Dell hit by Intel shortage

A shortage of some PC chips from Intel has hit Dell - and the tight supply may continue for several months

Even as Dell was blaming chip shortages for a fourth-quarter shortfall Wednesday, Intel was saying it expects difficulty meeting demand for its Pentium III and Celeron processors over the next few months.

For PC buyers, this means a longer wait for systems with certain processors. And it could be a hit to earnings for some PC makers. "Right now, the industry is trying to recover (from the busy fourth quarter), including Intel," said Intel spokesman Howard High, interviewed before Dellannounced its shortfall Wednesday afternoon. "There will be tightness in parts of our product line throughout about the next two months."

The tightness, he said, is caused by Intel seeing higher numbers of orders from PC makers than it expected to have, so-called upside demand.

"We've been able to meet our commitments. But we hadn't, in Q4, been able to meet upside demand," High said. "We're still, as a company, working to get our capacity levels up to this (new) level that the industry is building (PCs) at."

Dell issued a fourth-quarter earnings warning, which blamed an "uneven and constrained" supply of semiconductor components for causing $300m (£186m) in lost sales, primarily of newly introduced consumer products.

The transition to the latest generation of Intel's Pentium III chips (known by the popular code-name Coppermine) and its 820 chip set and its Rambus dynamic RAM, caused the hurt for Dell.

"Dell always plays at the front end of those transitions. This time it was dangerous ... because it was not handled well by some of our partners," said Michael Dell, Dell chairman and CEO. "That left us with promotions on high-end products that we could not deliver during a heavy selling season."

Dell's statement echoes a recent warning from Gateway. Dell was hurt by Coppermine shortages not only because it meant the PC maker could not deliver enough high-end PCs to satisfy demand. Meredith said the shortages also forced Dell to ship more expensive components in place of those it could not get, for example, replacing unavailable 450MHz Pentium III chips with more expensive 500MHz Pentium III chips.

"We ate that difference in order to fill the demand that we created," Meredith said. On the high-end, "We didn't get the volumes we would have liked."

Meredith and Dell were quick to say that the situation has resolved itself, with component shortages falling off and lead times shrinking for all chips except the 800MHz Pentium III. If ordered now, a Dell Dimension PC with an 800MHz Pentium III processor, Intel's 820 chip set and 128MB of RDRAM, would not ship until March 9.

Have the chip shortages made Dell consider using alternative processors? "On the processor side, we are completely Intel at this point. Certainly, we evaluate alternatives on an ongoing basis," Dell said.

While Dell sees the supply shortages easing up, Intel expects things to stay tight.

"There are some (chips) in the Pentium III line that are tight ... there are some in the Celeron lines that are tight ... but I don't know, on a megahertz basis, which are which," Intel's High said.

Intel expects that its newest fabrication plant (to be called Fab 22), along with $800 million worth of its updates to its Hudson, Massachusetts, fab, should help ease its supply situation in the long run.

Short-term relief should come from conversion of the company's New Mexico-based Fab 11 to manufacture processors on Intel's 0.18-micron process. This should be complete by the end of this quarter, High said.

Fab 22 will be Intel's first fabrication plant to use 300mm wafers. The wafers, 12-inches in width, should yield about 2.25 times more chips than the current 200mm or 8-inch wafers used by Intel.

"It should crank somewhere between 35,000 and 40,000 wafers per month," High said.

The actual number of chips on each wafer depends on the kind of processor being manufactured. A single wafer would yield more mobile chips, for example, than higher-end Itanium chips, because the Itanium will be physically larger.

While the improvements will give the company a needed boost in manufacturing capacity, that capacity may not be the only answer to supply issues.

Intel, sources said, is experiencing problems with a new Pentium III processor package, called "flip chip." It appears that the packaging, delivered to Intel from an outside firm, has been delayed for some versions of the chip. The package mounts the chip on top of a board, whose back side sprouts 370 pins, allowing the chip to be mounted to Intel's Socket 370. Celeron processors have been using this type of packaging since last year.

While the packaging technique itself is not new, it is being employed by Intel for the first time on the latest-generation Pentium III "Coppermine" processors, aimed at small-form-factor PCs.

Intel officials refused to comment directly on the packaging situation. They did say, however, that the company is shipping Pentium III at 500MHz and 550MHz with the 'flip chip' packaging. Supply of those chips, however, is also tight. Intel's High said he was not aware of packaging problems with the Pentium III. He said reports of the issue likely stemmed from shortages related to demand.

Fab 22, located in Chandler, Arizona, will not only be Intel's first to utilise 300mm wafers, it will also be the company's first to deliver its 0.13-micron manufacturing process and copper metalisation. Copper metalisation changes the interconnects that link transistors inside a chip from aluminum to copper, yielding a performance increase.

Fab 22 will come online in 2001 using 200mm wafers, but quickly transition to 300mm. It will manufacture mobile, desktop and Intel's forthcoming IA-64, or Itanium, processors.

"It should be a significant productivity improvement. ... We'd expect to save about 30 percent as opposed to building chips on a 200mm wafer," High said.

Intel now has 14 fabrication plants in operation.

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