Intel: Extent of restructuring could rival 1985 exit from DRAM business

Posted by Scott M. Fulton, III

Santa Clara (CA) - Expanding on comments made by CEO Paul Otellini in an analysts' conference last Wednesday, Intel spokesperson Chuck Malloy today told TG Daily that the size and extent of the restructuring efforts that Otellini has ordered, could be as sweeping as those the company instituted in 1985. At that time, Intel made the painful decision to exit the DRAM manufacturing business that it helped create.

Malloy said that this will be a careful, strategic, data-driven restructuring, where every segment of the company is under analysis, although he later stated there would be a few aspects of the company's plans that would not be changed. Intel wants to avoid what he called a "knee-jerk" reaction to rising corporate expenses, akin to a situation we mentioned in one of our questions: the recent General Motors restructuring, which led to the closing of factories in Oklahoma City and elsewhere, and layoffs of tens of thousands.

This restructuring won't be about laying off staff, Malloy reassured us, although the possibility of some job cuts is not exactly out of the question as some businesses may be reorganized, or even sold off. "One of our key strengths is our manufacturing capability," said Malloy, implying that factory closures would not be among the most optimum solutions Intel will explore. The company also intends to deliver on its roadmap for CPU introductions, including its Woodcrest, Conroe, and Merom platforms, during the third quarter as scheduled; in fact, Malloy said, sticking to that road map is now more critical than ever.

The inventory buildup which we wrote about in a story this morning is not so much in the chipset department, said Malloy, as in low-end CPUs. He reminded us that under-production was responsible for a chipset shortage just last fall, which precipitated the plummet of Intel's market share. But as supplies leveled off, demand hasn't risen to meet it, as customers have drifted away from Intel to other suppliers.

The retooling of factories toward 65 nm and 45 nm lithography can and must continue, Malloy stated quite firmly, implying that cuts in factory expenditures may be the least likely of Intel's options. Furthermore, it's inaccurate to characterize this restructuring, Malloy continued, as a program whose sole objective is to reclaim a billion dollars in would-be expenditures. Rather, it should be interpreted as a way to re-institute efficiency in all the company's divisions. A number of related data points will be examined during this reorganization for signs of success, including efficiencies, productivity, factory output, average selling price, market share, and penetration into new markets. All of these will collectively comprise a sort of "agility" rating, which Intel will use to assess its progress.

"If we're moving into new markets," Malloy asked rhetorically, "can we provide products in an efficient enough fashion to be competitive?" This question, he said, will be applied to those new markets which Intel has tried to penetrate over the last year, including home entertainment with its new VIIV platform, as well as the Ultra Mobile PC (UMPC). Reactions to Intel's entry into these markets has been perhaps more subdued than was anticipated, with the future of the UMPC platform entering into the realm of doubt.

In 1985, then-CEO Andrew Grove led Intel in a restructuring program that resulted in its exit from the DRAM market, in which the company had decided it had ceased to be competitive. That restructuring, Chuck Malloy said today, is the inspiration behind Otellini's move on Wednesday, though not necessarily the blueprint for it. Every market in which Intel does business, as well as the economy as a whole, Malloy said, have changed, evolved, become more stratified. "There's no one-size-fits-all solution any more," he said, "because it's not the same PC market any more." He cited many of the same figures Microsoft and analysts have been citing these past few weeks, indicating a definitive slowdown in the global PC market, with commercial sales slowing down faster than consumer sales.

Malloy cited a statement Andy Grove made years ago, in recalling that painful decision, that at that time, Intel's executives were surprised to discover that mid-level managers were further along than top-level executives in understanding where Intel's market truly was. That much of Intel's history, Malloy said, could serve as a model for this new restructuring, by involving managers at every level in a thorough housecleaning that could result in a leaner, more agile company. Complete details of Intel's restructuring program, Malloy said, should be made available at its fiscal second-quarter results announcement, during which the company will provide guidance for the third quarter and the rest of the year.