When the chips are down, Intel turns to VMware's Pat Gelsinger

While the appointment of VMware's Pat Gelsinger to replace Bob Swan as Intel's CEO prompted a positive reaction among analysts and vendors, most agreed Gelsinger will have to make some critical decisions quickly, including outsourcing the manufacturing of its next generation of chips to regain its competitive edge.

Once holding a comfortable market share lead over its competitors, the chip giant has fallen behind the technical advances made by Nvidia and AMD over the past two to three years, due mainly to delays in delivery of key products and manufacturing glitches.

The dilemma Gelsinger faces when he assumes his new role on February 15 will be deciding between building expensive new facilities to produce new chips or outsource manufacturing to a leading chipmaker such as Taiwan Semiconductor Manufacturing Company (TSMC).

Given the time it will take to implement a new approach to manufacturing as well as perhaps making significant changes to the company's corporate culture to make up ground lost to archrivals, most believe outsourcing gives Gelsinger the quickest way to rebound.

Pat Gelsinger

"With everything focused on things like systems-on-a-chip and GPUs, there comes a point where you say, is it worth it for us to keep building these [chip] factories?" said Charles King, president and principal analyst with Pund-IT. "It makes more sense to go with manufacturers that have expertise in making 7-nanometer chips and below, like a TSMC."

Earlier this week, Intel tapped TSMC to make a second-generation discrete graphics chip for personal computers for gamers that it hopes make it more competitive with Nvidia. That deal could set the stage for a deeper relationship that could lead to Intel outsourcing its next generation chips for business users.

One of Intel's stumbling blocks was its failure to deliver a 7-nanometer chip to market due to manufacturing glitches -- a technology AMD delivered in July 2019 and Nvidia delivered in November of that year.

Also adding pressure on Intel, both of its major competitors have made strategically important acquisitions that strengthened their respective competitive positions during the past couple years. Late last year, AMD acquired Xilinx in a $35 billion stock-based transaction that brings both CPUs and GPU technologies under one roof. Nvidia purchased ARM Technologies, a top-tier chipmaker whose offerings are used in systems ranging from hand-held devices to supercomputers.

One analyst believes the decision to replace Swan with Gelsinger came down to growing pressures from investors and Intel's board of directors along with impatience.

"[Bob] Swan was dealt a difficult hand," said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. "By the time he was appointed CEO 10-nanometer chips were off the rails. I think he accomplished a lot, but it wasn't enough."

Moorhead believes Gelsinger is the right man for the job but doesn't expect him to be in a position to make significant changes, mostly because of the complexity of chip technology and how chip companies operate internally.

Chip problems take years to address. I am not foreseeing any significant strategic changes, but I expect him to focus on its engineering culture, getting it back to an execution culture.

"Chip problems take years to address," Moorhead said. "I am not foreseeing any significant strategic changes, but I expect him to focus on its engineering culture, get it back to an execution culture.

"[Choosing Gelsinger] is a good move, but big changes take years at chip companies," he said.

One consultant underlined Moorhead's point about a return to an engineering culture being critical to the company's success, adding it will be a steep hill for Gelsinger to climb, given not only AMD and Nvidia's technology but what they have on the drawing boards over the next year or two.

"They not only have to catch up with 7-nanometer chips, but they have to leapfrog the competition, which has 5-nanometer offerings out there and, like Apple, working on moving to 3 [-nanometer]," said Frank Dzubeck, president of Communication Network Architects, Inc. "It's a manufacturing issue but also an engineering issue they face."