Intel CEO Pat Gelsinger‘s ambitious three-year effort to restore the 56-year-old American chipmaker to its former glory has faltered amid strategic blunders, manufacturing setbacks, and deepening financial losses, forcing the company to lay off 15,000 employees and fundamentally restructure its operations.
Under Gelsinger’s watch, Intel’s revenue has plummeted to $54 billion in 2023, nearly one-third below when he took charge in 2021. The company now faces its first annual net loss since 1986, with analysts expecting a $3.68 billion deficit this year, Reuters has learned. The stock has crashed 66% from its peak during Gelsinger’s early months as CEO.
“This is painful news for me to share,” Gelsinger wrote in a memo to employees. “Our revenues have not grown as expected — and we’ve yet to fully benefit from powerful trends, like AI.”
TSMC partnership sours, AI opportunity missed
One of Gelsinger’s earliest missteps came just months into his tenure when he publicly questioned Taiwan’s stability, offending crucial manufacturing partner TSMC. “Taiwan is not a stable place,” he declared at a tech conference in December 2021, according to sources familiar with the matter.
The diplomatic blunder cost Intel dearly. TSMC withdrew a valuable 40% discount on its $23,000 3-nanometer wafers, significantly impacting Intel’s profit margins on chips manufactured by the Taiwanese giant, Reuters reported.
In the booming artificial intelligence sector, Gelsinger’s optimistic public projections clashed with internal realities. While Intel teams estimated maximum AI chip sales of $500 million, Gelsinger pushed for public announcements of a $1 billion sales pipeline to match market expectations, sources told Reuters. The company later quietly revised its 2024 AI revenue target back to $500 million.
The AI miscalculation extended to client relationships. Sources say Gelsinger oversaw a deal to build custom chips for Alphabet’s Waymo self-driving taxis, personally discussing the agreement with Alphabet CEO Sundar Pichai. However, Intel later cancelled the project amid worsening financial conditions, paying a fee to Alphabet after it threatened legal action.
Manufacturing woes plague turnaround plans
Intel’s ambitious 18A chip manufacturing process, central to Gelsinger’s $60 billion foundry expansion strategy, has encountered significant obstacles. Early tests by potential customer Broadcom revealed disappointing results, with merely 20% of chips passing quality tests – far below industry standards.
In response to these challenges, Intel announced a major restructuring of its foundry business as an independent subsidiary. The restructuring provides Intel Foundry with “clearer separation and independence” from the parent company, including its own operating board and separate financial reporting.
Gelsinger indicated this structure would allow “flexibility to evaluate independent sources of funding” for the struggling foundry business, which posted operating losses of $7 billion in 2023 and another $2.8 billion in the latest quarter.
While Intel secured a significant win with a multiyear, multibillion-dollar agreement with Amazon Web Services to produce an “artificial intelligence fabric chip” using the 18A process, other major potential clients including Apple and Qualcomm have declined to use the technology, sources familiar with their decisions told Reuters.
The manufacturing challenges have forced Intel to pause construction of new chip plants in Germany and Poland for approximately two years, citing “anticipated market demand.”
“All eyes will remain on us,” Gelsinger acknowledged, emphasising the importance of the restructuring and new partnerships in Intel’s turnaround efforts. However, a recent supplier document indicates further delays in the 18A technology’s rollout, with customers having little prospect of high-volume production until 2026.
CEO Gelsinger’s “painful news” to employees as chipmaker
“This is painful news for me to share,” Gelsinger wrote to employees. “We must align our cost structure with our new operating model and fundamentally change the way we operate. We will reduce layers, eliminate overlapping areas of responsibility, stop non-essential work.”
The cost-cutting measures have extended globally, reaching as far as Intel’s Israeli operations, where even basic employee benefits are being eliminated. In a telling sign of the depth of cuts, Israeli employees recently arrived at work to find empty kitchen stations and a notice announcing the end of complimentary beverage services. Vehicle benefits for senior employees have also been cut, effectively reducing some salaries by 10%.
In a dramatic reversal of strategy, Intel is now exploring the sale of a minority stake in Altera, its programmable chip subsidiary, seeking a deal that values the unit at around $17 billion. This represents a significant shift for Intel, which acquired Altera for $16.7 billion in 2015 and had, as recently as last month, described it as core to the company’s future. Intel is also shutting down Granulate, a startup it acquired for $650 million less than three years ago, as part of its transformation process.
The stark reality of Intel’s situation is evident in its staffing numbers. “Our annual revenue in 2020 was about $24 billion higher than it was last year, yet our current workforce is actually 10% larger now than it was then,” Gelsinger acknowledged in his memo to staff. “There are a lot of reasons for this, but it’s not a sustainable path forward.”
The company’s restructuring efforts extend beyond personnel cuts. Intel announced plans to reduce its global real estate footprint by about two-thirds and pause construction of new chip plants in Germany and Poland for approximately two years. However, the company will continue with its US manufacturing projects in Arizona, Oregon, New Mexico, and Ohio, supported by $3 billion in funding from the CHIPS Act.
Intel CEO Pat Gelsinger is “confident” about company’s “turnaround” plan
Despite the setbacks, Gelsinger maintains his characteristic optimism about Intel’s turnaround prospects. “I’m very confident that we’re going to pull it off,” he told Reuters in August. “Three years in, yeah. This one’s going to happen, baby.”
However, with Intel now the worst-performing tech stock in the S&P 500 this year and facing intense competition in both AI and traditional chip markets, the company’s path to recovery remains uncertain.