Intel's growth plan is a big roll of the dice

Advances in the world's half-a-trillion-dollar chip industry do not happen overnight. Building new factory facilities to boost capacity often takes years. By the time they are ready, the sky-high demand that existed when the investment was announced has usually disappeared. This largely explains why the semiconductor industry has been locked in a boom-and-bust cycle for years.

It should make any sensible investor wary of Intel's monstrous spending plans. Pat Gelsinger, who celebrates his first anniversary in the CEO job this month, has been jetting around America and Europe promising a future feast of chips to politicians in component-starved economies. This year alone, Intel plans to invest $27 billion in capital expenditures, nearly double the amount it spent in 2020.

Figure 1: Intel's share price in the last year ($) (Source: Google Finance)

Politicians from Joe Biden to the European Union's Ursula von der Leyen are ravenous partly because the world is still experiencing one of its worst chip famines ever. Just this week, Cisco CEO Chuck Robbins warned investors the components shortage will not ease soon. "I wouldn't say we have a great timeline for you as to when things begin to improve," he told analysts. "All we know now is we expect this to be with us through the second half of our year."

It is not just hunger but also geopolitics that has stimulated the appetite for chip investment. Europe worries (as Europe does) it has fallen behind other regions on semiconductor production – much as it frets about lagging in 5G and the public cloud. Its grand plan involves doubling market share to about 20% by 2030. EU schemes normally end badly, but Gelsinger spied opportunity.

Wargames

Meanwhile, both America and Europe seem increasingly nervous about their dependency on chips made in Asia. This is most pronounced in the market for advanced technology based on sub-10-nanometer designs (a nanometer is a billionth of a meter and supposedly measures the size of the transistors used in the chip). Andy Sellars, who advises the UK government on chip strategy, says Taiwan's TSMC makes 85% of these high-end chips.

The doomsday scenario modeled by the Pentagon is a Chinese invasion of Taiwan that cuts Western firms off from TSMC's chips. As he maintains Donald Trump's policy of restricting China's access to American tech, Biden wants semiconductor independence from Asia for the US. This government position suits Intel, which is determined to challenge TSMC and South Korea's Samsung, the other big "foundry," in this market for advanced circuitry.

Unfortunately, for Intel, TSMC is not planning to be cut off from its customers in the West and its own investments dwarf Gelsinger's. Last year, it pumped as much as $30 billion into capital expenditures. This year, it expects the figure will rise to between $40 billion and $44 billion. It already has the technological advantage over Intel. Gelsinger has never satisfactorily explained why he thinks he will be able to catch up with and eventually overtake TSMC when Intel has far less foundry experience and a much smaller budget.

Even if he can, Western markets able to procure TSMC chips in future will have far greater supplies than they would if the industry fragments along geopolitical fault lines, as politicians fear. In other words, if a company like Ericsson can choose in future between Intel and TSMC when buying sub-10-nanometer chips, prices should be lower than in a market served by Intel alone. The difference between the two scenarios does not sound insignificant for planning purposes.

Intel is guiding for a revenue increase of less than 2% this year, to about $76 billion. Next year, however, it anticipates sales growth in the "mid- to high-single digits," and by 2026 it reckons on a 10-12% increase. At the mid-point of the guidance, and assuming no blips in 2025, this would lift sales to more than $104 billion in 2026, a $29 billion increase on the figure last year. For a comparison with the previous five-year period, Intel's annual revenues rose about $15 billion between 2016 and 2021.

Figure 2: Intel's sales outlook (Source: Intel, Light Reading)

Remember the 50-billion forecast?

But nobody can describe with total confidence how the market will look five years from now. Regardless of geopolitics, technophiles imagine a world of 5G hyperconnectivity, where semiconductors are included in everyday objects like toothbrushes and running shoes. Yet forecasts have been wrong before. Remember Cisco's estimate that 50 billion objects would be connected to the Internet of Things by 2020? That exceeds last year's figure by around 35 billion, according to Ericsson's most recent mobility report.

While unprecedented, the sustained growth in semiconductor sales that has occurred over the last three years has come at a weird time. The pandemic fueled sales of laptops and other connected gadgets for the home as people became hooked on the Internet during lockdowns. That revolution is now in the past, though, and some analysts have warned of a possible impending glut.

Want to know more about 5G? Check out our dedicated 5G content channel here on Light Reading.

IDC says the semiconductor industry will generate $600 billion in annual revenues by 2025. That would represent a compound annual growth rate of 5.3% over the forecast period, compared with a historical rate of 3-4%. But the market-research company also thinks some "normalization and balance" will return starting in mid-2022. There is "a potential for overcapacity in 2023 as larger-scale capacity expansions begin to come online towards the end of 2022," it says.

On top of this, Intel is struggling in some of the established markets it has dominated historically. Research carried out by Omdia, a sister company to Light Reading, shows that Intel's share of the market for server CPUs (central processing units) dropped from 98% in 2017 to 77% last year. AMD, a rival that licenses Intel's x86 technology, has been on the attack, as have licensees of UK-based Arm (including Intel's own customers).

Gelsinger might pull off his audacious plan, seizing the foundry initiative from Asian manufacturers and halting the advance of AMD and Arm rivals. But none of those firms are standing still. And the rebalancing of supply and demand that IDC and others anticipate this year or next is not what a company investing tens of billions in new factories wants to see. There is a lot that can go wrong.

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— Iain Morris, International Editor, Light Reading