Intel released its second quarter earnings yesterday, but the company put out a far more interesting press release last week, on July 7th.
Intel Corporation today announced that it has entered into a manufacturing agreement with Panasonic Corporation’s System LSI Business Division. Intel’s custom foundry business will manufacture future Panasonic system-on-chips (SoCs) using Intel’s 14nm low-power manufacturing process.
What’s incredible about this isn’t that Intel is manufacturing another company’s SoC — it’s that Intel is manufacturing another company’s SoC with its most advanced manufacturing process.
Traditionally, Intel has produced its newest chips with its most advanced (i.e. smallest) manufacturing process. Not only does a smaller manufacturing node make the chip cheaper to manufacture, but it also makes the chip more power efficient. Taken together, Intel has traditionally been able to charge a steep premium on its newest chips in no small part because they were made with the company’s most advanced manufacturing process.
For Intel to make another company’s chip with its most advanced manufacturing process is anathema to the way Intel has been running for a while now. At any given time, Intel has a finite capacity to produce processors at its most advanced manufacturing node. By definition, Intel is giving up capacity to produce its own 14nm designs in order to make 14nm Panasonic chips.
And that’s very interesting. Panasonic will no doubt pay a premium for the advanced manufacturing process. But there’s no way that the premium is more than what Intel is forgoing by giving up capacity that could be used to produce 14nm x86 chips.
With this deal, Intel consciously chose to forgo production of its most advanced and profitable chips in order to make pocket change on Panasonic SoCs. That makes no sense.
But there is another possible explanation.
Years ago, when Intel was designing the factory that would eventually produce 14nm chips, the company decided to make the fab capable of producing X amount of chips in a given period of time based on the assumption that OEMs would purchase a certain number of x86 processors. But things didn’t turn out the way Intel expected them to, and OEMs aren’t buying the number of chips Intel projected they would.
In other words, Intel has excess 14nm production capacity.
Intel, of course, doesn’t want that production capacity to sit there idly. The company would rather produce Panasonic’s SoCs and make a few bucks instead of making no money with that manufacturing capacity at all.
Viewed as an isolated incident, Intel’s excess production capacity isn’t that big of an issue — the company simply incorrectly forecasted demand for its chips.
But this isn’t an isolated incident — rather, it’s a sign of things to come. It’s clear that there will be less demand for Intel’s traditional consumer x86 chips five years from now than there is today. And, like it’s doing now, Intel will make the best use it can of its excess production capacity. Better to produce other companies’ SoCs and make some money with the capacity than let it sit idly and make no money with it at all.
The problem is that the revenue Intel will bring in by producing other companies’ SoCs won’t be enough to offset the decline in x86 revenue. In fact, the revenue Intel will bring in through fabbing third-party SoCs will almost definitely be less than the profit it would make by selling its x86 chips. Quite simply, I can’t see how the margins on producing other companies’ chips will be anywhere near high enough to support Intel’s 100,000+ employee workforce.
Layoffs are inevitable. All Intel can do at this point is take the right steps to minimize them.