Intel Needs to Fess Up
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
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
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
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:
In after hours trading on Thursday, the chip giant Intel
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
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
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
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:
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
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
Flight of Vanity, Trek of
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
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
uprising against him and is openly ridiculed on many computer enthusiast
Web sites. Some are even railing against the entire financial analyst
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
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
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
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.