How Intel CEO Pat Gelsinger couldn’t get the 56-year-old chipmaker’s comeback plan right

Intel CEO Pat GelsingerThe ambitious three-year effort to return the 56-year-old American chipmaker to its former glory has failed amid strategic blunders, production setbacks and mounting financial losses, forcing the company to lay off 15,000 workers and fundamentally restructure its operations.
Under Gelsinger’s watch, Intel’s revenue has fallen to $54 billion in 2023, nearly a third less than when he took charge in 2021. The company is now facing its first annual net loss since 1986, with analysts expecting a deficit of $3.68 billion this year. learned. The stock is down 66% from its peak during Gelsinger’s first 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 have yet to fully benefit from powerful trends such as AI.”

TSMC partnership sours, AI opportunity missed

One of Gelsinger’s first missteps came just months into his term when he publicly questioned Taiwan’s stability, insulting crucial manufacturing partner TSMC. “Taiwan is not a stable place,” he stated at a technology conference in December 2021, according to sources familiar with the matter.
The diplomatic blunder cost Intel a lot of money. 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 reality. While Intel teams estimated maximum sales of AI chips at $500 million, Gelsinger pushed for public announcements of a $1 billion sales pipeline to meet market expectations, sources told Reuters. The company later quietly revised its 2024 AI revenue target back to $500 million.
The AI ​​miscalculation extended to customer relationships. Sources say Gelsinger oversaw a deal to build custom chips for Alphabet’s self-driving Waymo taxis, personally discussing the deal with Alphabet’s CEO Sundar Pichai. However, Intel later canceled the project due to deteriorating financial conditions and paid compensation to Alphabet after threatening legal action.

Production problems plague turnaround plans

Intel’s ambitious 18A chip manufacturing process, which is central to Gelsinger’s $60 billion foundry expansion strategy, has encountered significant obstacles. Early testing by potential customer Broadcom revealed disappointing results, with only 20% of chips passing quality testing – well below industry standards.
In response to these challenges, Intel announced a major restructuring of its foundry operations as an independent subsidiary. The restructuring provides Intel Foundry with “clearer separation and independence” from its parent company, including its own board of directors and separate financial reporting.
Gelsinger indicated that this structure would provide “flexibility to independently evaluate sources of financing” for the struggling foundry sector, which posted operating losses of $7 billion in 2023 and another $2.8 billion in the last quarter.
While Intel scored a significant victory with a multi-year, multi-billion dollar deal Amazon Web Services To produce an “artificial intelligence chip” using the 18A process, other major potential customers including Apple and Qualcomm have declined to use the technology, sources familiar with their decisions told Reuters.
The manufacturing challenges have forced Intel to halt construction of new chip factories in Germany and Poland for about two years, citing “expected market demand.”
“All eyes will remain on us,” Gelsinger acknowledged, emphasizing the importance of the restructuring and new partnerships in Intel’s turnaround efforts. However, a recent supplier document points to further delays in the rollout of the 18A technology, with customers facing little prospect of high-volume production until 2026.

CEO Gelsinger ‘painful news’ to employees as a chip maker

“This is painful news for me to share,” Gelsinger wrote to employees. “We must align our cost structure with our new business model and fundamentally change the way we work. We will reduce layers, eliminate overlapping areas of responsibility and stop non-essential work.”
The cost-cutting measures have spread globally, reaching as far as Intel’s Israeli operations, where even basic employee benefits are being eliminated. In a sign of the extent of the cuts, Israeli workers recently discovered empty kitchen spaces at work and a notice announcing the end of free beverage services. Vehicle benefits for older employees have also been reduced, effectively reducing some salaries by 10%.
In a dramatic reversal of strategy, Intel is now exploring selling a minority stake in Altera, its programmable chip subsidiary, in a deal that values ​​the unit at about $17 billion. This marks a major shift for Intel, which acquired Altera for $16.7 billion in 2015 and had described it last month as the core of the company’s future. Intel is also closing Granulate, a startup it acquired for $650 million less than three years ago, as part of its transformation process.
The grim reality of Intel’s situation is evident in its workforce numbers. “Our 2020 annual revenue was approximately $24 billion higher than last year, but our current workforce is now actually 10% larger than it was then,” Gelsinger acknowledged in his memo to staff. “There are many reasons for this, but it is not a sustainable path forward.”
The company’s restructuring efforts extend beyond workforce reductions. Intel has announced plans to reduce its global real estate footprint by about two-thirds and pause construction of new chip factories in Germany and Poland for about two years. However, the company will continue with its U.S. manufacturing projects in Arizona, Oregon, New Mexico and Ohio, supported by $3 billion in CHIPS Act funding.

Intel CEO Pat Gelsinger is “confident” in the company’s turnaround plan

Despite the setbacks, Gelsinger maintains his characteristic optimism about the prospects for a turnaround for Intel. “I am confident that we will succeed,” he told Reuters in August. ‘In three years, yes. This one’s gonna happen, baby.”
However, with Intel the worst-performing technology stock in the S&P 500 this year and facing fierce competition in both the AI ​​and traditional chip markets, the company’s path to recovery remains uncertain.