Intel Needs to Fess Up

Posted By Van Smith

Date: August 2, 2001

Once again demonstrating the might of the still potent chipmaker, Intel's CEO speaks and global markets move, but until the chipmaker owns up to the real causes of its catastrophic woes the economy will not be safely clear of it current morass.


Trying to Close Pandora's Box

In what appears to be an attempt to close the Pandora's Box of global financial misery his company opened last year when it blamed its poor performance on "macroscopic economic conditions," Dr. Craig Barrett said today that the personal computer industry has bottomed out with demand for personal computers recovering throughout the rest of the year. 

Dr. Barrett shielded his rosy predictions by stating ambivalently that the recovery was seasonal rather than a full-fledged rebound.  He conditioned a real upswing on a global recovery.

Even with this doublespeak, the market, and in particular Intel's stock, surged upwards today.


A Fall Foreseen

The fly in this odorous ointment is that Intel's performance and its reckless lack of character for not owning up to its missteps were effectively the lead weight tied around the neck of a bull market thrown to drown in our economy's current morass.

We expected Intel's fate and outlined its inevitable downfall in a detailed analysis over a year and a half ago.  Furthermore, we stated immediately after Intel opened the door to Pandora's Box what ills the chipmaker was recklessly releasing onto a fragile market.

The cause of Intel's problems has not been macroscopic economic factors although the chip giant's spiral downwards has caused plenty of broad market damage hurting everyone and even compounding the chipmakers own troubles.

The primary causes of the Intel disaster has been the whipping it has been taking from a vibrant and technically stellar AMD and the woeful and arrogant mismanagement of the Santa Clara company through this flogging.

There are many reasons to hold Intel in high regard, but its total lack of character for not taking responsibility for its own fate has been an egregious violation of corporate responsibility.  Until the company isolates its contagion properly to itself, every time the sick chip giant sneezes the market will catch pneumonia.



As stated above, we produced an article immediately after Intel's tragic scapegoating episode that soon sent the market into a tailspin.  Our employer was attempting to mend its relationship with the chip giant and refused to publish the article, so we placed the analysis on one of our own noncommercial sites and sent the link to a few members of the media.

Here is that message replayed almost a year later: 



Titan Crashes

In after hours trading on Thursday, the chip giant Intel (nasdaq: INTC) saw its stock price fall dramatically after the company announced that it expected third quarter gross profit margins to decline from the previous quarter.  The Santa Clara company also announced that it was revising its third quarter earning estimates downwards.  Intel cited softening of the European market as cause for this unpredicted weakness.  As trading resumed following the 45 minute halt due to the announcement, the semiconductor titan’s share price nosedived to 48 ½, down almost 23% from the day’s high of 62 15/16.

Lost in the Vortex

News of this crash along with fears that Intel’s admission signals a coming downturn in the technology sector have sent worldwide markets into panic.  Hong Kong’s Hang Seng index fell to its lowest level since May, the Nikkei slid 3%, Taiwan plunged 4.5% to an 18-month low, and Korea suffered a 7% freefall.  Reverberations were similarly felt in European and African markets as well.

With Intel maintaining that broad market forces are the cause of its problems, computer memory companies, motherboard manufacturers, computer OEMs, and even Intel’s rivals such as AMD and Apple are being sucked downwards into the vortex left by the crash of this giant’s stock.  Even much broader concerns of the overall strength of the global economy were set to boil as the chip maker fingered the sagging Euro and soaring fuel prices as causes for the slumping European demand in processors.

Falling through the Spider’s Web

Ignoring the broader market dynamics that the chip giant blames for its revised estimates, as Intel falls it crashes through a web of interests that are terrifically interwoven into the fabric of the worldwide economy.  In addition to being a major portfolio component of a vast number of investment houses, Intel stock is also in the portfolios of 1,176 mutual funds and comprises a chunk greater than 5% in 127 of these according to Morningstar.

On the Right Side of the Looking Glass

Intel’s troubles are no secret to readers of this site as we have been documenting them for many months.  In fact, in early February we explained in detail the chip company’s predicament, and, sadly, our forecast continues to be ruthlessly accurate.  Intel is losing revenue and its margins are thinning largely as results of its savage and chiefly unsuccessful competition with AMD (nyse: AMD).  Although Intel was allowed to disguise its problems in the second quarter with its massive sell off of Micron stock, as we predicted, pulling another Micron sized rabbit from its hat for the third quarter would be next to impossible.  Now the damage from its war with AMD is beginning to become obvious.

Intel’s current problems are only peripherally related to the weak Euro.  Yes, Intel is doing poorly in Europe, and the sagging Euro doesn’t help but Intel’s European decline is at least partially due to market share erosion to AMD.  Europeans have a long history of being less conservative than Americans when evaluating computer technology and are known to adopt technology offering the most “bang for the buck” -- an area where AMD’s Athlons and Durons particularly surpass their Intel counterparts.  It is logical that Intel’s crisis with AMD would be felt most acutely in Europe first.

Flight of Vanity, Trek of Disaster

Analysts with deeply tangled histories with the chip maker and conditioned to spin the latest bad news in Intel’s favor, sang tunes of woe for broader concerns, blindly disregarding the implications for the world outside of the titanic processor manufacturer.  Unsurprisingly, the media apparatus that Intel has helped establish has also been willing to uncritically and recklessly spread the Intel excuse.

According to one infamous Intel zealot, while Intel may be suffering from the European downturn, what this market softening really meant was that AMD will be “road kill.”  In what are now almost surreal, farcical conditions, this gentleman has managed to trigger a grass roots uprising against him and is openly ridiculed on many computer enthusiast Web sites.  Some are even railing against the entire financial analyst community.

Shouts from the Darkness

Although it is clear that Intel’s statement, if uncontested, will sink the value of many companies, many Taiwanese motherboard companies remain fearful of openly criticizing Intel as concerns linger that the chip company might withhold technology necessary for the production of motherboards.  However, in the last few months, Intel’s leverage has weakened greatly.  A year ago Intel dominated chipset market share, but since then VIA Technologies has explosively emerged from being a relatively minor player to now projecting a 60% market share of core logic chipsets at year’s end.  Additionally, AMD’s Athlon has been tremendously successful, further weakening Intel’s influence in Taiwan.

Although not directly confronting Intel’s statement, a few companies have raised other issues that the Santa Clara chip maker did not mention.  For example, yesterday the Taiwanese company First International Computer, or FIC as it is commonly known, revealed that AMD “now represents 30 to 35 percent” of its production.  FIC is a major motherboard supplier to OEMs such as Compaq Computers.  In a surprisingly revealing statement to The Register, Wen-Chi Chen, VIA’s president and CEO, disclosed that chipsets tailored for AMD’s Athlon processors now comprise about a third of those that VIA ships supporting PC133 SDRAM.  Considering that VIA delivers about half of all chipsets in the world, this is strong testimonial to the success of the AMD Athlon at the expense of its Intel counterparts.

Analysts, too, seem more receptive to raise the question that competition with AMD could at least be a part of Intel’s problems.  Semiconductor Analyst Dan Scovel suggested boldly in an interview with On24 yesterday that Intel’s problems might in fact be more of result of European market share loss to AMD rather than the broader economic reasons cited by Intel.

Only the Paranoid Survive?

Intel’s Dr. Andy Grove authored the oft-quoted tome “Only the Paranoid Survive.”  It seems that this dictum has been taken to the extreme in the current “inflection point” as the chip giant seems bent on not just distrusting everyone else, but now harming them as well with the chip company’s reckless face saving measures.

Fall Softly, Intel

The warning we issued at the end of our article, “A Titan Falls,” was not made frivolously.  If Intel does not fall softly, the ramifications could be severe for the entire global economy.  The market swing of the last day is only an indication of what could happen if this colossus does not measure its actions wisely and ends up falling with a fury.  We can only hope that Intel and its minions recognize that limiting the damage to themselves -- and taking the lumps that come with it -- is wiser than trying to bring down everyone else with them. 

But if Intel chooses to try to soften its plunge with the bodies of bystanders, we hope that companies follow VIA’s and FIC’s lead and fight back with the truth.  Intel is slipping because of competition with AMD, not because of broad, only secondarily related market forces.