Odd Lots - How the Number One U.S. Semiconductor Company Stumbled

Episode Date: November 30, 2020

For years, Intel has been the pre-eminent U.S. semiconductor company. But lately, the company has stumbled. This past summer, shares in the company plunged after it said it was experiencing delays in the production of its next generation chips. And while most tech companies have been on an absolute tear, Intel is still close to its lowest levels since the March bottom. So what went wrong and what do they need to do to right the ship? On this episode, we speak with Stacy Rasgon, a semiconductor analyst at Bernstein Research on Intel and the general state of U.S. high-tech manufacturing.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. So Tracy, you know, we haven't talked about it in a while, but one recurring topic on the podcast over the years has been China's effort to really sort of. leap into the lead technologically. We've talked about it with a few different guests, invests aggressively in airlines, semiconductors, and so forth. Setting aside all the current noise, that's still like one of the bigger long-term storylines that attempt to sort of supplant the U.S. at the lead in the lead of technological manufacturing and development. Yeah, that's right. And I think that's where a big

portion of the trade war or the Trump administration's trade war with China actually came from. And that's why we see so much of it centered around technology, things like bite dance, TikTok and of course, 5G and Huawei. And of course, we're seeing Beijing rolling out. It's new plans for, I think it's for the next 20 years or something like that. And of course, tech dominance features quite highly once again. Absolutely. But it also like, it takes two to tango because in addition to China's own endeavors to leapfrog or surpass the U.S. in terms of technological development, there's also another element, which is that a lot of the U.S. companies that we sort of associate with, you know, the great heritage of U.S. manufacturing, whether it's Boeing, GE or Intel with chips, All of them seem to be not doing so great. So literally going in the other direction.

Yeah. So this is something that I wasn't that aware of just because I've been outside of the U.S. for a while. But Intel seems to be struggling. So I think in the summer they said they were something like 12 months behind schedule when it comes to developing like their new next generation of chips. And the share prices come down quite a bit since then. And it's sort of the polar opposite to what you.

see happening at some other chip companies like a TSM over in Taiwan, for instance. They seem to be doing quite well during the pandemic. Well, relatively well. Yeah, I mean, you have it exactly right. There seems to be going in the exact opposite direction falling further and further behind. And their stock has really been got hammered this summer. So like what happened is sort of an interesting question because we could talk about China's research efforts, but how this company that basically invented the industry. industry, one of the, you know, that put the Silicon in Silicon Valley, so to speak, how it lost its lead and ability to be one of the world preeminent manufacturers is itself a pretty

interesting storyline here. Yeah, absolutely. And I mean, I remember during the early 2000s, Intel was this massive, massive company, and it had the branding and the advertising around it, and just a huge deal. So it's interesting to see it sort of turning around. this year. So we're going to talk more about Intel and what happened, and I'm very excited about our guest. We're going to be speaking with Stacey Razgan. He is a managing director, senior analyst, U.S. semiconductors at Bernstein Research, and notably at a recent Intel conference call after one of their quarters, the company didn't call on him leading him to a sub-tweet the company on Twitter, which is always fun

and doesn't happen that often with analysts. So Stacey, thank you very much for joining us. Oh, my pleasure. I'm glad to be here. And by the way, nobody knows what that tweet was about. Okay, fair enough. Even it was a sub-tweet of anything. Okay, so just on the day that you didn't get called on by Intel

during their quarterly conference call, you tweeted cowards dot, dot, dot, But we'll all pretend that we have no idea what that was about. Maybe it was something completely unrelated to your professional career. This is one of the mysteries of the universe. We'll leave it at that. It'll be a mystery forever. We'll just leave that tweet.

But it is true that you didn't get called on. So that part, that is true. So forgetting the sub-tweet aside or whether it was a sub-tweet, what were you going to ask? Like, you know, here's your chance, Stacey Razgan. at a Bernstein research, you're up. What would you have asked? Oh, boy, I don't even remember what I was going to ask at this point. I have to go back and look at my question list.

I'm sure it was something pointed, though. It typically is I have a reputation, I suppose, for asking those kinds of questions. And it's not really my fault. I can't help it. My BS detection threshold is set kind of low. And I tend to forget who I'm talking to once I get going, so I can't help it. But it doesn't always engender a lot of love. but that's okay.

I don't have to, I don't have to believe. This is going to be a good conversation. Yeah. This should be a great conversation. I'm looking forward to it. We'll see if that threshold gets hit or not. I feel like sell-side analysts with a low BS detector is fairly unusual, or at least we don't get to talk to many of them.

It goes with the territory. Can you set the scene for us? Like, how bad are things at Intel? at the moment in your view. Like Joe said, you're a sort of noted critic of the company recently. What's going on there? How bad is it? I mean, it's problematic right now.

And so, you know, you started out the beginning of this call talking about some of the issues they're having with manufacturing. It's important to note these are not new issues. So the current issues are with seven nanometer process. And you're right. In July, they disclosed further delays there. They said the process was 12 months delayed. They said the products, I think, versus the prior roadmap, were six months delayed.

That being said, this is not the first time they've had a problem. 10 nanometers, which was the prior generation manufacturing technology. And if you want, we can go into what the numbers and everything mean, but just in general, 10 nanos was the prior one. They had big problems with that one as well. That one was delayed for five or six years and forced them to sit on the, you know, the two generations back, which was called 14 nanometers. They were sitting on that one for many more years than they intended.

But even 14 nanometers was delayed a little bit when they originally launched it. It took about a year longer than they had originally anticipated to reach sort of like fully manufacturable yields and reach full volume. So these are not new problems at Intel. These have been building over probably half a decade plus and they finally hit a wall. I mean, that's sort of the current state of affairs. So Tracy and I aren't technologists, but we see these terms or hear them 10 nanometer, seven nanometer.

Why don't you take this moment to describe like what these means? I mean, I get it. Okay, smaller chips and efficiency and all that. But talk to us a little bit about like what we're really talking about. Yeah, you bet. So in theory, like it used to be like some measure of the size of the transistor, the, that was called the gate length at one point. In reality, these numbers are complete in total marketing.

They don't actually mean anything in isolation. And they're not comparable from one company to another. So, for example, an Intel 10 nanometer part is not the same as a TSM 10 nanometer part. I'll give you an example of this, by the way. When TSM went from what they purportedly called 20 nanometers to 16, they didn't shrink the transistors at all. What they did is they changed the structure of those transistors. They went from what, and again, we can talk about what these terms mean, but they went from a transistor that was called a planer transistor structure

to a 3D or a FinFET transistor structure. But they didn't make them any smaller. They didn't squeeze them closer together. They didn't do anything. They just went from planer to FinFet and called it 16. No shrink, no nothing. So that's the thing. The numbers themselves actually stopped really having actual meaning,

oh, more than a decade ago. It's been marketing ever since. What you can think about them, though, in terms of meaning, It is typically some measure of improved transistor density, so squeezing more and more transistors onto a given area of silicon. It is some measure of that. And with every further node in every further transition in theory, you should be getting better performance out of these chips and better power efficiency.

This is really what Moore's Law is, by the way. It's sort of these three legs of the stool. It's better performance, better power, and lower cost. And by the way, when people talk about Moore's Law dying, which is sort of the situation we're in right now, it does not mean that it's impossible to shrink these things or to make the transistors any smaller. What it actually means is that the cost leg of that three-legged stool is going out the window. So we can still do this. Like engineers are smart. If there's a, if there's a business case to shrink, they'll do it. But now we have to pay for it. Whereas before,

we used to get it every two years for free. It was fantastic. Right. But that's kind of the situation of what's going on now. So we keep comparing in this discussion, Intel to TSMC. but my understanding is they're not exactly the same company, right? The business model is slightly different. Could you maybe explain how they differ? You bet. So there are two primary semiconductor, broad semiconductor business models in the industry. The first is called an IDM or integrated device manufacturer.

And these are companies that both design and manufacture their own chips like Intel, right? The issue is, you know, a leading edge semiconductor manufacturer, facility can cost these days, you know, $10 billion, like it's very expensive. And if you're going to build a factory that costs that much, you better have a lot of revenue in order to put through it in order to cover those costs. And most semiconductor companies do not. And so decades ago, this became clear. And the supply chain atomized and split apart. And you gave rise to what's known as the fabulous foundry model where you have companies, say like an Nvidia or a Qualcomm, these are referred to as fabulous companies in the sense that they do not.

not have fabs. Fab is a semiconductor manufacturing facility. They only design chips, and then they outsource the manufacturing to a company known as a foundry. This is what TSM does. And they're able, because of this model, they can agglomerate demand together from many semiconductor companies and build up the revenue scale that is required to support the high costs of manufacturing that ordinarily all these companies would not be able to support on their own. And so that's what TSM does. And it's been kind of amazing. I mean, in the sense that, you know, for the longest time, Intel talked about being an IBM as being an advantage because you could barely tightly couple both the process and the design together and get really good products. And I guess as long as

both of those things were on the right trajectory, that was true. The problem is now because their, their manufacturing side has fallen by the wayside, it's actually really impacting them. Not only can they not tightly couple those two things together anymore, but it interferes with the design because you design for a specific manufacturing process. If the process isn't ready, you've got to throw that stuff out. And so the fabulous foundy model, the found you model itself actually seems to be growing. It's ascending now. It seems to have the advantage of especially because they are able to, at least at this moment, to stay on their manufacturing roadmap. So we can kind of think of Intel in theory as designing chips a la Invidia and also having a fab la TSM.

But what you're saying is it sounds like you can't really like sort of neatly divide the two. And if they're having trouble on the fab side, on the foundry side, then that also bleeds through to the design side. Yeah, because you don't design in isolation, right? You have to design for a specific set. There's a set of design rules that go with a specific manufacturing process. So, for example, if I'm Intel, and we'll probably get to this, but Intel is talking about using outsourcing potentially in a bigger way. Intel cannot just take their current designs and just throw them over the wall to TSM.

They have to completely redesign them to correspond to TSM's manufacturing process and TSM's design. So these two things are coupled, and if you have problems with one, it causes problems with the other, sure. Wait, so could we delve into the manufacturing problems at Intel a little bit more then? Like, what exactly is happening there

and what's gone wrong? Because, of course, as we mentioned in the intro, you know, Intel was supposed to be the state-of-the-art global standard for chip-making for many, many years, and now it seems like it's not. Yeah, so first I want to step back and say, this stuff is very, very difficult to do. So the fact that people are having problems is not in and of itself a shock.

These are the most technologically advanced products that humanity has ever devised. And I don't know if either of you ever been in a semiconductor factory, but you can think about this. I mean, if I just take these node sizes as gospel, which I know they're not, but I mean, let's just take them. You know, at Intel right now is delivering 10 nanometer products, right? When they're actually doing the manufacturing and they're imprinting these features onto the wafers, I'll try to be simplistic here, but they use a laser light to do this. The laser right now has a wavelength of 193 nanometers. So they're printing purportedly 10 nanometer features using a wavelength of light that's almost 20 times the size of the feature that they're trying to print.

Like I'm amazed that any of this stuff works at all. So just to get that out of the way. It's astonishing. By the this is one reason that I love this space, because it's like I said, I'm just continually in awe of the things that humanity collectively has been able to pull together here. But in terms of specifically what's going on at Intel, so I'll step back at 14 nanometers, like I said, that was a minor delay.

It was like I said, it took them about an extra year to yield the process. By the way, when I say yields, that's a simple. concept. That is, you know what, I'm making a silicon wafer full of chips. How many of those chips are good? That percentage is your yield. The more, the higher yield, the lower your cost. So that's a good thing. And it's that yield that determines how quickly you ran for process into production. 14 nanometers took a little bit longer. We still don't know why, but it didn't hurt them because back then they had a genuine five-plus year process leadership. So they burned a little bit of it, but it was fine. With 10 nanometers, we kind of know qualitatively what was wrong. Intel

was using multiple patterning on some of their layers for the first time. Again, we can talk about what that is if we need to, but they were using a specific type of advanced process for the first time and it caused problems. They were using new materials at the time, like cobalt and other things, and they were using other techniques to get a much greater density improvement that was normal. With a normal node transition, their transistor density the transistors per millimeter squared of silicon area typically went up by maybe 2.2 to 2.4 times. With 10 nanometers, it was a 2.7 times improvement. So the way the company has discussed this is it was just too big of a leap.

And they bit off more than they could chew and it caused problems. I have no idea what's going on at 7 nanometers. All I know is that it is something that's completely different from anything they hit them at 10. And 7 was supposed to fix those problems at 10. it was a smaller density improvement. It was only 1.7. They're using a new lithography technique that's called EUV or extreme ultraviolet lithography that was going to replace that multi-patterning and fix those problems.

And so they were taking steps in order to learn lessons from the 10 nanometer debacle and to repair. And that's why the 7 nanometer announcement came as such a shock because they've been telling everybody, you know, for a year, 7 nanometers is on track. We've learned their lessons. It's going to be good. came out and just dropped the bomb on us. And this is why going forward it's so problematic

because their credibility on this stuff is now zero. So when they're telling us, we think we've got a handle on it, we think we know what's wrong. I mean, like nobody knows what to believe anymore. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all.

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business app, or listen to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. So many good questions. I think we're going to have to

extend this episode to about two or three hours. But in all seriousness, we saw, you know, Tracy mentioned it when they dropped this bomb this summer. The stock took quite a reaction. I mean, it was a major plunge. I don't think it's like really recovered very much since then. Was that because this was understood to be fundamentally different as you describe it than those other delays? Because there's this nobody really understand. Like explain the sort of financial market reaction to this one versus the previous setbacks

they bet. Yeah, you bet. And I need to fold AMD, I think, and do this discussion a little bit. So if you go look at AMD's stock versus Intel's, they're polar opposites, right? And part of the reason there is AMD is now on a trajectory, and they've come a long way. AMD, you know, four, five years ago, the controversy on that stock was, are they going bankrupt or not? And the stock bottomed out, you know, in below $2. That's kind of where it was. The stock now is, you know, close to 80 and it's been even higher. The reason is AMD actually, they had already gone fabulous back in the financial crisis.

They had been using global foundries, which is another foundry, and global foundries back in the, you know, 2011, 2012, 2013, time from shot AMD in the foot. Global foundries had problems with their process technology as well. And then AMD, I mean, the business was in total freefall. I mean, their revenues got cut in half. They had four or five different rounds of restructuring. It was pretty awful. They had a last Hail Mary effort to get a new architecture, which they're delivering now. they're on their third generation.

And that architecture was extremely successful. And they made the shift from global founders to TSM. And so now you're in a situation where AMD actually has a competitive and in some cases even superior architecture and they have a superior process technology. And so they've been taking share from Intel, both on the client side, PCs as well as in servers. Now the real bulls on AMD, they have this vision, right, that AMD is going to go, I'll make up the numbers, but I mean this, you know, by 2020,

By 2022 or 2023, they'll be doing 250 or $3 in earnings, and by 2025, they'll be doing five or six bucks in earnings. And this is a duopoly market. It's them and Intel primarily, so all that would be coming at Intel's expense. But AMD has been kind of a dream. And so before Intel announced these seven nanometer issues, it was kind of like, well, okay, maybe AME will get to this two or three dollar number in a few years. But by then Intel will be going harder on seven.

They'll have fixed the issues at 10 that gave AMD in advantage. and at that point, like, it's all over, right? And Intel's going to be back on the ascendancy. Now, because of these issues with seven nanometers, like with A&D, now, you could believe whatever you want. Like, there's no pushback because you have no idea what Intel's going to be doing at that point. And it makes the idea of the, the, the, the, the, the 86 CPU market and PCs and

servers, which today is sort of like a 90, 10 or an 80, 20 kind of market, you know, if you wanted to believe that it could be a true duopoly, a 50, 50, 50, your 60, 40 market in a few years, if you want to believe that you can. And that all comes if it happens at Intel's expense and the driving force behind it is a continued loss potentially of competitiveness on Intel's part. And with the seven nanometer delay, which like I said, was really a bomb that was dropped on people, it becomes very easy if you want to believe that sort of thing to believe it. So this was potentially a thesis changing announcement for Intel. That's why the stock reacted like it did. So is this just, I don't know, is all of

this just down to Intel doing basically a chip version of vertical integration for far too long when other companies decided to specialize in various ways? Yeah. So again, I don't know why Intel's having this. It's kind of amazing that they are because they look, Intel has 113,000 employees. They spend over $13 billion a year in revenue, which is like almost double AMD's revenue. In R&D, Intel spends that much. It's almost double A&D's revenue. It's almost double A&D's revenue. Maybe he's growing now. I don't know what's going on.

Like we don't know why. And now, by the way, it's causing bigger problems because like Intel is faced with a choice now and we'll find a little bit more about this in January. Intel is now trying to make the decision. Are they going to outsource it in a greater fashion? Intel outsources some. Don't get me wrong. Like Intel's bought companies like Altera and MobileWy that use TSM.

And for some of Intel's internal volumes, you know, maybe not CPUs, but like chipsets and peripherals and other things, they've used TSM. So it's not new to Intel. But I mean, Intel is now talking about if they can't fix their seven nanometer problems, they may have to scrap it entirely and outsource that as well. And so there's a lot of unanswered questions with Intel right now. Like right now, I have no idea what the company looks like in three years. That's probably the biggest problem.

Like if they were to come out and give us a concrete plan and give a certainty that they could execute on that, I think the stock still would have fallen as much as it, but maybe you could felt a little more comfort with buying. it at the bottom. Like right now it is it is very easily a value trap because again we don't know what's going to happen in three years. They're going to make some announcement in January. We don't know what they're going to say. And in the meantime, the competitive problems, no matter what they do, we're only going to get worse. A&D is going to keep taking share on some trajectory. Apple made an announcement yesterday. So like a good chunk of, I wouldn't be surprised

if three quarters of Apple's notebook business goes away from until next year, which I'm not sure is in the numbers. I know you didn't want to talk so much about short term, but I still think numbers next year. I still think people are smoking crack next year. The numbers are too high. They need to come down. They made it to come down more. So this is dangerous. You mentioned that you don't know what Intel is going to look like in three years. So how difficult does that make your job as an analyst in trying to determine, you know, an appropriate price target or way of valuing a company where there is this much uncertainty? Yeah. Well, let me step back because my job as an analyst, like my favorite thing is controversy, right? Because it gives me a reason to talk. to my clients. So from that standpoint, this is fantastic, right? Because I don't think this controversy is going to go away at any time. In terms of sizing it, I mean, look, like I have to sort of like our published model right now is status quo. And like I said, we're decently below.

I think the street's too high. But one thing we can do is sort of like run out scenario analysis and like what could things look like? We've done some of this. And it's actually kind of interesting because, you know, if you sort of step back and you say, well, what would an Intel look like if they were fab light or if they were fabless. If I had a magic genie that just snapped her fingers and they were fabulous tomorrow with the same competitive environment as we have, it doesn't necessarily look bad. Like gross margins would be lower because they would be paying a margin to a TSMC to make the chips. At the same time, they wouldn't be having to invest nearly as much in their own factory. So you'd save Capax. You'd probably save R&D because you wouldn't be paying for research and

development for process technology development. And so the operating margins, and free cash flows could be just as high as they are now, if that's possible. If you had a magic genie that made the transition instant, the problem is I don't have a magic genie. It's going to take years, whatever they do. In the meantime, it's going to throw more uncertainty in their roadmap. And I'm not sure it's appropriate to take today's competitive environment, which is already deteriorating and apply it to that, as an overlay to that model.

And today where you have like I said, a 90, 10 or an 80, 20 model, maybe by the time they're finished, it could very easily be a 60, 40 or 50, 50, you model. And so the more they talk about this, you know, these are, these are the kinds of things that you can roll out as an analyst. And we've done that and we'll continue to do that. Let me ask you a broader question. I mean, we started talking about, we started this conversation, talking about the context of the tech trade war, some of the actions. The current administration is made against Huawei and so forth. Should this be, you know, stepping aside from your pure stock or down hat for a second or cell side analyst had per se. But if Intel rely, the ends up needing

to rely on Taiwan semi to make its chips, is that the type of issue that, you know, could rise, should rise to some level of anxiety in D.C. Yes, I absolutely think it should because you think about this, right? Right now, you know, broadly in the world, there are only a few companies that can do leading-edge semiconductor manufacturing anymore. It's Intel, Samsung, and TSM. That is it. Everybody else who has ever been at the forefront of semiconductor manufacturing has exited the leading edge.

That doesn't mean that other players don't make stuff. I mean, there's plenty of folks out there with fabs, but in terms of the bleeding-edge stuff, it's only those three companies anymore. Only one of them is U.S. And the U.S. one is having problems. And so if you think about this, like, what does that mean for Taiwan? I mean, they always used to say like data is the new oil. I mean, maybe semiconductors are the new oil now.

And Taiwan, like, if this happens, I mean, already is kind of turning into potentially the most strategically important country on the face of the earth. And it's also 150 miles offshore from China and they kind of think they own the ground that it sits on. So, yeah, I think this is potentially problematic. And again, like, even if Intel wanted to outsource like the bulk of their leading edge to Taiwan, like, is it politically. viable. I don't know. You know, there's other things going on in the U.S. now. I mean, like, one of the few

sort of bipartisan initiatives that are out there right now is around strategic semiconductor investment. Like, certainly the Chinese are doing this. I mean, semis are a big part of their, have been a big part of their five-year plans. They've already been pushing towards self-sufficiency. Everything that's going on in terms of the trade war and the sanctions and everything else is just going to drive China to push towards self-sufficiency even more because we have them by the balls right now. right. I mean, if we wanted to completely cut China's semiconductor ambitions off of the knees, right now we have the ability to do that by banning semi-sales, but in particular banning semi-cap and EDA on design software sales, we're already kind of doing that to Huawei if we want

to do it broader, like that's it. So they have to move towards self-sufficiency. And I don't know what the political viability of having like the last bastion of like advanced US-based semi-conditioner manufacturing being outsourced to a foreign country. I don't know how. of how that's going to fly. Like, we'll see. But it's got to certainly be on top of mind for any of the policymakers that are looking at this area. Right.

On that note, do you think there's a role for policy to play in, I guess, helping out Intel if you think that it's a strategically important industry for the United States? Well, yes and no. So there is, have already been efforts to invest. And there were something called the Chips for America Act, which we actually had bipartisan support. one of the few things.

I think that was subsumed into the National Defense Authorization Act. But there is talk of funding for semis. Now, in terms of Intel's problem, like Intel's issue right now is not having enough, it is not not having enough money. They've got plenty of money. So throwing money at the problem is not going to fix it. Right. But, you know, could you make it easier in general for them? I mean, they're talking about things like, you know, investments for manufacturing,

tax incentives, R&D incentives, DARPA is getting involved, that sort of. So all of that stuff would be good. One issue I have with some of the things that have been throwing around it is I still think there are a drop in the bucket. So we've seen a few things. There's already some funding. Now, TSM is going to actually be building a fab in Arizona. It's a PR headline right now.

It's like, I can't remember, 20,000 waivers per month. Ultimately, they're going to invest like $12 billion or something over eight years. I mean, that's a rounding error, frankly. And then some of the numbers we saw in some of these initiatives, there's really been no funding that's actually been apportioned yet. They were talking about whatever it was, $28 billion or $30 billion or something like over a number of years. I personally feel like if the U.S. is really serious about this, we need an Apollo moment. We need like hundreds of billions of dollars. I'm not, if we really want to make sure that we have, you know, the majority of manufacturing that it's rebased in the U.S.

Right now, it's all moving to Asia. I don't know that the political appetite is there to invest that much money. But I'll take whatever we can get at this point. Like whatever they want to do it to start. So I think long-story, I think dollars would obviously would help Intel a number of other players in the U.S.

just to make easy. But it won't fix the technology problems that are potentially driving the shift in the world. Intel has to do that on their own. I'm Francine Lacqua, an award-winning journalist. And I've got a new podcast, leaders with Francine Lacroa from Bloomberg podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment.

But I've always been curious who are these people as leaders. I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. One of the previous guests we've regularly had on the show, Dan Wang, he's a technology analyst at Gavkell. And he talks about how, like, tech knowledge comes in sort of two parts.

Or manufacturing knowledge is in two parts. One is just sort of, like, blueprints, which you can sort of, like, write down on a piece of paper. And then the other is just sort of like this, like, tacit sort of understanding knowledge, like, how to build a factory, which is not something you just, like, write down on a piece of paper. There's no, like, guide that someone can say, oh, this is how you build a factory and just follow it. And it's something that sort of like exists in the collective knowledge of people who have been building factories for their whole careers. So going back to the seven nanometer debacle, is there something that's like identifiable where like this some sort of like knowledge or transmission of knowledge from one generation of engineers is getting degraded or lost within Intel or within US manufacturing? is there some sort of identifiable leak

where these things that once used to be known and ongoing learnings and improvement is just not happening the way it used to be. Well, so I'll talk about like more general and more specific. So I mean, in general, there's always a learning curve. And so like, I'll make it up. I've got 10 nanometers done and I'm going to seven.

Right? Seven nanometers is going to incorporate all of the issues potentially that the prior gen, the 10 had. plus a whole bunch of new ones. And so the fact that they still haven't really fixed 10 and they, and but they really haven't, they're ramping 10 nanometers right now, but it's impacting significantly impacting their margins, which tells you that the yields are not good. They have, but they have to ramp it.

They can't wait any longer because of the competitive situation with A&D, right? So they've got to ramp it even though the yields aren't good. But if you don't completely nail like the prior node, all of those problems are going to still pretty much exist on the subsequent plus all. all the new problems. And so that may be part of it. And there's always learning curves on this stuff. And if your learning curve is too shallow, it can impact.

In terms of the employees, and you ask, like, are there issues with like knowledge or so, again, I don't know specifically what's going on at 7. I do know that in 2016, Intel had a very sizable layoff. And I know that there were worries that they had been laying off like some of the more senior employees at the time. And there were lawsuits. You can go back and look. Like there was a whole bunch of stuff in the new.

news flow around this. So I have no idea what those employees were doing. I don't know if they would have had anything to do with like the subsequent seven enemies. I don't know. But I do know that there was talk of a potential brain grain several years back when they had that layoff. So who knows? With seven again, my biggest concern with seven was again, they never really seemed to nail 10 either. And that's going to propagate. It seems like it is. So we've discussed all these problems. And you clearly have some concerns about this company. How does management actually go about restoring confidence in the business model? Like what should they be doing at this moment in time? Well, I mean, they're trying, right? I mean, look, there's the magic solution, which is like,

I wake up tomorrow morning and they say, hey, we fixed it. It's all good. I guess that would solve things, although I'm not holding my breath or something like that. They're doing other things. I mean, so, you know, what they're doing now is they're trying to focus on other areas for differentiation. And so it's it's it. It's not necessarily just process. You know, it's process. It's also things like packaging. They're doing what's known as a chipplet architecture now where I can have a single product that's say we'll go into a PC someday that is not a single monolithic chip anymore. It's a whole bunch of little chiplets that may be made in different places on different processes, depending on whatever's best for that particular functionality. And packages. And packages,

those together in clever ways Intel's got good IP there and so they're starting to leverage that. They're also trying to leverage software and other things. And like all of these things are all important. They always were. Other players are also good at some of those other things as well. But they're going to try the best they can, you know, if process is not going to be the end all and be all and everything to try to leverage those, those other areas. And like I said, they're going to have to make a call like one way or the other in terms of what to do. Do you give up on decades of of leading edge manufacturing, you know, prowess and, and, and, and, and, and, and, and, and, and, and, and, and, and, I don't

know. I mean, they'll have to make that call in one way the other. And it will, we'll see, we'll know in a few years if it was the right call or not. These are going to be pretty high, high profile decision. I also think tactically, they need to, personally, they, and again, if we're just talking about the stock for a moment, I think they need to reset expectations. I think numbers are two. I, and the problem I have right now, I mentioned it once before. I don't know what it looks like in three years.

And not only am I below the street next year, but I, can't tell you with confidence that next year represents the bottom either. And that's the biggest problem. The stock itself is hard to buy unless you feel like expectations have been sufficiently reset so they can grow off the trough. And I don't think they're there yet. And I'm not sure. So far, the current management team has not shown a willingness to sort of like rip the Band-Aid off, right? I mean, they seems like they wanted to go in dribs and drabs. And that's usually not a good way to go for stock performance, especially when things are on the decline. climb. So we'll see what they do. So is the issue just that, you know, especially as they

don't, you know, they fall behind in their ability to develop cutting edge foundries, potentially outsource more, is the issue just that Intel will still be Intel or Intel will still be there and be competitive, but it's just another chip company. And there's Nvidia and TSMC and AMD and others and what was once the sort of category defining company is just another player. Yeah, I mean, look, so I'm not worried about Intel going to zero. Like, it's a behemoth still. I mean, even today, go look at their numbers. They're doing almost five bucks in earnings this year and delivering.

I can't even remember the number, something like 18 billion plus in free cash flow. Right. And again, even if it's on decline, like, those are still pretty hefty numbers, right? And they've got a ton, they've got 113,000 employees and they spend, like, let's 13 billion plus a year in R&D. it's hard to believe that they're not good things embedded within that, right, that have value. So you have that.

But I think you're right. I mean, if you're going to go to a scenario where, you know, they're no longer differentiated on process, where their destiny would, at that point, would now be in TSM's hands,

you know, like their ability to ship would be limited by how much capacity they could get from TSM at that point. Similar to how AMD is today, right? That's a problem. And where they're trying to differentiate and all these things where other players are good as well.

yeah, you're right. It becomes, you know, they're, they no longer have that secret sauce necessarily in that point. They're competing, you know, on a much more even footing with lots of other players who are also very, very, very good. And so you have that, that kind of a problem. I mean, you can go look at other tech companies, like an IBM, for example, which in IBM, and by the, I used to work at IBM research, like, like, way back in the days. I mean, it's a great company. They got fantastic IP and everything else. But, I mean, it's been a financial engineering sort of thing for many years, right? They haven't grown, you know? And that's kind of what is. They've, they've been pulling like increasingly financial levers and sort of manufacturing earnings.

And, you know, that may be a scenario, like if Intel can kind of get their mojo back, we may see something like that. It won't go to zero, but you're not going to see a ton of multiple expansion like with something like that either. And like this is the thing with Intel right now. I mean, like the bull case on it from here is it is very cheap and maybe something will go right. It's cheap hope. And both of those engines, are true. Like, it is extremely cheap. Even on my numbers, which are below, it is inexpensive. And maybe something will go right. I mean, that's kind of the bold. But that, that is not like a hugely compelling case. You never, you never sell a tech stock because it's just because it's expensive.

You never buy a tech stock just because it's cheap. I think that's where we are with Intel right now. Anything else, sort of other last thoughts, Stacey, that we didn't hit on that you think is sort of important for understanding this story? No, I think that covers it for anything. Like if you'd like to talk broader on semis, I'm happy to come back anytime, by the way. Well, we'll have to do it again sometime because I do feel like it's a fascinating subject and I was pretty transfixed. So really appreciate you joining us and we'll have you back. You bet my pleasure anytime. Yeah, thanks so much. Hopefully you get to go on the next Intel call, huh?

They kind of have to let you now. I figure like, look, either I'm going to be first in the queue or I'm never getting on again probably after that article. But I had no comment to the reporter. I didn't comment on that. Nothing in there was for me. Well, thank you for commenting to us. Yeah, I know.

You bet. Anytime. Got Tracy, we got to do more of these sort of like industry deep dives because honestly, like seven nanometers, 10 nanometers, all these issues. Like, I feel like, especially when you have someone like Stacey who can explain these things very clearly, I could really get. I can really get hooked up this, though. Yeah, Stacey really stands out.

I think he sort of makes cell side analysis sound fun, doesn't he? Like, you can sense the enthusiasm in what he does. Yeah, absolutely. And I think that, like, you know, often maybe what sort of gets lost in sell side is this sort of like focus on numbers and margins and all that stuff. And I think he does a really good job of connecting the sort of. like the hard tech questions with the margins. So thinking about like, sort of like, okay, the ramping up 10 nanometers, even though the processes aren't great, so the yields are going to be lower, so the margins are going to be lower. The connecting the dots between the sort of technological

debt that they have or the technological difficulties that they have with what actually falls through to the bottom line. He does that really well. Yeah, I agree. And I really, I mean, having spoken to him, I now feel like I need to listen to the next Intel earnings call just to see if they let him on or not. Yeah, no, I'm interested in that too. Also, like, his point, you know, Taiwan is the most strategically important place in the world right now. If like that's where all of the, you know, that's where basically all of the cutting edge semiconductor manufacturing is happening or a huge bulk of it. And it just feels like that story is like, we got to talk more about it. it. I mean, that's huge. Yeah, well, not only the technological angle, but also the geopolitical angle as well. That's sort of been heating up recently, too. But yeah, I agree with that. That's a

good way of putting it. Okay, shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow our guest on Twitter, Stacey Razgan. He's at S. Razgan. You can see him sub-tweet companies or not. No one really knows exactly what he's saying, but maybe he'll do it again.

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