Every morning when I open my Macbook Air, I am amazed at how quickly it comes back to life. It’s almost instant. I then proceed to go through my workday without ever waiting for apps or documents to open. As they say in the commercials, it just works.
You may say that this is just part of what happens as technology gets better. Apps are optimized for speed, and operating systems are streamlined. Just another step on the ladder of progress. However, there’s something special going on inside my Macbook Air.
As it turns, my laptop is using a chip called the M1, which Apple designed themselves and manufactured with an external partner (TSMC). It also happened to replace the Intel chips that Apple used for over 15 years. Apple has hit a home run with their new chips, and their action can be felt throughout an entire industry.
However, this is not the story about Apple though they will make an important cameo. This is the story of Intel and how they lost their way. Intel is still a successful company and one of the leaders in its industry, but there are cracks in the fortress that may bring down an entire company. To understand how we get here, we need to revisit the past.
How Intel Missed Out on the Great Chip Shortage of 2021
If you read any kind of business news lately, then you know that there’s a global chip shortage going on right now. It’s not expected to ease until the end of 2021 or early 2022. Companies like AMD and TSMC are in an envious position. There’s so much demand for their products that they can’t grow fast enough. Intel is also benefiting, but the mood at their headquarters isn’t quite as joyous.
Intel was founded in 1968, but I will focus primarily on recent history. We are looking for the root cause of Intel’s current issues, and we only have to go back around 15 years to find that. It starts in 2007 after Intel introduces their famous Tick-tock production model. Intel planned a consistent decrease in the size of chips every two releases, i.e., every Tick.
Intel started with 65 mm chips and would reach as low as 10 mm. At first, everything seemed great. Intel was designing and manufacturing some of the best chips in the world. Their production model was consistently getting better, and their chips were used in countless products. Intel partnered with companies like Apple (2005), Google (2012), and of course, Microsoft from even earlier days.
In 2006, Intel also announced its Core microarchitecture to widespread acclaim. It would proceed to put these chips in all kinds of devices, including laptops, phones, and tablets. Intel even had a brief entrance into the smartphone market in 2011 though they exited the market 5 years later. Making chips for other companies seemed to be the way forward. Intel was going to keep designing and manufacturing chips, a rarity in their industry.
In 2016, things started to change for the worse. The 10 mm chips were full of delays and production errors. Their plan to create a 10 mm chip wasn’t based on what was possible but simply what was next in their tick-tock model. The company didn’t quite know how to make chips at this level, which created serious production problems.
In 2018, Intel was hit with the Meltdown and Spectre bugs. These two bugs have affected all Intel processors since 1995 — excluding Intel Itanium and pre-2013 Intel Atom. It was estimated that hundreds of millions of systems were affected by these bugs. Eventually, more flaws came to light. It’s not clear the actual impact of these bugs, but the impact on Intel’s brand was significant.
Things were also changing in the industry. Competitors like AMD experienced a resurgence in their ability to design their chips. Other companies like TSMC achieved the ability to create smaller chips, e.g., 5 mm, and the production model shifted. Competitors like AMD and Nvidia don’t even manufacture their own chips. Instead, they design them and work with someone like TSMC to create them. Intel was trying to do both and losing ground on both ends.
Finally, we get to Apple in 2020 and their announcement of the M1 chips. It was expected that Apple would eventually design their own chips as that would give them full control over their stack. Like AMD, Apple partnered with TSMC to manufacture the chip. Companies like Google and Amazon are also exploring designing their own chips as that gives them a further edge in performance.
The Great Chip Shortage of 2021 doesn’t quite feel the same for Intel. They appointed a new CEO in early 2021, and they are working to right the ship. They are on track to release a 7 mm chip though there are questions about potential production delays. Nonetheless, Intel isn’t dying. Their stock has actually done well in the last 20 years (see the chart below), but there are existential questions that Intel will need to answer in the next 5- 10 years.
What Are the Lessons from Intel’s Floundering?
What can we learn from Intel? They have flounder somewhat in the last 5 years, and they are at risk of losing their leadership position. I think Intel made 3 primary mistakes which are compounding during the present.
1. Fell Behind in Strategic Focus
Intel has always prided itself on being able to design and manufacture chips. However, its competitors, AMD and Nvidia, have always relied on outside manufacturers. This is classic specialization, and we see the benefits of it. TSMC can outperform Intel in manufacturing because that’s their focus. Intel has also been caught in the exodus of local manufacturing in the US (TSMC is based in Taiwan).
The lesson here is to understand what are the strategic factors to success. If that is manufacturing capacity (I would call it technology), then you need the appropriate investments or acquisitions to sustain it. If it’s not, then you can shift resources to other factors.
2. Unable to React to Industry Changes
Apple designing their own chips wasn’t a surprise. The trend towards companies doing this has been in the works for years. It’s unlikely that Intel was caught off-guard by what Apple did.
Intel should have reacted to these industry trends much earlier. For example, they could focus on designing and outsource their manufacturing, or they could have expanded their manufacturing and work with Apple to produce their chips.
3. Disrupt Yourself Before Someone Else Does
Other players like TSMC and AMD disrupted Intel. They should have done the disrupting themselves instead of waiting for market forces. They were the king, but they fell asleep at the throne.
What’s the Future for Intel?
Recent news suggests that Intel is planning to continue to double down on building up its manufacturing capacity while also designing chips. Effectively, the same strategy from the last 5 years but with more money. I’m not sure how well that will work, but time will tell.
Something that might help Intel tremendously is the Biden administration’s focus on abilities like local manufacturing. It’s expected that an infrastructure bill will pass sometime in the future, and that may inject billions of dollars into companies like Intel. It might be enough money to simply build whatever is needed to compete with the likes of TSMC.
In my opinion, Intel should drop manufacturing and focus on designing chips. Instead, move into the “data processing business” and become the foremost expert on helping other companies design chips. There are all kinds of use cases that require specialized chips, including cryptocurrency mining, self-driving cars, mobile devices, etc. They could also extend beyond chips into other ways information is processed.
In the meantime, I’ll continue to be amazed at how quickly my Macbook Air loads. I’m looking forward to the M2 chip that Apple is likely already working on.