Intel: Caught with its PIIIs down

Reports of the death of the PC have been grossly exaggerated, Intel officials told analysts Thursday at the company's annual New York Analysts Meeting

In fact, demand for PCs has been so strong, it's been the root of Intel's problems in delivering enough processors, top-level company officials said. Eating a little bit of crow, Intel admitted that it miscalculated its transition from a .25-micron manufacturing process to an .18-micron process and was caught off-guard when the demand for high-end Pentium III chips spiked. Intel normally has extra manufacturing capacity in place to guard against such sudden spikes, but didn't in this instance, leaving the company a few PIIIs short of optimal. Intel President and CEO Craig Barrett said three factors are driving this chip and PC demand on a worldwide basis. They include the buildup of hardware to support electronic business, along with the strong North American economy and the resurgent South American and Japanese economies. Demand has also increased from large corporations -- Intel included -- that are launching programs to offer PCs to employees for next to nothing. Ford Motor and American Airlines, among others, have launched such programs. "In retrospect, we probably underinvested last year and were caught a little off-guard by demand for our core products [this year]," Barrett said. Not having enough chips hit Intel's bottom line. "We could have done better than this, if we had some more parts," said Chief Financial Officer Andy Bryant, when reviewing Intel's first-quarter earnings. "Because we undercalled demand, we shipped our inventory buffers." Manufacturing "is really critical to our success right now," he added. "We need to get everything out of it ... to meet customers' needs." As a result of expected higher levels of demand in the second half of the year, Intel will increase its manufacturing capacity. "We're growing overall capacity to meet higher seasonal demand in the second half of the year," said Paul Otellini, executive vice president of Intel's Architecture Business Group. Later, during a question-and-answer session, he added: "I'm comfortable that the number of wafer-start capacity is more than strong enough to meet increases in demand." Intel has five fabrication plants producing chips with the .18-micron process, and plans to increase that number to eight fabs by year end. The company also recently increased spending on new manufacturing plants and equipment by $1bn (£0.63bn). That increase, however, won't yield any additional output this year, officials said. It's not an issue of manufacturing yields, Otellini said. "We're seeing very good yields. The yields are better than we first thought. Any shortage is because of demand." As evidence, he cited the company's quick run to 1GHz (1,000MHz). The company jumped from 800MHz at the end of 1999 to 1GHz early last month. It skipped a few speed grades, however, shipping its 850MHz and 866MHz Pentium IIIs later last month. Intel has yet to release a 933MHz Pentium III. "I think you'll see us stretch at least one notch above 1GHz, maybe two," Otellini said. Those two speed grades would likely be 1066MHz and 1133MHz, based on the Pentium III's bus multiplier. Intel also plans to introduce a new SpeedStep-enabled mobile Pentium III this summer, which will consume less than one watt of power when a machine is operating in Battery Saver Mode. "We can take the overall performance up in terms of clock speed [and still maintain battery life ]," Otellini said. "Using .13 [the next generation manufacturing technology, which Intel will put in place next year], we can go above 1GHz and stay within that envelope." Still, Intel and the industry are not out of the woods -- yet -- when it comes to manufacturing, Barrett said. Based on current levels of demand, there could be a capacity shortage across the industry for the next year or two, he said. "We don't think we're at a place where there will be a short spike, and then demand goes back," Bryant said. What do you think? Tell the Mailroom. And read what others have said.
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