The only remedy for Intel’s woes may be a breakup

A chip-manufacturing spinoff could help solve some of the company’s thorniest issues.
To emerge from a yearslong financial and technological rut, Intel needs to better compete with chip makers like Taiwan Semiconductor Manufacturing Co. It looks increasingly like that will require breaking up the company.
The storied chip maker for decades minted money by designing and making its own chips in its own factories. The model worked well when the company was making the fastest-calculating chips with the smallest transistors in the world.
That changed more than a half decade ago, after TSMC and South Korea’s Samsung Electronics took the chip-making lead. Both are contract chip-makers, which meant any of Intel’s competitors in chip design, from Nvidia to Advanced Micro Devices, had access to better factories.
Intel coped with its manufacturing missteps by having some of its own chips made by TSMC. But that reduced its profit margins and raised questions about its investments in its own factories.
Investors have understandably turned sour. Intel’s stock has fallen around 65% over the past five years, while AMD’s has more than doubled, TSMC’s almost quadrupled and Nvidia’s is more than 16 times as valuable.
Former Intel Chief Executive Pat Gelsinger aimed to right the ship by making Intel itself into a leading contract chip maker, while investing in new factories and attempting to regain the chip-making technology lead. It was a costly effort that didn’t bear sufficient fruit in his three years at the helm. He was ousted in December.
What to do with the contract chip-making arm is now perhaps the most pressing question facing Lip-Bu Tan, who became CEO in March. Yet Tan hasn’t said much about his strategy for the unit. He assured investors that he is committed to it at a company event in April and promised a more customer-centric approach.
Separating Intel’s chip-design functions from its factories could solve a lot of its problems. For one thing, many potential customers of the factories are competitors in chip design, including the likes of Nvidia and AMD. Separating the two would help the chip-making side to court their business.
It would also help address corporate-culture problems that have dogged the contract chip-making effort: Intel’s manufacturing operation lacks the customer-service mindset that TSMC and other dedicated contract manufacturers have.
That logic hasn’t been lost on Intel’s board of directors or the company’s competitors, some of whom have been eyeing the company as it wades through its struggles. Chip and software giant Broadcom, as well as TSMC, circled parts of Intel early this year.
That the company has yet to commit to a breakup may partly reflect how complex it would be.
Gus Richard, a semiconductor analyst at Northland Capital Markets who worked at Intel early in his career, said the company wasn’t functioning well as a united entity. But pulling it apart would be thorny because Intel’s factories have grown up solely making Intel chips, and Intel chip designers had until recently almost exclusively used its factories.
“They can create a [chip] design environment that works for Intel, but it’s hard if not impossible for anybody else to use, and they’re failing at getting additional customers," Richard said.
Even under Gelsinger, Intel seemed to recognize the need for further separation. Two years ago, it moved to a so-called internal foundry model, with its manufacturing arm acting like a separate entity and Intel’s designers free to choose between its factories or outside ones. In September, it pledged to establish its factories as a separate subsidiary inside the company, with its own operating board and independent directors.
Intel’s chip factories also aren’t doing well financially: They posted an operating loss of $2.32 billion in the first quarter, after losing $13.4 billion last year.
That dismal performance would likely make a stand-alone factory unit unappealing to investors. But such a deal could quickly become more palatable if it came with a significant injection of capital to support the independent business.
Intel has already planted the seeds for that to happen. Part of the logic of putting its factories into a separate subsidiary was to bring in new capital for the unit. Chief Financial Officer David Zinsner told The Wall Street Journal in January that the company was beginning discussions with potential strategic investors, including financial ones and customers.
Intel can afford to plug along for a while as a unified entity, with nearly $9 billion in cash on its balance sheet as of the end of the first quarter. It also has a globe-spanning factory network and manufacturing equipment it values at more than $100 billion, plus a range of side businesses it has been selling off. One of Tan’s big priorities has been laying off staff and cutting costs, which should provide a further financial buffer.
Tan could opt to keep Intel together and extract some value for shareholders by gradually winnowing down a dying business. But that wouldn’t solve the chicken-and-egg dilemma facing the company: It is hard to stand up a loss-making manufacturing arm on its own, yet without a separation, it is more difficult for that same manufacturing arm to mount a challenge to TSMC or Samsung.
Intel is hoping the unit reaches break-even in 2027, and it has gathered a handful of customers, including Microsoft and Amazon’s cloud-computing arm. But those are far from the biggest chip-design customers, and reaching the billions of dollars in new revenue that would be needed to bring the manufacturing operation out of the red is no sure thing.
If Intel is going to correct the course it has been on for the past decade, the question is increasingly one of when rather than if it will carve itself up.
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