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Idle Intel fabs foretell PC decline

Were Intel's fabs the canary in the tech coal mine?
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By Andy Patrizio, ITworld | Data Center

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April 11, 2013, 7:10 PM After its engineers, Intel's most important asset is its fabrication
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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.
But idle they are. Intel's fabs may be at their

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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 The exterior of Fab 32 on the Intel Ocotillo
campus, Chandler, AZ

something that only now is coming out with

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Image c redit: Intel

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

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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

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machine to 2001, when the Tech Bubble burst and the industry was left sitting on billions of

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useless inventory that had to be sold off cheap or written off as a loss.
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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
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This is the first time we're

seeing the entire industry
coming up fairly well, but
the PC sector is not leading

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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

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.
Jim McGregor, pres ident, Tirias
Res earch, a s em iconductor analys t,
Phoenix, AZ

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production almost overnight and did not get

stuck with a huge amount of inventory. Other

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chip companies followed Intel's lead, figuring Intel knew something they didn't. The early

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warning failsafe ended up working out very well and vendors didn't get saddled with inventory.

manager?
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secure?

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,

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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.

Ask a question

"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
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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.

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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,
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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
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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.
Consumer impact?
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
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inventory," she said.

So with demand lower, inventories are staying lower. The lessons of 2001 remain in place, it
would seem.
No recovery
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.
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1 Comment

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java lu

a year ago

This really make me sad. I guess it is time to move on and start using those powerless little devices that doesn't let
you do much.
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