-efficient Japanese imports saw surging growth in the US. The US automakers could never quite figure out how to make low-cost cars in large part because their financial models were rigidly adherent to industry traditions. Our understanding of the history (and we would love to hear from experts on this) is that the automakers ran their financial forecasts on a per-plant basis. No factory wanted to take on the costs of retooling to build smaller cars, and so the company as a whole suffered.
This seems to be the case with Intel now. We have made similar comparisons of Intel to Nokia, whose phone business foundered on similar shoals through its over-emphasizing its manufacturing lines at the expense of strategic flexibility. Ultimately Nokia got forced out of the business, and the US auto-makers had to get bailed out by the US government repeatedly, permanently denting their global competitiveness. Unfortunately, Intel risks a similar fate.
Leave a Reply