Activist Investor Implores Intel to Explore External Fabs

Intel is under siege by rival chipmakers, cloud providers, and now its own investors. Activist hedge fund Third Point LLC is pressuring Intel to make strategic changes to its operations, according to a report from Reuters. Intel is under siege by rival chipmakers, cloud providers, and now its own investors. Activist hedge fund Third Point LLC is pressuring Intel to make strategic changes to its operations, according to a report from Reuters. In a letter reportedly sent to Intel Chairman Omar Ishrak, Third Point Chief Executive Daniel Loeb expressed concern that Intel was falling behind rival chip fabricators and losing ground to competing chipmakers. “Without immediate change at Intel, we fear that America’s access to leading-edge semiconductor supply will erode, forcing the U.S. to rely more heavily on a geopolitically unstable East Asia to power everything from PCs to data centers to critical infrastructure and more,” Loeb wrote, according to Reuters. In particular, Loeb urged Intel to address its “human capital management issue.” The company has been bleeding talent for some time now. In June, Jim Keller, one of Intel’s most influential chip designers, left the company reportedly over a dispute as to whether the company should outsource its production. Then in July, Intel’s lead engineer Venkata Renduchintala left the company amid sweeping changes to the company’s leadership team. Third Point has asked Intel to retain an investment advisor to investigate whether the company should separate its design and fabrication divisions or move production to a third-party chip fab. Intel CEO Bob Swan previously said the company would consider outside fabs as a contingency if it is unable to meet demand internally. Intel is unique in that it designs and fabricates its chips in house. The company operates fabs in the United States, Ireland, Israel, and China. By comparison, most chipmakers outsource fabrication to companies like Taiwan Semiconductor Manufacturing Co. (TSMC) and Samsung Electronics. While this vertical integration allows Intel to more easily integrate new features into its chips, the company has faced challenges with poor yields in recent years as transistors have gotten exponentially smaller. Intel’s current 10-nanometer manufacturing process has been plagued by challenges, while its upcoming 7-nanometer process has been delayed until 2022 or early 2023. Rival fabs are currently producing 5-nanometer chips in volume and are expected to launch 3-nanometer chips in 2022. However, in a tweet, Patrick Moorhead, founder and principal analyst at Moor Insights and Strategy, points out that Intel is already using external fabs for some of its products — it’s newly launched GPU is not manufactured internally. Moorhead also questions the wisdom of Intel selling its fabs, as a non-executing fab won’t be worth much. Third Point, which according to Reuters owns a $1 billion stake in Intel, has threatened to nominate members to the chipmaker’s board if its warning is not heeded. In a statement responding to Third Point’s letter, Intel appeared open to working with the investment firm to address their concerns. “Intel Corporation welcomes input from all investors regarding enhanced shareholder value. In that spirit, we look forward to engaging with Third Point LLC on their ideas towards that goal,” an Intel spokesperson wrote. It’s been a difficult year for Intel. The company started 2020 on a high note that quickly soured with the onset of the COVID-19 pandemic. While surging laptop sales, spurred by work-from-home initiatives, helped to prop up revenues, the pandemic and fierce competition from rivals AMD and Nvidia have begun to eat into the chipmaker’s bottom line. AMD in particular has seen major gains this year on the back of its EPYC 2 processors, which offer similar performance and higher core counts than Intel’s Xeon Scalable offerings. Meanwhile, in the emerging artificial intelligence (AI) space, Intel has done plenty of talking and even begun integrating AI features into its Xeon family of data center chips. However, the chipmaker has also faced challenges, abandoning its Nervana project in favor of Habana Labs’, which it acquired last year for $2 billion. Habana helped Intel score a high-profile contract with Amazon Web Services (AWS), but the deal appears to be more of a stopgap measure than a long-term deal. In the same keynote that AWS CEO Andy Jassy announced the partnership, he announced plans to build an even more powerful AI training chip to replace them. And this is a trend that’s been seen repeated throughout 2020. Amazon, Apple, and now Microsoft are all developing their own custom silicon.