Idle Intel fabs foretell PC decline
Were Intel's fabs the canary in the tech coal mine?
After its engineers, Intel's most important asset is its fabrication facilities ("fabs"). Fabs cost billions to build, populate, operate and maintain, and just as an airplane isn't making the airline any money when it sits on the tarmac, a fab isn't making money when it's idle. It's costing the owner money, and lots of it.
Image credit: Intel
But idle they are. Intel's fabs may be at their lowest rates of utilization ever seen, according to Jim McGregor, president of Tirias Research, a semiconductor analyst based in Phoenix, Arizona, and in retrospect, it could be they were the early warning that the PC industry was in deep trouble - something that only now is coming out with the disastrous PC sales figures from Gartner and IDC.
While it was known that the PC industry has been twisting in the wind with poor sales through Christmas, this week we got the solid figures. IDC put worldwide PC sales for Q1 2013 down 14% from Q1 2012, while Gartner said sales were down 11.2% year-over-year.
To understand how Intel may have known this was coming, you must set your wayback machine to 2001, when the Tech Bubble burst and the industry was left sitting on billions of useless inventory that had to be sold off cheap or written off as a loss.
Jim McGregor, president, Tirias Research, a semiconductor analyst, Phoenix, AZ
Vowing never to let that happen again, Intel formalized what had been a more casual look into the supply chain, requiring the entire supply chain report on what they were hearing in the market rather than trading on gossip and hearsay. It also changed how client purchase plans were handled, which forced more customer financial commitment as well. If there was a problem at some point, such as OEMs not buying product because sales were trailing off, Intel would know before orders started backing up the supply chain.
When the economy took a massive downturn in late 2008, Intel was ready. It was able to halt production almost overnight and did not get stuck with a huge amount of inventory. Other chip companies followed Intel's lead, figuring Intel knew something they didn't. The early warning failsafe ended up working out very well and vendors didn't get saddled with inventory.
The hints of trouble were there, if you were in Arizona. Intel's four fabrication plants in the Arizona area are all reportedly running below capacity, with one not even operational. Fab 12, which makes processors, has been below capacity; Fab 22, which makes chipsets, is also running below capacity, as is Fab 32. Fab 42, the newest, isn't even running.
"The walls are up, and they took in some equipment, but they are delaying outfitting it. They don't want to call it mothballing it. They are delaying taking equipment orders until they are needed, and some equipment has been rerouted to Oregon," said McGregor.
Intel's two biggest fabrication sites are Arizona and Oregon, but there are other plants as well around the world. McGregor says his contacts within Intel manufacturing put the company's global utilization capacity at around 60%. Normally, Intel's fabs run at 95% and only come down when the equipment is being upgraded.
Quite a few of the fabs were taking 50% as many orders in Q4 as they did in Q3, said McGregor, and that's not just Intel, it's across the industry, he said. "It's happened to memory, processors, anything that went into PCs. Demand wasn't shaping up, and the outlook wasn't looking rosy," he said.
McGregor said that starting in September, all of the chip companies stopped buying raw materials. He talked to a company that provides chemicals to chip makers and they told him that literally overnight sales dropped 50%.
Could this be Intel seeing another collapse in the distance? McGregor thinks so. "Intel does try to keep a very good view in the entire channel. And when it gets to a certain point, they shut it down. To Intel's credit, I think they did see a lot of it. I think a lot of the other chip guys saw Intel was hitting the brakes and they followed, figuring Intel knew something they didn't," he said.
Intel declined to comment, citing the quiet period before announcing its first quarter earnings. Those earnings will be released after the market closes on April 17, and the earnings call will be the curtain call for CEO Paul Otellini, who retires next month after 39 years with the firm, the last eight as CEO.
Windows 8 has been viewed as the villain in PC sales stumbling, but it's not to blame, said Dean McCarron of Mercury Research, who follows the semiconductor industry. He blames the global economy.
"OEMs are all telling me it's the economy. There's not a lot of optimism out there. The U.S. has been soft since 2008, Europe is a mess and emerging markets have gone soft. They aren't driving growth anymore, it's more of a replacement market than a growth market," he said.
Windows 8 "doesn't help the situation. There was an excessive amount of emphasis on it. To lay the blame on Windows 8 would be too strong of an attribution. When I look at the market, the number one impact is just tablets. Mobile PCs are soft at the bottom end of the market," he said.
So does this mean fire sales for old inventory? Don't bet on it, said Sharon Stiefel, analyst for semiconductor market intelligence at IHS iSuppli. Because Intel and other chip vendors hit the brakes so soon, inventory didn't build.
"Down the road, they'll have the ability to keep their pricing up. There won't be shortages because demand is so low. I think they were responding to where they could have had an overage they needed to get rid of. Instead of having a fire sale, they said what do we need to do to match what's going out this quarter and the next and not get too far ahead of themselves," she said.
Stielfel isn't surprised or alarmed at Intel's cutback on production. "Looking at what happened last year, the industry was ramping for demand they thought would occur in Q1 and Q2, then things fell much lower than was expected. It brought people to a screaming halt in Q3 and Q4 last year and looking back at how much inventory had built, they were way over with their inventory," she said.
So with demand lower, inventories are staying lower. The lessons of 2001 remain in place, it would seem.
Intel hitting the brakes in response to a drop in sales is a good thing for the company, a sign the company has a clear view into future demand. But this time, the economic situation is different.
"This is the first time I can remember through a downturn that Intel is not continuing fab expansion. This is the first time I've seen them put the brakes on for a while. They are still continuing process development, but it is putting a damper on some remote facilities," said McGregor.
He heard that the company started offering voluntary retirement at the plants based on age and experience, but there wasn't much interest. That means the next likely move is layoffs, which will probably happen under the new CEO. "I fully expect they won't announce anything related to fab capacity, but they will announce realignment once they get the new CEO in place," McGregor added.
And even then, there's a chance Intel won't bounce back to its previous levels. Intel makes PC chips and the PC simply isn't where technology is at these days.
"This is the first time we're seeing the entire industry coming up fairly well, but the PC sector is not leading it. The PC is not driving the direction of technology anymore, it's not driving processor technology and it's certainly not the software magnet for technology anymore. It's a tablet and smartphone world," said McGregor.