Intel Corp's decision to spend $13 billion in 2013 to develop and build
future manufacturing technology has not gone down well on Wall Street
but it may be necessary if it wants to stay on top of rivals in coming
The top chipmaker's shares slumped nearly 7 percent on Friday, a
day after executives said the company would increase 2013 capital
spending from an already dizzying $11 billion.
decried the move, saying adding new capacity should be far from Intel's
mind in a waning personal computer market. Increased spending may
further pressure margins and leave Intel with even more idle capacity if
PC sales keep falling.
But others believe that Intel's top
priority must be maintaining its technological edge, a costly but
necessary endeavor that may even pay off in the long run with market
share gains. Moving up the technology ladder can also deliver cost
savings, helping safeguarding Intel's margins as it tries to catch up to
rivals in smartphones and tablets.
"That's the bet they're making
and they're all in," said Sanford Bernstein analyst Stacy Rasgon. "If
you stop, TSMC and Samsung close the gap - and you're toast."
Intel's $13 billion capex this year, $2 billion will go toward expanding
a fabrication plant, or fab, in Oregon where engineers will work on a
long-term plan to manufacture microchips on silicon wafers measuring 450
mm - about the size of a large pizza.
The other $11 billion goes
toward more immediate improvements in Intel's manufacturing technology,
letting it build chips over the next two or three years with features
measuring just 14 nanometers, and then 10 nm. The narrower the features,
the more transistors can fit on a single chip, improving performance.
newest fabs currently use 300 mm wafers, about the size of a vinyl
record. Moving up in size will make room for more than twice as many
chips to be etched on each, leading to cost savings.
costs will be a serious priority for Intel as it ventures into the
tablet and phone markets, where chips sell for much less than in the PC
industry. Intel, which has yet to make meaningful progress in mobile,
stresses that its most advanced fabs have the lowest cost per chip
"One of reasons why Intel is so aggressive on capital
spending is to maximize the chances it has of protecting its gross
margins as it moves into smaller and lower priced CPUs," Longbow
Research analyst JoAnne Feeney said.
not the first tech company to worry Wall Street with aggressive
long-term investments whose payoffs are difficult to estimate.
in the past have criticized Amazon.com Inc for splurging on costly
warehouses and other shipping facilities, investments that eventually
paid off and contributed to rich stock valuations.
While the size
of Intel's capex increase alarmed investors, the chipmaker since 2011
has been spending heavily. Intel normally pours 12 to 16 percent of its
revenue into capex, but spending has been closer to 20 percent in the
past two years and will probably be higher this year, Feeney estimated.
costs of developing the new technology to use 450 mm fabs are so high
that just a few companies, such as Intel, Samsung Electronics and
Taiwan's TSMC, are expected to have the scale to make the jump
worthwhile. Building 450 mm plants from the ground up is expected to
cost $10 billion or more.
It's not just a matter of creating
bigger silicon wafers. Most of the high-tech equipment - sold by the
likes of Applied Materials used in chip manufacturing has to be
redesigned as well.
The transition from 300 mm to 450 mm is so
expensive and complicated that the world's biggest chipmakers and tool
makers are collaborating to establish new standards and timing new
Intel made a $3 billion strategic equity investment
last year in chip equipment supplier ASML to help fund the development
of future lithography tools for 450 mm fabs, a move followed by rivals
Samsung and TSMC.
Intel's Oregon plant will lead the effort to
produce chips on 450 mm wafers, with other larger Intel plants upgraded
in the future, Chief Financial Officer Stacy Smith told Reuters on
Rasgon said Intel's long-term investments in
manufacturing will mean more pressure on its margins over the next few
years, but that its spending will help ensure it remains a major player
in the chip industry over the next decade - though there's no guarantee.
there's any company I can look at five years from now, they'll be here
and they'll be really successful at whatever they're doing. But I don't
know what they'll look like," Rasgon said.
"They have to do this, but it doesn't mean I want to own the stock while they're doing it."
© Thomson Reuters 2012