Intel struggles, potential Qualcomm deal show turmoil in chip industry

When The Wall Street Journal broke the news Friday that Qualcomm had approached Intel with a potential takeover, tech forums were abuzz — and with good reason for the change.

A rescue for Intel is tied to debates about the changing role of the US in the world’s chip industry and the battle for dominance in the age of accelerated computing.

Intel tried to fix it its course for years. In 2021, he brought back the CEO Pat Gelsingerformer VMware CEO and longtime Intel executive to revive its status as a leader in the chip industry. It recently received CHIPS and Science Act funding to create more microchip manufacturing capacity in Arizona. And it made a series of acquisitions to catch up with the development of more advanced architecture and to profit the AI ​​boom.

Intel’s American manufacturing efforts are a big bet for the company’s future. Each new factory can take billions of dollars and three to four years to complete, which Intel may not have on its side. Even if Qualcomm were to acquire Intel, it’s unclear what it would do with its manufacturing operations.

While Intel has built factories in Ohio, major chip designers have not publicly signed on.

“They just dropped the ball out there and so far they’re trying to build the foundry business, but they haven’t even proven they can do things for themselves,” said Stacy Rasgon, senior analyst at Bernstein Research.

A series of unfortunate events

Intel was central to the personal computer boom of the 1990s, designing and manufacturing state-of-the-art microprocessors. With its x86 processors (central processing units), Intel has driven rivals such as AMD from the market.

Because of its focus on computers, Intel chose not to capitalize on the growth of mobile chips in the 2000s – a big mistake due to the iPhone boom.

In a 2013 interview with The Atlantic, former Intel CEO Paul Otellini expressed regret that he backed out of an agreement with Apple to design and manufacture iPhone chips before the smartphone was introduced. The two companies could not reach an agreement because Intel’s forecasts said that the volume would not make up for the cost.

“We ended up not winning it or passing it on, depending on how you want to look at it. And the world would have been a lot different if we had,” Otellini told The Atlantic. “And in hindsight, the cost estimate was wrong, and the volume was 100 times more than anyone thought.”

Another opportunity arose when OpenAI approached Intel for an investment. OpenAI wanted to reduce its reliance on Nvidia chips for AI and build its own infrastructure. The deal fell through, and according to a Reuters report, Intel management didn’t believe generative AI models would hit the market anytime soon. That bet would later come back to bite Intel, and now OpenAI has billions in backing from Microsoft.

Intel bought deep learning startup Nervana Systems in 2016 to invest in AI. The chipmaker soon wound down operations at Nervana and bet on Israeli startup Habana Labs, which it acquired for $2 billion in 2019. Habana helped launch Intel’s next-generation AI Gaudi chip for companies this year.

Lack of Intel GPUs

While Intel has focused on processors, competitors such as chip designers AMD and Nvidia have hedged their bets on GPUs, or graphics processing units, which could help speed up the computing process, a critical necessity for AI training.

“They didn’t really have a roadmap for GPU products,” Rasgon said.

Intel had a standalone graphics chip called Larrabee in beta development. However, the project was canceled in 2009 and turned into a software development platform after failing to meet performance goals.

“Nvidia’s dominance didn’t come from luck. It came from vision and execution. What Intel lacked,” tweeted Bryan Catanzaro, vice president of deep learning applied research at Nvidia, who previously worked at Intel as an intern at the Larrabee project.

The processors that made Intel big now presented what Logan Purk, a senior analyst at Edward Jones, called the “inventor’s dilemma,” when newer technology replaces incumbents.

“I think management rested on their laurels, so to speak, and there wasn’t a strong competitor nipping at their heels to force them to continue pushing this innovation,” Purk said.

Manufacturing delays

Intel’s customers and rivals have taken their silicon business overseas to cut costs. Companies like AMD and Nvidia have decided to skip chip design while outsourcing manufacturing.

Intel’s manufacturing capabilities lagged behind the demands of its customers. It had delays for its chips while TSMC was shipping chips for Apple, AMD and Qualcomm. In 2020, Intel announced a delay in its 7-nanometer chips due to a “faulty mode” that would have been key to the next generation of chips. Samsung and TSMC soon announced more advanced manufacturing capabilities, integrating more transistors into a processor and leaving Intel behind once again.

After using Intel chips for 15 years on its Macbooks, Apple debuted its own chip design with the M1 in 2020 and contracted production to TSMC.

Intel is now betting on the 18A chip and its Xeon data center chips. Gelsinger’s latest announcements point to the creation of an independent subsidiary for Intel foundries, which would allow more independence to raise and borrow capital.

A potential Qualcomm merger

A cash bailout could be coming. Mobile chipmaker Qualcomm approached Intel to acquire its chip design business and later a merger agreement, Reuters and the Journal reported, respectively. Apollo Global Management also offered an “equity-like” investment of up to $5 billion, Bloomberg reported.

“If Intel were to be acquired by a Qualcomm or a Broadcom, or any of these other big chip companies, it would be one of the biggest deals ever to happen in the chip space. Just as monumental,” said Dan Morgan, a senior trust portfolio manager at Synovus.

The merger could also reinvigorate the Biden administration’s efforts to position the U.S. as a global chip manufacturing center and create a competitor capable of challenging Nvidia’s monopoly in the AI ​​chip market, Morgan said.

While it would help Qualcomm diversify its products, the takeover would be a difficult bridge between the two companies and would not address Intel’s weaknesses, analysts said.

“Now, you’re buying their PCs and servers today, but you’re buying all the problems in their foundry business. Why would you want to get involved in this? It’s a huge undertaking,” Morgan said.