The Risk in Intel’s New Chipmaking Strategy

Since the 1990s, Intel has managed the huge capital demands of the chipmaking business by concentrating on designing the most advanced and profitable chips and keeping its manufacturing operations lean. The company routinely snapped up billions of dollars in chipmaking tools, only to sell them off a few years later when they were no longer cutting edge.

But at an investor event last week, Intel CEO Pat Gelsinger called that decades-old practice “the bug in the Intel business model.” Instead, Gelsinger plans to hang on to those pricey chipmaking tools for much longer, using them to make chips for other companies like Qualcomm and Cisco Systems. The nearly year-old business, Intel Foundry Services, aims to compete with Intel’s larger rival, Taiwan Semiconductor Manufacturing Co., and help Intel regain its manufacturing lead, which is in turn key to producing faster chips that sell for a higher margin. Since losing its crown, Intel has lost market share in key segments to rivals like Advanced Micro Devices and faced gross margin erosion from 62.3% in 2017 to 55.4% last year.