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on september 16th local time, intel ceo pat gelsinger issued an open letter after the latest shareholders' meeting, responding to recent rumors and comprehensively outlining intel's transformation plan.

kissinger: persist in developing foundry business, cutting costs, and simplifying x86 product portfolio

after releasing poor financial reports and forecasts in early august, announcing a 15% global layoff, capital expenditure cuts (us$10 billion in capital expenditure cuts by 2025), and suspension of quarterly dividends, intel has been under tremendous pressure from investors, the government, internal employees, and public opinion. as a result, a series of rumors have been triggered, such as "intel will sell its wafer manufacturing business", "intel will sell its fpga (altera) business", "qualcomm will acquire part of intel's chip design business", and "intel will suspend overseas wafer fab construction".

"since we announced our second quarter earnings, all eyes have been on intel. there has been no shortage of rumors and speculation about the company, including last week's board meeting, so i am writing today to provide some updates and outline what's coming next," gelsinger wrote in the open letter.

first, i want to say that we had a productive and supportive board meeting. we have a strong board of independent directors whose job is to challenge and push us to perform at our best. we discussed in depth our strategy, portfolio, and the immediate progress we have made against the plans announced on august 1.

the board and i agree that we have much more work to do to improve efficiency, increase profitability and enhance our market competitiveness, and here are three key takeaways i would like to focus on:

with the launch of intel 18a, we must build on our foundry momentum and improve capital efficiency in this part of our business.

we must continue to act with urgency to create a more competitive cost structure and achieve the $10 billion in cost reductions we announced last month.

as we advance our ai strategy, we must refocus on our strong x86 franchise while simplifying our portfolio to serve intel customers and partners.

intel foundry will have greater independence

in order to further develop its foundry business, intel announced last year that it plans to make intel foundry an independent subsidiary within the company, and completed independent financial accounting earlier this year, separating the profit and loss and financial reports of intel foundry and intel's product divisions.

intel foundry is a newly established operating unit that includes foundry technology development, foundry manufacturing and supply chain, and foundry services (formerly "intel foundry services", referred to as "ifs"). under this new structure, the relationship between intel foundry and intel's product departments will undergo a major transformation:

first, intel's product division will cooperate with intel's foundry division in a similar way to the cooperation between fabless semiconductor companies and external wafer foundries. this also means that intel's product business division can choose more suitable or more cost-effective external wafer foundry service providers (such as tsmc) for some of its products to improve efficiency.

secondly, intel's foundry department will account for revenue from external foundry customers and intel products, as well as the technology development and product manufacturing costs that were allocated to intel products in the past. this move will reduce costs and improve efficiency by reducing the expedited wafer orders and testing time originally brought by the internal product department. at the same time, intel's foundry department can also better develop external customers and transfer more production capacity to more valuable external orders, such as wafer foundry and advanced packaging needs for ai chips.

kissinger said that the benefit of intel foundry as an independent subsidiary within intel is that it provides its external foundry customers and suppliers with clearer separation and independence from other parts of intel. importantly, the independence of intel foundry also provides intel with future flexibility to evaluate independent sources of funding and optimize the capital structure of each business to maximize growth and shareholder value creation.

according to the latest performance data submitted by intel to the us sec from 2021 to 2023 under the independent reorganization of "intel foundry", the revenues in these three years were us$22.8 billion, us$27.5 billion and us$18.9 billion respectively. it can be seen that the revenue of intel's foundry business in 2023 decreased by us$8.6 billion compared with 2022. this is mainly due to the decrease in revenue from the product department after the independence of "intel foundry".

specifically, in 2023, intel's foundry business will have internal revenue of $18 billion, a decrease of $9.1 billion. external revenue will be $953 million, an increase of $479 million from 2022, thanks to higher packaging service revenue.

from the operating profit of intel's foundry business, it has been in the red from 2021 to 2023, with losses of us$5.1 billion, us$5.2 billion and us$7 billion respectively, and the losses have a tendency to continue to expand. this is mainly due to the decline in revenue from internal product departments after the independence of the foundry business, which has lowered profits. at the same time, the increase in period expenses caused by overcapacity and increased inventory reserves in 2023 are also important influencing factors.

however, according to intel's previously released forecast data, after the spin-off of the wafer manufacturing business, it can save $3 billion in costs in 2023 and $8-10 billion in costs in 2025. moreover, based on this model, intel's foundry business revenue is expected to exceed $20 billion in 2025, while intel's product department gross profit margin will also increase to 45% and operating profit margin to 20%. the longer-term goal is that by 2030, intel foundry will become the world's second largest wafer foundry and achieve a break-even!

although there have been rumors recently that intel may sell its wafer manufacturing business in order to resolve its financial crisis, manufacturing is one of intel's core competitive advantages and developing wafer foundry business is also intel's long-term strategy. therefore, the "rumors" of selling the manufacturing business are just "rumors", at least not during kissinger's term of office.

after intel foundry becomes independent, its leadership team will remain unchanged and they will continue to report to kissinger. intel will also establish an operating committee, including independent directors, to manage the subsidiary. this supports intel's continued focus on improving transparency, optimization and accountability across the business.

gelsinger said: "a more focused and efficient intel foundry will further strengthen collaboration with intel's product groups. our capabilities in design and manufacturing will continue to be a source of competitive advantage and strength."

aws selects intel foundry

gelsinger also announced an expansion of its strategic collaboration with amazon web services (aws), including joint investments in custom chip design, and a multi-year, multi-billion-dollar framework covering intel products and wafers.

specifically, intel foundry will produce ai fabric chips for aws using the intel 18a process. intel will also produce custom xeon 6 chips for aws on the intel 3 process, building on the existing partnership between the two parties. more broadly, intel expects to work closely with aws on other designs covering intel 18a, intel 18ap, and intel 14a.

it is worth noting that at the intel foundry direct connect conference in february this year, microsoft chairman and ceo satya nadella also announced that microsoft plans to use intel's 18a process node to produce a chip it designed.

recently, in order to ensure the smooth mass production of intel 8a process in 2025, intel also announced that it would "skip the productization" of intel 20a node and will invest engineering resources from intel 20a to intel 18a in advance to reduce capital expenditure. according to estimates, skipping the intel 20a process node and investing related engineering resources from intel 20a to intel 18a in advance will save $500 million.

through previous work on the intel 20a process, intel successfully integrated the ribbonfet all-around gate transistor architecture and powervia backside power supply technology for the first time, both of which will be used in intel 18a. regarding the latest progress of intel 18a, intel stated at the time that intel 18a was well produced in the wafer fab and had excellent yield performance. products based on intel 18a have been powered on and the operating system has been successfully started. at present, the defect density of intel 18a has reached the d0 level, which is less than 0.40 (def/cm^2). this indicator means that the intel 18a process node is generally considered to be production-worthy and in good operating condition.

kissinger also said in the open letter, "the latest cooperation framework with aws reflects the power of our "joint progress" strategy, which is based on our integrated portfolio across foundry services, infrastructure and x86 products. as the end of the five-year mass production and four-process festival plan approaches, we are beginning to see a significant increase in interest from foundry customers. this includes the continued momentum in advanced packaging, which remains a meaningful differentiator for intel foundry, as our deal pipeline has tripled since the beginning of the year."

received $3 billion in funding from the u.s. department of defense

earlier, intel also announced that it had received up to $3 billion in direct funding from the u.s. department of defense's secure enclave program, which aims to expand trusted manufacturing of cutting-edge semiconductors for the u.s. government. it should be noted that the funding program is part of the chip science act.

according to reports, the secure enclave program mainly supports the trusted production of advanced chips based on intel's 18a (1.8nm) process technology for the us government to use in intelligence and military applications. the us department of defense (dod)'s funding plan for intel is also based on intel's previous successful cooperation with the us department of defense, including the ramp-c and ship projects.

intel’s partnership with the u.s. department of defense dates back to 2020, when it played a key role in the ship program by providing advanced semiconductor packaging. by 2023, intel had delivered the first multi-chip prototypes, contributing to the department of defense’s efforts to acquire cutting-edge microelectronics technology and modernize defense capabilities.

additionally, intel has been participating in the ramp-c program since 2021, providing commercial foundry services to develop custom circuits for critical dod systems. over time, intel has successfully worked with multiple defense industry partners, including boeing, northrop grumman, microsoft, ibm, and nvidia.

as the only u.s. company that designs and manufactures advanced logic chips, intel plays a critical role in ensuring the supply chain security of the u.s. technology infrastructure. through this collaboration, intel will also help the department of defense use complex chips manufactured based on its upcoming intel 18a process technology to enhance the resiliency of critical systems.

in fact, this $3 billion in support also proves that the us government is full of confidence in intel's intel 18a process technology.

the secure enclave program is designed to manufacture advanced chips for defense and intelligence applications in highly secure environments in the united states. ideally, this would be done in a dedicated facility, separate from the production of other components. however, due to the huge expense of building separate clean rooms for military-grade chips (which account for 1%-2% of revenue for foundries such as intel), intel appears to have chosen another approach to meet the security standards set by the department of defense.

this new contract is different from intel's earlier agreement with the u.s. department of commerce in march 2024, in which intel received $8.5 billion in direct subsidies and $11 billion in loan commitments to build and upgrade its semiconductor manufacturing facilities in the united states. however, both grants are part of the chips and science act, which aims to revitalize the domestic semiconductor manufacturing industry in the united states.

“today’s announcement underscores our shared commitment with the u.s. government to strengthen the domestic semiconductor supply chain and ensure america maintains leadership in advanced manufacturing, microelectronic systems and process technologies,” said chris george, intel federal president and general manager.

gelsinger also noted in the statement: "this news, combined with our announcements with aws, demonstrates our continued progress in building a world-class foundry business."

construction of the us domestic factory continues, and the german and polish factories are suspended for two years

for intel, which is currently in financial difficulties, its massive overseas wafer fab construction plans that are currently underway or planned will undoubtedly greatly increase intel's subsequent financial burden.

in this regard, kissinger said: "another key priority for intel foundry is to improve capital efficiency. our manufacturing investments on three continents have laid the foundation for world-class foundries in the ai ​​era. now that we have completed the transition to euv, it is time to shift from a period of accelerated investment to a more standardized node development rhythm and a more flexible and efficient capital plan. that is, when completing the manufacturing expansion, we will maintain a 'smart capital' approach to maximize financial flexibility and make some adjustments to the near-term scope and speed of our manufacturing expansion."

specifically:

intel announced that it would suspend its advanced packaging plant project in poland and its wafer fab construction project in germany for about two years.

on june 16, 2023, intel announced that it would invest up to $4.6 billion to build a cutting-edge semiconductor packaging and testing plant in an area near wroclaw, poland, which will help meet intel's expected critical demand for packaging and testing capabilities by 2027. the construction of the plant was originally scheduled to begin after approval by the european commission, and it is expected to create approximately 2,000 jobs after completion.

on june 19, 2023, intel and the german federal government signed a revised letter of intent for investment, in which intel plans to invest more than 30 billion euros in magdeburg, the capital of saxony-anhalt, germany, to build two angstrom-level wafer fabs. the german government is expected to provide 10 billion euros in subsidies. intel acquired the land required for the project in november 2022.

obviously, the suspension of these two investment projects with a total investment of nearly 35 billion euros will greatly ease intel's capital expenditure pressure in the next two years.

with the two new projects on hold, intel plans to make full use of existing capacity. as a result, intel recently increased its european capacity through its fab in ireland, which will remain intel's main hub in europe for the foreseeable future.

separately, intel plans to complete construction of a new advanced packaging fab in malaysia, but will align startups with market conditions and increase utilization of existing capacity.

intel's manufacturing plans in the united states and other locations have not changed. this has also dispelled some of the doubts of some us lawmakers that intel might cut investment in the united states while taking subsidies from the "chip bill". this will also help the implementation of the $8.5 billion direct subsidy funds and $11 billion loan commitment previously agreed between the us government and intel.

"we remain committed to our manufacturing investments in the u.s. and are advancing our projects in arizona, oregon, new mexico and ohio. as our manufacturing operations grow, we remain well-positioned to scale production globally as market demand demands," said gelsinger.

focus on a stronger intel x86 portfolio

in the core x86 products of its existing product business, intel plans to increase focus, speed and efficiency through strengthening and simplifying its product portfolio.

“our top priority is to maximize the value of the x86 franchise across client, edge, and datacenter markets, including delivering a broader range of custom chiplets and other customized offerings to address emerging customer needs, as demonstrated by today’s aws announcement,” gelsinger said.

“our ai investments, including continued leadership in the ai ​​pc category, our strong position in datacenter ai, and our accelerator portfolio, will leverage and complement our x86 franchise with a focus on enterprise-class, cost-effective inference. at the same time, we are taking steps to simplify our portfolio to improve efficiency, accelerate innovation, and deliver more integrated solutions.”

specifically, intel's edge and automotive businesses are being transferred to intel's client computing business (ccg), a move that gelsinger believes will have great opportunities to leverage its core client business and extend intel's leadership in the ai ​​pc category to a wide range of vertical edge solutions.

in terms of network and edge business (nex), intel will focus its business on networking and telecommunications;

intel will also incorporate integrated photonics solutions into its data center and ai infrastructure products (dcai);

intel also announced that it will integrate its software and incubation businesses into its core business units to develop a more integrated roadmap, unlock efficiency and create value.

complete 15,000 layoffs by the end of the year to promote altera's ipo

taken together, these changes are a critical step forward in building a leaner, simpler, more efficient intel. they build on progress made in intel’s plan to create a more competitive cost structure, announced on august 1.

regarding the previously announced plan to lay off 15% of the global workforce (15,000 employees), kissinger pointed out, "through our voluntary early retirement and separation services, we have achieved more than half of our goal of laying off about 15,000 people by the end of this year (that is, more than 7,500 layoffs have been completed in one and a half months). we still have difficult decisions to make and will notify affected employees in mid-october."

in addition, kissinger also revealed that intel is implementing a fixed asset disposal plan, which is to reduce or exit about two-thirds of its real estate worldwide by the end of this year.

as intel continues to move urgently to execute the plan announced last month, it is also working to carefully manage its existing cash to meaningfully improve its balance sheet and liquidity. this includes selling a portion of altera's shares and pushing for its independent ipo, a plan intel has publicly discussed many times.

summary:

judging from kissinger's open letter, intel has basically maintained its original long-term strategic plan, that is, to vigorously develop its core capabilities in advanced process manufacturing, while actively developing its wafer foundry business. there is no so-called consideration of selling its wafer manufacturing business.

as part of its efforts to enhance its manufacturing capabilities, intel is about to complete its five-year plan to mass produce four advanced process nodes. intel has high hopes for the most advanced intel 18a process. after announcing that it would be adopted by microsoft earlier this year, it was announced that it would be adopted by aws and related products of the us department of defense. this also reflects that intel 18a is beginning to gain recognition from more and more customers and is capable of competing with tsmc in cutting-edge processes.

at the same time, as a key measure to develop its foundry business, intel has already begun to promote the independence of this business, and is currently continuing to advance as planned. although intel's foundry business currently has revenue from external customers mainly from advanced packaging business, according to previously disclosed data, intel is negotiating with 12 potential customers and will generate some foundry revenue from external customers in 2026 and "meaningful" revenue in 2027. intel 18a has successively won contracts from external customers such as microsoft, aws and the us department of defense, which is also a good example.

in terms of capacity construction, intel has only slowed down its factory construction plans in germany and poland, but its huge capacity construction plans in other regions, especially the united states, have not slowed down.

in terms of organizational structure and products, intel began to focus more on the core x86 product business in order to improve the performance of the core business more quickly and efficiently. as for non-core businesses, such as fpga (altera), intel is promoting its independent ipo according to the original plan, just like the successful promotion of mobileye ipo before, in order to bring higher investment returns to intel.

in the era of social media, when a company gets into trouble, its various problems can be easily magnified quickly, and various unfavorable rumors will follow, which in turn will affect the stock price and investors. investors will put pressure on the company's management based on this unfavorable information or poor stock price performance, which is indeed a big challenge for management.

“all eyes will be on us. we need to fight for every inch of ground and execute better than ever before because only then can we quiet our critics and achieve what we know we can achieve. we must maintain our focus on innovation while being an engine of operational efficiency and financial performance to win in the market.”gelsinger noted: “as i have said before, this is the most important transformation at intel in more than 40 years. we have not attempted anything of this magnitude since the transition from memory to the microprocessor. we succeeded then, and we will meet this moment and build an even stronger intel for decades to come.”